A shell company refers to any legally structured corporation with no significant assets or active business operations. Also called a shell corporation, they are often domiciled in a country or state where the business isn’t carrying out its primary operations. For example, a company doing most of its business in the United States, can have a shell company registered in a famous tax haven such as Panama. The history of Panama as a tax haven began in 1919 when Standard Oil used the small Central American nation to register foreign ships to evade U.S. taxes and regulations.
Other regions infamous for incorporating shell corporations are Switzerland, Jersey, and Luxembourg in Europe; Caribbean hotspots such as Cayman Islands, The British Virgin Islands, Bermuda, Bahamas; and in the United States — Delaware and Nevada.
With the Panama Papers expose back in 2016, shell companies were all over the news and due to their reputation for mostly tax evasion, many associate shell companies as illegal entities. The truth is, shell corporations are legal — but are often used illegitimately — which, again, is subject to local laws. What is not allowed in one country doesn’t mean it is illegal in another.
Benefits of Shell Corporations
By far, the most common reason for shell companies is to lower a company’s tax bill. Shell companies allow a U.S.-based corporation to avoid paying large amounts in taxes because some tax havens do not report any tax information to the U.S., making it possible to defer taxes and hide offshore bank accounts.
Shell companies can be used to avoid lawsuits. It can protect the owners’ identity because countries like Panama allow companies or individuals to set up tax-free, anonymous corporations.
Shell companies can be used to gain access to foreign stocks and exchanges. Like, shell companies used as SPACs (special purpose acquisition company). These are companies formed exclusively to raise capital via an initial public offering (IPO), which will then purchase a company already in operation.
A shell company can be used to disguise ownership or hide assets. For example, a millionaire's assets (such as a yacht) can be placed in the shell company's name and the company can then be sold to avoid taxation on the sale of the assets (including the yacht).
Tax avoidance isn’t the only reason a business would set up a shell corporation. Neither are businesses the only ones who use shell companies. Wealthy people the world over use shell corporations to hide their earnings and their wealth from the governments of the countries in which they are based. There’s nothing necessarily illegal about shell corporations themselves. Shell companies, when used right, can allow businesses to operate in a country, while protecting its other operations from the legal, political and financial risks related to that country.
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