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From the Managing Director's desk

Business is moving to the net


Miért éri meg a jövőben is offshore céget működtetni?I have to start with an apology: the title of the article is extremely misleading. The process began some time ago, is still ongoing, and will probably never come to an end. The reason behind this is the speed with which the internet has „invaded” every day, hour, minute and even second of the average person. Because an awful lot of us now begin the day by reaching for our mobile phones to see what messages we received from friends or business partners while we were asleep. In fact, so important has the role of the internet now become, that sociologists seriously claim that the satisfaction of physiological needs no longer represents the base of the pyramid in Maslow’s Hierarchy of Needs, but has been replaced by the presence of an internet connection, or the lack of it. 

Furthermore, we are not merely talking about a simple internet connection; today, we laugh at the thought of the dial-up internet, only available via a pc. Wifi and mobile internet replaced that what seems like an age ago. It may still seem a little far-fetched, but believe me, the day when the whole planet is one huge online interface where anyone can log on to the virtual space from anywhere at any time is not some unattainable Utopia. Although this is not going to happen tomorrow, we already play out a significant part of our lives in this virtual space. In fact, for many of us, the majority of our time is spent there. To be honest, our children can not even see the dividing line between what is virtual and what is tangible earthly reality. It’s as if our lives have been divided into two, and the border between the two worlds is becoming visibly blurry.

What effect will this have on the development of and changes in the personality of the modern man? You could fill libraries with the answers to this question, so I would like to deal specifically with the question from the point of view of the business world, and, more concretely, the worlds of banking and company formation. What challenges will we be faced with? How can we find the right solutions? Do businessmen need to jostle for position at all here? Are there offshore solutions in this area? These are interesting questions. Let’s look at them one at a time.
The challenges. A number of the retail chains in the United States of America have already come face-to-face with the process, and it doesn’t look good for them: internet sales are gradually squeezing them out of the market. Consumers are happy to order their favourite muesli or mineral water over the internet, rather than having to queue up in a crowded shopping centre and then carry it home when it can be delivered to their door instead. If the stores don’t organise this kind of delivery service themselves, then sooner or later some watchful entrepreneur will start doing it via the internet. As just about anybody can become a distributor for mineral water or muesli.

LAVECO newsletterBased on the above, it is worth considering whether the same challenge is present in the industry in which we work. If the answer is yes, then it is necessary to rush headlong into the search for a solution, before somebody else takes our place in the virtual world. And we are not just talking about simply advertising on the internet. The internet presence, sales and promotion form a complex procedure, made up of a number of parts. In the case of bulk products it is assumed that the sales and financial transactions will take place in a closed system. In addition to the physical process, it is very important to be able to carry out fast and efficient financial transactions, and here too, just as in every facet of life, the question of profitability also arises.

The question is whether the offshore world has any solutions which can be successfully applied in the internet era and world. The answer is definitely yes. It is enough to consider that the company behind one of the world’s best known online hotel booking sites was registered in the British Virgin Islands, and it immediately becomes clear that the offshore world was capable of providing an efficient answer in that case.

If, however, we start to examine things more closely, the picture becomes much more hazy. I would like to highlight just two important obstacles to the realisation of transactions. The first is set down by the EU directive on distance selling, and applies to companies selling products in the European Union through distance selling. I am thinking specifically of the complicated, sometimes impossible, uncontrollable regulations relating to VAT registration. In my opinion, this is over-regulated, and they would like to simplify it in the near future, as the current regulation makes life extremely difficult for numerous companies, particularly small webshops.

LAVECO newsletterThe other obstacle, which is even more difficult than organising the physical procedures, is the attitude of the banks, or rather the policy of the banks in this area. While the world has gone through enormous changes over the last 10 years and everything has moved to the internet, a significant number of the banks still operate according to outdated regulations, treating companies trading on the internet with suspicion. They see the potential for committing crime, rather than the actual business activity being carried out. It is somewhat paradoxical, but we find ourselves facing the hostile behaviour of the banks on an almost daily basis. And on many occasions we are talking about totally unrealistic restrictions. For example, they are not happy to open accounts for companies trading in, say, mobile telephones or electronic devices on the internet. The reason is that the banks feel that the risk of abuse and cheating is just too great. So they reject the application, even in the case of careful entrepreneurs with good references.

The absolute low point for me was when a bank in Cyprus closed the account of a company operating in Cyprus with 15 software developers and its own local office. The reason was that it was considered a high-risk business, which the bank’s policy would not support. When this was mentioned at an international conference attended by ministers and the bank’s managing director, a number of them were understandably stunned. Undoing 12 years of work based on an „unfriendly” decision is not a particularly fair move by the bank. Not to mention the loss for the country in which a foreign businessman had settled and created 15 new jobs.
The above examples show that the opportunity is there, the challenge is getting greater by the day, and the role of the internet is growing. But the solution we choose can make a huge difference. If we look at the tax side, then again there are serious differences. Considering the average tax rates in the EU, the lowest rate of corporate tax is around 10%. While the lowest bracket of VAT falls between 15 and 19%, 20% can be considered more acceptable. If you add these two together, then a 30% tax burden is already taking shape.

And where there is none of this? Yes really, in a significant number of offshore jurisdictions there is neither profit tax nor VAT. Having said that, this by no means implies that these jurisdictions would be suitable, or rather efficient, for the establishment of a modern e-shop.

The situation is much more straightforward when the subject is the selling of data, information or services, as the physical distance does not have an impact. On the other hand, when goods have to be transported, logistical questions arise which make the operation of such companies inefficient. For example, shipping goods around the world from the Seychelles is not the easiest of tasks to organise, as the islands are located in the middle of the Indian Ocean. We are also faced with the same problem if we try and operate in the Caribbean region or the islands of the Pacific Ocean.

The traditional offshore jurisdictions, therefore, are not really suited to the efficient operation of a webshop which requires the physical shipping of goods. Hong Kong looks like a promising jurisdiction, especially as such a significant part of the goods ordered on the internet comes from China. In the case of Hong Kong, however, the question of taxation must be examined very thoroughly. Local activities are subject to a 16.5% tax on profits, while offshore profit is exempt from taxation. If there are products originating from Hong Kong among the items being sold on the webshop, then the activity can hardly be classified as being outside Hong Kong. So, Hong Kong can be considered very good for a number of reasons, but the question must be looked at very carefully.

Where, then, is it worth establishing a webshop which can truly operate well all over the world? It is very difficult to provide a cast-iron response to this question, but the United Arab Emirates, or more precisely, the Free Trade Zones operating there, may be a good option. The main purpose of these Free Trade Zones is to facilitate international trade, of which internet sales now form an integral part. The more than 30 Free Trade Zones established in the 7 Emirates offer legal and convenient solutions for the arrangement of web trading.

Here are a few arguments in favour of the Emirates:

  • In many of the Emirates (Ajman, Umm Al Quwain etc.) it is possible to form entities as Free Zone Companies whose licence to operate includes a licence for internet trading.
  • The rate of corporation tax and VAT are both currently 0%. Furthermore, there is no requirement to file accounts.
  • There is a well-developed infrastructure of warehouses and offices for the physical handling and forwarding of goods.
  • The world’s largest shipping and transporting companies (UPS, DHL, TNT etc.) are present, facilitating the forwarding of goods.
  • There are numerous banks offering the opportunity to open not only current accounts, but also merchant accounts.
  • Thanks to the stability of the country, entrepreneurs with serious investment intentions can build businesses for the long term.

Further advantages could be listed in favour of the United Arab Emirates. At the same time, nothing is perfect, including this jurisdiction. Having said that, if we consider that this small country is one of the most important business centres for a continent with a population of 4 billion, then it is understandable why LAVECO Ltd. also recommends it for web traders looking to resettle. Behind the bright lights and pomp of Dubai lies a business solution which offers any foreigner the ideal possibility for the realisation of their business goals.

I hope you will enjoy reading and analysing these pages.

With warmest regards

László Váradi
Managing Director