Despite its name, a shell company is a legal tool more than what you might normally consider a „business.“ It has no storefront, no assets, and is not involved in the day-to-day operations of a business. As a legal instrument, letterbox companies can be created to achieve: A shell company is a company with no active business activities or significant assets. These types of businesses are not necessarily all illegal, but they are sometimes used illegitimately to hide business ownership from law enforcement or the public. Legitimate reasons for a shell company include things like a startup that uses the business unit as a vehicle to raise funds, fund them, make a hostile takeover, or go public. When it comes to the legal use of a shell company, one of the most common applications is to facilitate corporate mergers and acquisitions. This is especially common when a company tries to buy another business without much public attention. I would say that a major turning point began around 2016 when the Panama Papers were published. The International Consortium of Investigative Journalists, a kind of pan-journalistic investigative collaboration for hundreds of media outlets around the world, published articles that made headlines at the time after receiving a leak of millions of documents that anonymous shell companies had set up to engage in all sorts of unscrupulous activities. Some suspected actions trigger the investigation into the operation of the shell company.
For example: This is a big problem for law enforcement and national security investigators because they track criminal networks or threats to national security. If they come across an anonymous shell company, they can`t figure out who is behind the company. You are just hitting this wall of corporate secrecy. And investigations are often blocked and can sometimes be abandoned due to lack of time and resources to uncover and pursue the case. Since shell companies are very often used for various illegal purposes, the regulation of shell companies is becoming increasingly important to prevent such illegal activities. Too often, however, shell companies are involved in illegal activities. In May 2012, the SEC suspended trading on 379 inactive companies that were vulnerable to reverse mergers and other potential fraud schemes. The SEC is well aware of the questionable nature of Shell Corporation`s structure and is actively monitoring the Shell Corporation space. In fact, the SEC requires shell companies to disclose information in situations that could mislead investors, such as mergers of private companies with shell companies.
Any definition of a shell company can be a bit confusing. Indeed, there are several ways to use the term „shell company“ or „fictitious entity“. Most often, however, a shell company refers to a company that does not carry out significant operations. While not necessarily illegal, using a shell company to hold personal property exists in a legal gray area. All income earned in the United States is subject to U.S. tax. Hiding income from the IRS could result in civil or criminal penalties if discovered. The U.S. has tightened regulations on tax evasion by requiring foreign banks to provide information on U.S. citizens` accounts. · As a front for product development that an established company wants to keep private until it is ready; Some shell companies may have already had activities that have declined due to adverse market conditions or mismanagement of the company. A letterbox company can also be created when the business activities of a company have been liquidated, for example after a takeover, but the „shell“ of the original company still exists.
[3] The term „shell company“ does not describe the purpose of a business entity, but it is generally more informative to classify a company according to its role in a particular business structure; For example, holding company, general partner or limited partner. Whether you`re starting, buying or selling a business, or need legal support for your day-to-day operations, our business lawyers at Weisblatt Law Firm can help. We help you with day-to-day operations and compliance issues, as well as highly complex mergers and acquisitions using tools such as shell companies or holding companies. We strive to achieve each client`s goals and can help businesses of all shapes and sizes. Please contact our office for more information about our services at 713-352-0847 today. A shell corporation is a business entity that has no significant assets or active business activities. In general, a shell company is a legal instrument used in various business transactions to reduce tax liability, access financing, store funds or maintain anonymity. On the other hand, a holding company is a parent company – often for many different companies.
A holding company does not participate in the operations of the investee companies, but rather holds sufficient inventory to control the investee companies. This can reduce risk for owners while owning and controlling many businesses. Registering a letterbox company requires little personal information. A mailbox system is a financial arrangement in which individuals attempt to set up offshore shell companies to hide their true identities from the government. This way, the person can avoid taxes or hide various sources of money that they don`t want to disclose. Another example is the use of a shell company in a tax haven, which allows profits to be shifted to that shell company, in a strategy called tax evasion. A U.S. company that buys products abroad would have to pay U.S. taxes on profits, but to avoid this, it can buy the products through a non-resident shell company based in a tax haven, where it is called an offshore company. The shell company would buy the products on its behalf, brand the products and resell them to the US company, thus transferring the profit to the tax haven.
(Products can never physically pass through this tax haven and are shipped directly to the U.S. company.) Since the shell company is not domiciled in the United States, its profits are not subject to U.S. income tax, and since it is an offshore company in the jurisdiction of the tax haven, it is also not taxed there. Under the Tax Havens Act, the profits are considered not to have been made in the jurisdiction, with the sale deemed to have occurred in the United States. Since U.S. income tax is significantly less important than corporate income tax, U.S. corporate executives would claim a salary (or fees, consulting fees, etc.) on the company`s profits. The main problem in this context is that the number of letterbox companies in the EU and the corresponding impact of letterbox companies on the EU economy cannot be determined from the available data. In the EU, the main legal basis for regulating the performance of letterbox companies is the so-called Anti-Money Laundering Directive (Directive 2005/849). The most common use for a shell company is to avoid taxes. This is called tax evasion or asset advocacy. Companies abroad or relocate part of their activities to another country to benefit from lower taxes and regulations.
As long as the money held in a tax haven was earned in that country, this practice is legal.