Nomad Capitalist: How to Include a Business Partner in an Offshore Company

When planning to move a business offshore, the presence of a co‑owner often proves to be the biggest roadblock. Even when the primary owner is ready to relocate, the partner’s ties to the home country can keep the whole structure tethered to high‑tax jurisdictions.

How a Partner Can Pull You Back In

• Shared ownership – If the company is split 50/50, both parties must agree on any restructuring. A partner who prefers to stay in the original country can block moves that would otherwise reduce tax exposure.
• Controlled Foreign Corporation (CFC) rules – Many jurisdictions treat a foreign‑incorporated entity as a CFC if a resident owns a certain percentage. The partner’s continued ownership may trigger CFC reporting, forcing the offshore company to be taxed as if it were still domestic.
• Permanent establishment (PE) risk – Work performed by the partner in the home country can create a PE for the offshore entity, exposing the business to local corporate tax on the income generated there.
• Residency considerations – The partner’s personal tax residency (e.g., Canadian, U.S., EU) can affect the overall tax picture, especially if the partner continues to receive dividends or salary from the offshore company.

Practical Steps Before Going Offshore

1. Assess ownership percentages

   • Determine the exact share each partner holds. Minority stakes (e.g., under 10 %) may be less problematic, while majority or equal stakes require more coordination.

2. Open a candid discussion

   • Explain the tax‑saving goals and ask whether the partner is willing to:
     • Sell their equity for cash or performance‑based compensation.
     • Remain a non‑equity stakeholder (e.g., as a contractor) to avoid ownership‑related tax triggers.
     • Relocate together, if feasible.

3. Consider a buy‑out

   • If the partner is not interested in moving offshore, negotiate a purchase of their shares. This can be funded through a lump‑sum payment, installment plan, or a profit‑sharing arrangement that mimics equity without actual ownership.

4. Explore restructuring options

   • Convert equity into a profit‑interest or phantom‑share plan that provides economic benefits without triggering CFC rules.
   • Create a holding company in a jurisdiction with favorable tax treaties, then transfer the operating business to the offshore entity while keeping the partner’s interest in the holding company only.

5. Evaluate the impact of minority partners

   • In some jurisdictions, a small minority stake does not create a CFC or PE. Verify local legislation to see if the partner’s share can be left untouched.

6. Plan for operational continuity

   • Identify which functions the partner performs (e.g., sales, management) and determine whether those activities can be shifted to the offshore entity without creating a PE.
   • If the partner’s role is essential, consider hiring local staff in the home country to replace those duties, thereby reducing the risk of a PE.

“Scorched‑Earth” Approach – When It Makes Sense

Some advisors suggest cutting all ties to the original country—selling assets, disposing of local property, and ending domestic employment—to simplify the offshore transition. While this can eliminate many tax complications, it also discards valuable assets and may not be necessary if the partner issue is resolved through the steps above.

Key Takeaways

• A business partner’s residency, ownership percentage, and role can re‑anchor an offshore structure to the original tax regime.
• Early, transparent negotiations with the partner are essential; assumptions that they will “go along” often prove false.
• Options such as buy‑outs, equity conversion, or restructuring can remove the partner’s tax‑dragging influence, but each requires careful legal and tax planning.
• Even a small minority stake can be harmless in some jurisdictions, but verification is crucial.

By addressing the partner’s position before initiating offshore incorporation, owners can avoid the most common cause of stalled tax‑saving projects and move forward with a clearer, more efficient plan.