The scandal of the Panama Papers sent shockwaves across the globe. At the epicenter of it was a Panamanian law firm that had helped banks, politicians. Wealthy individuals camouflage billions of money in secret firms. Millions of documents were a testament to that fact. A few of them had used shell firms and even evaded taxes. If you are a business owner, here is what you need to know about these phantom firms. To get a better understanding of your obligations, including such matters as offshore bank accounts, you may need to consult with a financial professional.
A Brief Overview of Shell Firms
A shell company is actually a legally incorporated body, but it is only designed to operate and manage the financial instruments of some other company. A shell company is not a real company as it does not have any staff working in it. Secondly, it is not listed on the stock exchange either. It does not generate any kind of revenue, nor does it sell any type of products or services to any sort of customers. The only common corporate function that they perform is maintaining a record of the assets held, usually of a low value.
Advantages of Shell Firms
For various reasons, Shell firms have many advantages for individuals and business owners. For instance, a new business can have a shell company to hold money gained in fundraising prior to its official operation. Similarly, a firm that plans to acquire a merger would temporarily put its assets in a shell company just for convenience in handling the process.
Businesses can also use shell firms for security purposes. If a company is doing business in an insecure region or with an unscrupulous partner, it can be set up in a safe location for protection. In instances of divorce of a wealthy person, there is a need for a neutral account. A shell company can be used for this type of operation.
How Shell Firms Operate in Tax Havens?
Having a shell company can also save certain taxes, whereby some states or countries are even termed “tax havens”. Since their income and corporate tax rates are very low or even zero.
By setting up shell firms in tax havens such as Panama, foreign businesspeople avoid paying taxes in their home countries. Some of the tax havens do not report specific tax data. Thus, it may be easy to hide accounts held in foreign jurisdictions and delay making tax payments. In addition to Panama, Hong Kong, Belize, and Switzerland are considered to be tax havens.
Most countries around the world grant shell firms full legal status. Shell firms are often formerly operating companies that have either gone out of business or been acquired by others. As the Panama Papers affair illustrates, however, shell businesses can sometimes be used to mask illegal activity.
Illegal Shell Firms
Most of the time, when they mask their possessions under umbrella companies, this is one method for the purpose of hiding identity. Shell companies, just like any other business, do have physical addresses of their own. Shell companies in the United States are obligated to file reports with the SEC. While they seem like legitimate companies in all appearances, they at least have paper in reality, they are actually just hollow shells.
A company wishing to know more about a shell company usually contacts the company’s management, which is no more than the accountants or attorneys hired by the shell. It may even be hard to find the genuine owners of the money held by the shell firm in luxurious finishes. Some organizations that benefit from the secrecy of shell firms use them for illegal deals, such as money laundering. Allegedly, some of those involved in the Panama Papers affair did more than that. Documents leaked said the Mossack Fonseca law firm had helped tax evaders open offshore accounts.
The line separating legitimate from illegal shell company uses can easily become blurred. As you have learned from this article, shell firms are extremely popular. At the same time, it is pretty obvious which actions are illegal, like helping terrorists, facilitating drug dealers, or becoming a confidence fraudster yourself.
Concluding Thoughts
Typically, shell firms are legally faultless corporations. Using “shell companies,” individuals conceal their real identities when handling assets. Of course, nearly anyone can find an online service that will help them set up a shell corporation overseas for about $1,000. That can be helpful for people whose jobs or residences take them offshore from the United States. As the Panama Papers show, shell corporations represent the medium most ideal for persons wanting to engage in dubious activities.
