Before incorporating a company, the entrepreneur should define what form of company is necessary for him in a given commercial situation. Is it going to be an ordinary trading company or will it be a holding company? The situation may even demand the incorporation of an insurance or financial company. The options provided by foreign jurisdictions are presented below.

The trading company

The overall majority of non-resident companies operating in the international market are trading companies. However, it should be noted that the word "trading" does not imply that the company is going to be only buying and selling goods. A company that is involved in production, cargo shipment, tour operating or consultancy, in other words commercial activities in the wider sense of this notion (while also simply accumulating funds on the company's account) - will nevertheless have the status of a trading company. The list of jurisdictions used for trading-company incorporation is quite long and practically any tax-exempt or low-tax jurisdiction from the Caribbean islands to prestigious European jurisdictions suits this purpose well. Taking into consideration the costs of foundation and ongoing maintenance, as well as its simple management structure, this type of non-resident company is the most attractive.

The holding company

The holding company in the wider sense of this term is an entity possessing the shares of other enterprises, cash or other assets (including patents, trade marks or copyrights), and having the right to dispose of this property and invest in other enterprises, as well as acting as a source of finance for its subsidiary companies and enterprises.

At the same time a holding company, as a rule, does not also carry out manufacturing or commercial activities and does not carry on brokerage or banking on its own behalf.

Such highly respected jurisdictions as the Netherlands or Luxembourg, while not providing any privileges for trading companies, do provide tax privileges to holding companies satisfying certain criteria.

One of the most important criteria in founding a holding company is the correct choice of country of incorporation. Most often a holding company is incorporated in a jurisdiction having a double tax treaty with the countries where its subsidiaries are going to be incorporated in the future. If this condition is satisfied, further deductions (in the form of dividends for the parent company) will not be subject to additional taxation where the dividends are paid.

Insurance companies

Entrepreneurs at the head of large businesses often encounter the following difficulties in obtaining business insurance:

• Placing insurance against all comprehensive, property and personal risks with third-party insurance companies implies paying significant premiums;
• If the entrepreneur tries to economise on insurance premiums by creating his own reserve, provisions to this reserve will in most cases not be tax deductible;

In such instances, it is far more profitable for large enterprises to create subsidiary insurance companies of their own, which can then accrue the premiums payable in its books - acting in the first instance as a reserve fund against the occurrence of the insurable event. It should be borne in mind that there is, as a rule, a certain period of time that elapses between the receipt of insurance premiums on the one hand and the payment of indemnity insurance following the occurrence of an insurable event, during which time the subsidiary (captive) insurance company can accumulate considerable operating capital. The entrepreneur, for example, can use this capital for low-interest financing of his or her main business. Furthermore, in many countries insurance payments are includible in operating expenses and therefore deductible from taxable income.

As a specific example, a bank, having insured its operations against currency or credit risks with its own foreign insurance (or reinsurance) company, can considerably decrease the amount of its taxable profit. At the same time, the accumulated insurance premiums may serve as a tax-exempt reserve fund.

It should be noted that the main objective of insurance business is to earn profits, and captive insurance companies are no exception. They serve as a profit-earning vehicle and provide an opportunity for the owners to enter a new business sector. If they are successful, those companies may become strong competitors for existing insurance companies in the insurance market.

Trust companies

A trust provides for the transfer of property by one person (the founder or settlor) for its fiduciary management by another person (the trustee) on condition that when the trustee carries out activities in respect of this property, is guided by the orders and instructions of the settlor. The income from the trust property is usually paid to or accrues for the benefit of third parties (the beneficiaries), on the instructions of the settlor.

The roots of the trust can be found in English legislation of the Middle Ages. When wealthy people in England considered the distribution of their property - factories, banks etc. between their heirs, they often realised that their heirs might not be able to cope with the practical management of the "empires" they had built and therefore they entrusted all their property to trust funds, managed by their friends - professional financiers. It was nevertheless stipulated that the income from the trust fund would be distributed between the numerous heirs. In this way, the English sought to counteract the laws providing for direct distribution of the property to heirs, where they had little confidence in their heirs' capacity to manage the business.

These traditions nowadays have acquired many more varied forms, but their essence is the same - to alienate one's property from oneself, thus accomplishing one's wishes regarding distribution of the property and protecting it from undesirable persons, importunate friends and demanding creditors, all of whom may be laying claim to the property. Furthermore, trust operations also dictate the method of taxation. The settlor, having transferred his or her assets for management abroad, no longer has to pay tax on this property. The trustee is also not liable for tax on the trust income, as he does not use the trust property, but simply manages it. As for beneficiaries, they do not control the trust property, although they receive certain income from it. In many instances, these specific property rights provide effective tax-exempt status for the trust property.

An international trust provides for an agreement between the non-residents of one country as regards property of non-resident origin in favour of non-residents of the country where the trust is registered. Such trusts, incorporated in offshore centres, are practically tax-exempt. Due to the fact that property taxes and capital gains taxes remain high, many wealthy people prefer to keep their assets in "tax havens" under the protection of international trust agreements.

Shipping companies

Registration of a vessel under the flag of its home country in most cases produces comparatively high rates taxation, as well as stricter limitations regarding the technical state of the vessels, remuneration of the crew and other norms. By contrast, entrepreneurs who register their vessels under the flag of nations such as Cyprus, Panama or Liberia gain the opportunity of paying considerably lower taxes. In most jurisdictions offering "flags of convenience", taxes have fixed rates, depending only on the vessel's displacement, instead of being based on a percentage of the annual profit.

Furthermore, "flags of convenience" may be particularly useful, for example, when an embargo is placed on the home country of the crew or in other conflict situations.