By: Viktoria Soltesz

Updated: Dec 18, 2024

Beyond Tax: The True Cost of Offshore Strategies

Cyprus is rightly touted as one of Europe's most attractive centers for tax planning. It offers low corporate tax rates and easy access to the European market. While these benefits make it a favorite for advisors crafting tax-efficient structures, combining Cyprus setups with offshore elements often leads to severe operational issues, particularly in payments and banking.

Many businesses are lured by promises of cost savings and compliance on paper, only to discover that these setups can trigger account rejections, frozen funds, and disrupted operations.

The Danger of Nominees

One of the most common issues in banking is the use of nominee directors or corporate directors. Banks and payment providers immediately flag these setups as risky. When a director is a corporate entity, it is often automatically assumed to be a nominee, raising immediate concerns about transparency. Financial institutions want to understand who is behind a business. 

The main issue arises when a nominee or corporate director managing multiple companies faces a regulatory issue—such as fraud or AML violations—which can quickly impact all the companies they manage. Suppose the nominee or corporate director is added to a banking blacklist. In that case, all associated companies are also flagged as fraudulent due to the common management, severely disrupting the banking operations of otherwise compliant and innocent businesses.  

This is not a hypothetical risk. Even companies with spotless operations can face account freezes or outright rejections because of their association with certain nominee directors flagged by other financial institutions. Banks are unwilling to take any unnecessary risks and close accounts permanently for a minor hiccup.

High-Risk Providers Are No Solution

Offshore entities are at an inherently higher risk due to the enormous opportunity for money laundering or fraud. The high street banks usually refuse higher-risk entities from the get-go. But when banks refuse to onboard a business, companies have no choice but to turn to so-called “higher risk-friendly” financial providers.

These providers categorize clients into groups based on their perceived risk level. They are willing to take on some extra risk—for additional profits. The problem is not only the high fees that the operation has to bear but also the safety of the funds:

• If any other client company in the portfolio of this “higher risk-friendly” financial institution violates rules or commits fraud, the fallout can impact the innocent business, too.
• When financial providers come under regulatory scrutiny, they often leave their clients unable to access their funds for weeks—or indefinitely. 

This means companies that are forced to rely on “higher risk-friendly” financial providers often find themselves caught in a never-ending cycle of instability and extremely high fees, unable to secure the reliable financial services needed for growth.

Example: The Cost of Poor Planning

Accountants and tax advisors often overlook the operational realities of payments and banking when designing tax plans for expansion strategies. 

We had a client who wanted to expand into Latin America and pinpointed Paraguay as the pilot operation to test the waters.

Paraguay had relatively low costs and a favorable tax structure. Still, my client made a massive mistake assuming their existing European payment providers would work there. Unfortunately, less than 6% of the population used cards, making their market expansion to Latin America with a single card provider useless. Even if their marketing campaigns successfully drove traffic to their website, their customers couldn’t pay. Additionally, due to political challenges, moving money out of Paraguay and sending it back to the headquarters in Europe would have been a significant issue from a banking standpoint. 

This is one example of why payment and banking planning must come before any expansion, tax planning, or new company incorporation worldwide. Even the most carefully crafted tax plan can fail without understanding the infrastructure and customer behavior in a new market.

Why Accountants Fall Short

Accountants and tax advisors specialize in compliance and cost-saving strategies. Still, they are not equipped to handle the operational challenges of payments and banking. They often miss critical considerations such as risk assessments, security, technology integrations, and customer payment preferences. Decisions made with only tax efficiency in mind can lead to serious long-term problems, including frozen accounts, higher payment and banking fees than the tax savings, or even the inability to scale operations effectively.

The Right Way to Approach Tax Planning

The solution is simple: payments and banking should be the foundation of your strategy, not an afterthought. A thoughtful and detailed approach can make a big difference when it comes to businesses evaluating their risks and operational needs before making critical decisions. Only the right payment and banking strategy ensures your operation is viable and avoids costly mistakes and unnecessary risks.

A business cannot afford to set up a group structure with only tax planning in mind. Financial institutions already understand creative tax planning structures and all their processes are designed to prevent money laundering or tax evasion opportunities. This means businesses can only thrive with a reliable payment and banking setup. Tax benefits are irrelevant if you can’t move money or manage your finances effectively.

Always Be One Step Ahead

Combining offshore elements with Cyprus company setups may promise lower taxes but can easily backfire without a robust banking and payment strategy. Don't let short-term cost savings jeopardize your business. Consult with professionals and keep educating your team to fully understand the fintech world's rapidly changing landscape. This is the only way to ensure your structure is tax-efficient and operationally sound.