Forming offshore entities for ChinaMany years ago, a client came to us with what it claimed to be and initially looked to be a relatively uncomplicated international dispute. But the more we dug into this company’s “relatively uncomplicated international’ dispute, the more compicated it became. But what was interesting was that the complications were not so much stemming from the dispute itself, but from the myriad and confusing and diverse and related and somewhat related chain of offshore holding companies this client had.

It had nearly fifty (yes, 50) such companies and when we asked why, they mumbled something about prior lawyers and accountants. When we asked how their having so many companies was working for them, their answer was anything but positive. It was costing them a fortune to keep these companies alive and to figure out their taxes and to pay people to do these sorts of things. It should not take a genius to figure out why international lawyers and international accountants like offshore entities so much. I can only imagine how much the international lawyers and accountants made from forming and then providing legal and accounting services to 50 companies.

To make a long story short, the international lawyers at my firm were able to quickly reduce the number of these companies down to five (one holding company and one for each country in which it was operating), saving our client a veritable lifetime of hassle and expense.

Now obviously the above is an extreme example, but for every five or so companies that come to us every year with a stray and unwanted offshore entity, there have been zero (ever) that have said, “gee I wish I had formed an offshore entity” years ago. Not one. Ever.

We are often asked about the benefits of forming an offshore entity for doing business with China or for acting as a holding company for forming a China WFOE. Our typical response is to determine whether the company has or is likely to have the sort of profits that will make forming such a company worthwhile and whether forming such a company will provide real monetary benefits. We are not big believers in spending money to form and maintain a company to delay taxes on profits that may never be realized. And then, if there is enough there, we turn them over to our tax lawyer, but most of the time no such entity is formed. If the company is in a high liability industry it sometimes makes sense then as well to set up and operate an offshore entity, but again this too is rare.

Bottom Line: Offshore entities rarely make sense for SMEs and when they do, keep it simple. These entities are a cost that keeps on taking, so be wary and go easy.