What is a Shell Corporation?
Shell corporation is a company which is legitimate but has no financial assets, and it only exists on papers. These legal entities have no significant business activities; they do not hire employees and also don't generate any revenue.
These corporations obtain money and mainly control over a conglomerate company to engage in financial transactions. Their functioning allows the firms to get tax benefits. Though the shell corporations are formed to avoid taxes, they are usually used for black and grey market activities. They are also created to transfer assets from one company to other leaving behind the liabilities.
Good read: Tax Havens : All You Need To Know
Shell companies are commonly used in illegal activities such as money laundering. These firms often hide or protect the company's assets in a perfectly legal manner.
They are also known for legitimate activities like putting funds in the seed stage startup.
For instance, large companies like Apple, which are based out of the United States, moved their jobs and profits offshore. These companies take advantage of liberal tax policies. They earn their profit from the process of "offshoring" or "outsourcing" their work. These companies then form shell companies in the countries they are outsourcing work.
How to create a shell corporation?
It is effortless to form a shell corporation; usually, an anonymous shareholder of a company buys shares of a shell company. The shareholder then takes full control of the shell company, which he/she eventually merges with a private company.
Once this process is over the original company is left with nothing but the "shell". The newly formed company is then referred to as shell corporation. The shareholders entirely control the new company. They can use the shell company to accumulate a massive chunk of public company shares and leverage their control.
Usually, shell corporations are registered in the country they are created. Creating a shell company in a foreign country is legally permissible in many countries.
There are special agencies who have authorised agents on board to help companies and individuals set up shell corporations. These agents do all the administrative work such as paperwork and getting permissions from bureaucrats' offices, which are required to set up a company in a foreign land. Shell corporations are then required to register over phone or online. The agents pay the fees and register his/her name along with the nominal owner or shareholder directors’ name to complete the process.
The hassle-free and cheap way makes it easier to create a shell company. Many times, to create anonymity of the owner, shell corporations are registered and owned by another shell company. This layer creates a high level of secrecy as, at the time of the investigation, the owner is protected because each shell company is registered in different countries.
Which country has the most shell companies?
Shell corporations are mostly found in tax haven countries, meaning they have significantly less stringent tax codes and high privacy laws.
According to Global Financial Integrity, the United States is the second most popular choice for businesses to form a shell company. States such as Delaware, Nevada, and Wyoming provide a perfect environment because of lax requirements to start a shell company and follow strict privacy laws.
With a shell company in the U.S. foreign businesses can invest in the U.S. real estate market. The large amount of real estate investment in the U.S is made through shell companies.
Switzerland is also famous for providing safe harbour to the shell companies. According to Economist Gabriel Zucman, about 60 per cent of the money in Swiss bank accounts are from shell corporations.
Apart from Switzerland and the United States, some of the other tax havens for shell companies are:
What benefits shell corporations provide to the business?
Businesses and individuals use shell companies for various benefits.
Tax benefits: Business grows its operations along with limiting the tax burdens through forming shell companies. Companies can increase their reach in new markets and boost profits by operating through a country which has lower tax rates.
Even if the businesses do not wish to operate in the foreign land, they can still set up shell companies and invest in that country in markets like stock and securities exchanges. The states referred to as tax havens are tax-advantaged offshore hotspots for shell companies to operate.
Protecting assets: Shell corporations are also used by businesses to hide their assets. The shell company owners’ records are anonymous; hence it makes it easier to conceal financial transactions. Some businesses also use shell companies to protect their assets by keeping the capital stable.
For instance, a person living in Greece will have his capital value decrease substantially. But if the capital is held in a shell corporation in the foreign land, he will be able to avoid the volatile Greek economy easily.
Access to foreign markets: Shell companies are usually registered in the foreign land which gives businesses and individuals access to the lucrative marketplaces in that particular country and also other countries which have easy trade relationships with the registered state.
For instance, if you have a shell company in Switzerland, apart from the tax benefits, you will also be able to access the market in the country and countries in Europe. Similarly, if you have a shell corporation in the United States, you will be able to access the lucrative U.S. markets for investments.
Why should businesses avoid creating a shell company?
Shell corporations are easy to form no doubt, but they are risky to operate. Because the shell companies have a negative reputation in the market, the company's credibility may get dented for being associated with a shell company. The current U.S. administration is focusing on U.S. based companies to generate jobs in the U.S. rather than operating offshore and outsourcing.
Not all shell companies are illegal, but they hold personal assets which exist in the grey area legally. Also, hiding taxes is a civil or criminal punishable offence in many countries. Hence it makes the shell company's objective questionable.
The recent Panama Papers scandal is widely known, where more than 11 million secret documents were revealed. The papers of the shell company's owners were registered by the Panamanian law firm Mossack Fonseca.
A considerable number of government officials and public figures from many countries were involved in the Panama Papers scandal related to various crimes such as tax evasion and money laundering.