Now and then a client requests a shelf company.
There can be good reasons for buying a shelf company. In this article, we will explain those reasons.
However, we also discuss some of the downsides. These are not always understood (or explained).
But let us start with explaining what a shelf company is.
What Is A Shelf Company?
A shelf company is a company that has been created but never had any activity. You can compare it with a bottle of wine that has been left on a “shelf” to “age”.
A shelf company did not perform any business activity during its lifetime, has no public debt and no outstanding obligations.
The shelf company can be sold to someone who can use the company without having to set up a new one.
Why would someone need that?
The Reasons For Using Shelf Companies
Simply put, a shelf-company is a legal company that hasn’t yet been used, but is of a certain age.
The main reason for buying a shelf company, is the ability to show that the company has a history.
There are a number of cases when this is needed:
Tax treaties. In certain jurisdictions and certain situations a legal entity needs to be in existence for a certain amount of years, before any treaty benefits can be enjoyed under an applicable tax treaty.
Government bids. Some jurisdictions require that a company is in existence for a certain amount of years to be able to bid on government contracts. With a shelf company, you can bid on government contract work even when you have only owned the company for a brief period of time.
Attracting consumers or investors. Many clients and investors shy away from new companies in favour of those that have demonstrated the ability to remain in business for several years. Having a shelf company could take away reservations a potential client or business partner might have.
To gain access to corporate credit. Having a shelf company that has aged for several years can also give easier access to corporate credit. Many banking institutions worry about lending money to new organizations. Since a shelf company has a history, they might be more likely to provide credit.
Other government requirements. A minimum age requirement could exist in order for a company to get a particular license. In one particular case, we had a client that wanted to set up a holding company to hold shares in a company in Oman. Under local regulations a foreign corporate shareholder needs to be in existence for a minimum of three years.
Another important traditional reason for the use of a shelf companies is the ability to immediately use the new structure.
Since the shelf company already exists, a client does not have to go through the process of setting one up. In some jurisdictions, the shelf companies could already been registered with the tax authorities. There are providers that offer ready made corporate bank accounts. The new owner of the shelf company can be in business quickly.
We have some reservations with regards to this particular argument. We will explain those now.
The Downsides Of Using A Shelf Company
As you saw in the previous chapter, there are legitimate reasons for using a shelf company. However, there are a number of important considerations.
“Speed” of incorporation. A big reason for using shelf companies used to be the time it took to set up a new company. However, in our modern digital age, new companies can be incorporated very quickly. Using shelf companies for speed is not needed any more. In addition, a good chunk of the set up time of a company is usually spend on opening a bank account. This does not change. In fact: if the transfer of the the shelf company itself will be quicker than a new set up is also open to debate.
Hidden Paperwork. Some companies that sell shelf companies tell you that you just change ownership and are ready to go. But this is not always the case. There will be paperwork involved. In some case instruments of transfer need to be signed in original by both parties or passed before a notary. In a jurisdiction like the UAE, experience shows us that it takes more time to change the shareholder of an existing structure than setting up a new company. Also, the transfer of ready made bank accounts is not always easy or possible. Banks have their own due diligence requirements and are becoming stricter.
Real History. One of the arguments for a shelf company is to show a certain history to partners and potential creditors. But one look at the previous annual statements reveals that actually nothing ever happened. Which is exactly where we would look for. One could argue that showing an unused company could actually achieve the opposite in some contexts. Also, one really has to be sure that there are no existing liabilities from the previous use of the company. That the company was not actually used for something you would not agree with.
Price. Shelf companies are often sold at a significant premium. One has to take care of all the annual fees that have been paid and the premium for the agent.
Restricted Use. We briefly touched on this. But regulation with regards to offshore companies and financial service providers is becoming stricter. There are jurisdictions where the use of shelf companies is restricted. The most important free zone for offshore companies in the UAE, RAK FTZ, forbids the use of shelf companies. International banks are also becoming risk averse. In practice this means that they look critically at anything out of the ordinary.
Using A Shelf Company – Conclusion
A shelf-company is a legal company that hasn’t yet been used but is of a certain age.
There are good reasons for using a shelf company. These are: making use of tax treaties, being able to bid on government contracts, getting instant credibility from clients and potential business partners, obtain corporate credit and deal with possible regulatory requirements.
However, one of the main reasons for the use of shelf companies, increased speed of the set up, does not exist any more.
Also, like many of the other structures that are out of the ordinary, the modern regulatory environment makes the use of the shelf company will be met with paperwork and in some cases “red tape”.
Do you wish to know more about the best solution for your business or want to know more about setting up international shelf companies, please Contact Us.