Offshore companies: advantages, costs and when to set one up

When investing abroad, one of the first decisions an investor has to make is how the assets will be held. They can be kept directly in the investor’s own name or through a company incorporated outside Brazil.

A company based in a low-tax jurisdiction (the well-known offshore companies), such as the BVI (British Virgin Islands), the Bahamas or the Cayman Islands, can serve the same purpose as a holding company: owning investments. What changes is the regulatory environment in which it operates and the effects it produces in Brazil and in the jurisdiction where the structure is based.

With Law No. 14,754/2023, the logic behind this decision changed. The offshore company is no longer a tax deferral instrument and has become, essentially, a tool for wealth organization, tax efficiency and succession. That is why the right question today is not whether an offshore company reduces taxes, but whether it makes sense for the investor’s wealth and family, also from the standpoint of asset protection and succession planning.

In this article, we cover the advantages of an offshore structure, how much it costs to maintain, when it is worth evaluating one, the decisions that need to be made before incorporation, and what it does not solve.

Why use an offshore company?

Eliminating the Estate Tax

US-situs assets held directly in the personal name of non-US residents are subject to the US estate tax, at rates from 18% to 40%, with only the first US$ 60,000 exempt. This applies to shares of US companies, US-domiciled ETFs and funds, real estate and interests in US companies, regardless of where the account is held. When the investments are held by a company incorporated outside the US, there is no taxable event upon death in the country: the owner of the assets is a company, and a company does not die.

Easier succession

An offshore company makes it possible to implement several succession tools, as discussed in our previous article. Once a succession tool is in place, the transfer of assets to the heirs can be completed within 7 to 15 days, without waiting for the Brazilian probate to conclude and without opening probate abroad.

Tax efficiency

Within a company, Brazilian taxation is levied on the profit shown in the financial statements. This allows the deduction of the structure’s expenses, advisory and management fees and interest on financing, as well as the offsetting of losses between the different assets in the portfolio. If the portfolio is held in the individual’s name or through a transparent company, income and gains are taxed with no deduction of expenses.

There are two further, less discussed effects. The company’s profit is calculated in the currency of the structure and converted into Brazilian reais at the December 31 exchange rate, which removes the currency variation of the invested capital from the tax base. And any tax paid abroad by the company can be fully credited against the Brazilian tax due on the offshore company’s profit, regardless of whether a tax treaty with Brazil exists.

Organization and governance

The structure concentrates the portfolio in a single entity, with appointed directors and the possibility of a reserve director, which prevents the investments from being left without management in the owner’s absence. On the income tax return, the offshore company is reported as an equity interest, rather than asset by asset.

How much does it cost to maintain a BVI offshore company?

For a passive investment company with no operations, the main annual costs are:

In total, minimum maintenance costs are around US$ 3,000 per year. Ongoing tax and compliance support during the year, including assistance with the income tax return, the DCBE (Brazilian declaration of assets abroad) and the structure’s other obligations, should be contracted according to each investor’s needs and depends on the professional or specialized firm involved.

When should you start evaluating an offshore company?

This is the golden question, and there is no recipe that applies to every investor. There is no magic number above which an offshore company becomes mandatory. Factors such as the investor’s age, marital status, whether there are children, heirs living abroad and the liquidity available to the family at the time of succession all influence the ideal moment for incorporation.

When there are US-situs assets, succession is usually the decisive factor. Comparing the potential tax with the maintenance cost helps to visualize the break-even point. Below are some illustrative brackets:

When there is no estate tax exposure, as with portfolios made up of non-US-domiciled funds and ETFs, the decision depends mainly on the tax effects and on wealth organization, which tends to raise the threshold at which the structure is justified.

What to define before incorporation

Before incorporating, a few decisions need to be made. They are part of the company’s structure and directly affect taxation and succession.

The most common structures

In practice, three formats account for most of the cases we work on:

Direct investment has a low cost and simple management, but keeps the exposure to the estate tax and does not allow expenses to be deducted. An offshore company with a financial portfolio organizes the investments and the succession, at a predictable annual cost. The structure with a US subsidiary for real estate is the most complex of the three, because it adds US tax and compliance matters to the offshore company.

What an offshore company does not do

It does not eliminate taxation in Brazil

Since Law No. 14,754/2023, the profit of the foreign company is taxed annually at 15%, whether or not it is distributed. Once taxed, this profit can be distributed to the shareholder with no further taxation, even if the currency appreciates between the time the tax is paid and the time of distribution. Besides the regular (“opaque”) regime, the investor may elect to tax the offshore company’s results under the transparent regime, in which the company is disregarded for Brazilian tax purposes and the assets are reported and taxed as if held directly by the individual. The election for the transparent regime is irrevocable for as long as the entity exists. If no election is made, the opaque regime is deemed to apply.

For assets held with a very long-term horizon, with no turnover or income, taxation only upon realization (individual or transparent regime) may be more efficient. For portfolios with frequent turnover and relevant expenses, the opaque regime tends to make more sense. It has in fact become common to set up two companies, one under each regime, according to the profile of the assets.

It does not replace succession planning

Incorporating an offshore company, on its own, eliminates the estate tax but does not automatically eliminate the succession process. Without a succession tool in place, the US probate problem is simply transferred to probate in the company’s home jurisdiction, which still depends on the conclusion of the Brazilian probate.

It does not dispense with maintenance

The company must keep its accounting, pay annual fees and keep its regulatory obligations up to date, in Brazil and abroad, in order to remain in good standing. It is worth stressing that, under Law 14,754/2023, the financial statements must follow Brazilian accounting standards and be signed by an accountant registered with the Regional Accounting Council (CRC).

The choice depends on the wealth

There is no structure that suits every investor. The decision depends on the combination of asset type, location, expected distributions and the profile of the heirs. That is why a diagnosis of the existing structure, or of the portfolio to be internationalized, is the step that precedes any incorporation and is part of international planning.

Talk to 4Tax

We take care of our clients’ structures, from planning to the design and implementation of the structure suited to each family, following up on the obligations in Brazil and in each jurisdiction throughout the entire international investment journey.

Invest abroad and count on us to support you through the whole process of planning, structuring and annual follow-up of your wealth abroad. Reach us on WhatsApp or write to contato@4taxgroup.com.