Shell companies are companies with no business activity, employers, or bosses. They are pretty much a legal person established into existence by law. Therefore, Shell companies can open bank accounts, hold assets, and make transactions. Moreover, shell companies can be opened in places with low or no tax duties. In some cases, one simple way of using shell companies for tax advantageous purposes legally is to buying and selling investments (such as stocks and bonds) around the world through them (Gravelle, 2009). Trust companies in low tax jurisdictions can also be used to invest abroad and legally avoid taxation much like shell companies. Shell companies are also usually cheap to open, ranging from several hundred to a few thousand dollars. They can also be created very quickly online, sometimes within 15 minutes. Moreover, countries like the US do not tax non-residents (i.e. individuals who are not US citizens for tax purposes) for interest-bearing assets and most capital gains (Guttentag and Avi-Yonah, 2005). Therefore, if you buy stocks and bonds in the US through a shell company (or trust) but you are not American, most of the time you only need to pay capital gains on these assets in your country of fiscal residence. If your country of fiscal residence does not tax foreign source income (e.g. Singapore or Hong Kong) or does not tax any kind of income (e.g. Monaco or Dubai), you most likely will not need to pay any personal income tax on these gains, legally.
Although shell companies are often associated with illegal activities by the mainstream media, most shell companies are created for legitimate reasons. When the Walt Disney Corporation was buying large pieces of land to create what is now the Disney World in Florida, it created multiple shell companies, such as Tomahawk Properties and Reedy Creek Ranch. Walt Disney did so because sellers often overcharge their land when they know their real estate interests a rich company. By purchasing the land with multiple shell companies, Walt Disney Corporation could purchase the land at a fair price (Sullivan, 2011). Shell companies can also be legally used for investment purposes. Chinese people sometimes open shell companies in places like Hong Kong and the Channel Islands to attract foreign investments. The creation of a company in China takes months and Chinese companies are often blocked from being listed in foreign stock exchanges. By establishing a shell company abroad and setting up the Chinese original as an operating subsidiary, capital raised internationally through this shell company can be sent to back home with ease, legally (Sharman, 2012).
Most companies formed in offshore tax havens, such as Hong Kong and Channel Island, are shell companies, but they are not necessarily used for illegal reasons. The act of opening a shell company abroad is by no means an illegal action, as we just saw. Illegal is, for example, to not declare or not pay taxes on its gains when your country of fiscal residency requires you to do so. Moreover, most shell companies are not established in tax havens. Panama and the British Virgin Islands are two of the leading tax havens when it comes to shell companies creation and they have 70 and 40 thousand of these companies set up every year, respectively. In the UK and the US, there are 300 thousand and 2 million shell companies created annually (Van der Does de Willebois et al, 2011). Furthermore, different than many people think, tax havens are more compliant with international regulation when it comes to shell company creation than non-tax havens (Findley et al, 2014).
Shelf companies are companies that have been already created and are seating on the "shelf" waiting for a buyer, much like food in a supermarket. Shelf companies can decrease the time needed to purchase a shell company and their long time of existence can provide legitimacy. For example, some banks do not provide loans for brand-new companies but they would provide for a shelf company. Other firms may be reluctant to make a deal with a shell company established last week.
"Throughout history, people have changed their behavior to avoid taxes. Centuries ago, the Duke of Tuscany imposed a tax on salt. Tuscan bakers responded by eliminating salt in their recipes and giving us the delicious Tuscan bread we enjoy today. If you visit Amsterdam, you will notice that almost all the old houses are narrow and tall. They were constructed that way to minimize property taxes, which were based on the width of a house. Consider another architectural example, the invention of the mansard roof in France. Property taxes were often levied on the number of rooms in a house and, therefore, rooms on the second or third floor were considered just as taxable as those on the ground floor. But if a mansard roof was constructed on the third floor, those rooms were considered to be part of an attic and not taxed. So follow the historical tradition. Tax minimization should be a key objective in the way you organize your financial life. And by minimizing taxes, you can have more to save and invest."
- Burton Malkiel (Professor at Princeton) and Charles D. Ellis (Ph.D. NYU) in The Elements of Investing: Easy Lessons for Every Investor
- Findley, M., Nielson, D., & Sharman, J. (2014). Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism . Cambridge: Cambridge University Press.
- Gravelle, Jane G. (2009) "Tax Havens: International Tax Avoidance and Evasion." National Tax Journal, Vol. 62, No. 4 , pp. 727-753.
- Guttentag, Joseph and Reuven Avi-Yonah (2005). “Closing the International Tax Gap,” in Max B. Sawicky, ed. Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administration. Washington, D.C., Economic Policy Institute.
- Sharman, Jason (2012). “Chinese Capital Flows and Offshore Financial Centres,” Pacific Review 25, 317-337.
- Sullivan, Jeremiah (2011). "You Blow My Mind. Hey, Mickey!" The New York Times Magazine. June 8th, 2011.
- Van der Does de Willebois, Emile; Halter, Emily M.; Harrison, Robert A.; Park, Ji Won; Sharman, Jason (2011). The Puppet Masters : How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It. World Bank
IMPORTANT: THERE IS NO ONE BEST TAX OR INVESTMENT STRATEGY. IT ALL DEPENDS ON YOUR GOALS, RESOURCES, AND CITIZENSHIP.
For example, are you willing to move abroad? If so, where? How long do want to stay in each place? What is your annual income? How much money are you willing to invest? Do you want short term gains or long-term investments? What is (are) the source(s) of your income? How much taxes do you pay annually? Do you want to decrease your tax duties or completely remove them? Do you feel like you want to pay some taxes even if you do not need to? What is your citizenship? Do you have multiple citizenships? Depending on each of these answers the best investment/tax strategy for you will differ. To see what option is best for you and to help with the implementation of the strategy feel free to reach out to us. You do not need to be rich to create a global investment portfolio. Most of the bank and brokerage accounts we open do not have minimum initial deposit or maintenance fees. Thus, you can invest as much as you want or even leave the accounts empty until you have enough capital or interest to invest abroad.