What is a shell company and the benefits of a shell company?
The Panama Papers leak is a global scandal. In one of the largest data breaches in history, millions of documents revealed that banks, political leaders and the wealthy allegedly hid billions of dollars in shell companies through a Panamanian law firm. The scheme also reportedly allowed some of the company's customers to evade taxes. If you don't know what a shell company is, here's everything you need to know.
Shell Companies: The Basics
A shell company is a business created to hold funds and manage the financial transactions of another entity. Unlike traditional companies, shell companies have no employees and do not trade on exchanges. Shell neither makes money nor provides products or services to customers. In fact, the only normal business practice for a shell company to engage in is to keep track of the assets it holds - usually not a lot of money.
The benefits of shell companies
Business owners and individuals can benefit from shell companies in a number of ways. For example, a new startup could use a shell company to store the funds it raises before it officially launches. Companies preparing for a merger or acquisition can keep their assets in a shell company to simplify matters.
Shell companies as tax havens
There are also tax benefits for setting up a shell company. Some countries and territories are tax havens, meaning they are places where certain tax rates (such as income tax rates or corporate tax rates) are extremely low or non-existent.
Foreign companies can create shell companies in tax havens such as Panama and lower their tax bills at home. This is because some tax havens are not required by law to report any tax information, allowing them to defer taxes and hide offshore accounts from the government. Besides Panama, other tax havens include places like Switzerland, Hong Kong and Belize.
In most parts of the world, shell companies are considered fully legal entities. In some cases, the once fully functioning business of the shell company collapsed or was eventually taken over by another company. But, as the Panama Papers leak revealed, shell companies sometimes operate as illegal vehicles.
Shell companies are often set up to mask the identity of anyone who houses their assets. Usually, a shell company has its own address. The United States requires shell companies to register with the SEC. So while they may look like regular businesses (on paper at least), in reality they are just empty shells.
Sometimes companies take advantage of the secretive nature of shell companies by engaging in illegal activities such as money laundering. This is reportedly just one of the crimes committed by individuals involved in the Panama Papers scandal. The leaked documents also revealed that the law firm Mossack Fonseca allegedly set up offshore accounts for people looking to avoid paying taxes.
The line between legal use or illegal use of shell companies can become blurred. After all, shell companies are very common. However, some actions are clearly illegal, such as committing fraud, saving money for drug dealers, or collaborating with terrorists.
But, as the Panama Papers leak revealed, the structure of the shell company makes it an ideal vehicle for individuals who want to engage in questionable activities.