Offshore in Scotland: myth or reality

There is a common belief among entrepreneurs and investors around the world that registering a company in Scotland provides significant tax benefits. Is this really true? We invite you, together with Antwort Law, to objectively evaluate the real legal features, opportunities and advantages of this part of the UK and find out whether Scotland can be called an offshore zone.

First of all, it is important to note that we will not be talking about classic companies (Companies, Ltd), which fully pay taxes and do not enjoy tax benefits, but about such a legal instrument as Scottish partnerships, which are often mistakenly considered offshore structures. Scottish partnerships (Limited Partnerships, LP) are a legal form characteristic of countries under English law. Unlike companies, LPs are not full-fledged legal entities: they do not have a director or authorized capital, but they do have a name and the opportunity to be a business entity.

The main feature of LPs is their “transparency” from a tax point of view: in Scotland, such entities are not required to file reports. Tax obligations fall on the partners themselves, and not on the organization as a whole. This means that the tax is paid and accounted for by the partners themselves. This approach has its pros and cons.

Among the advantages are:

• No need to file returns in Scotland;
• Flexibility in management and distribution of profits between partners.

Often the partners of such a partnership are offshore companies from jurisdictions with a favorable tax regime and minimal reporting requirements (such as the BVI, Cayman Islands, etc.), where there is no reporting and taxes, which creates a complex and opaque structure that causes the following problems:

- additional questions when opening bank accounts, since banks require full disclosure of information about the final beneficiaries, and in the case of offshore partners this can become a problem, because the latter often seek to maintain anonymity;

- increased control over offshore structures leads to increased attention from tax authorities and regulators;

- it is almost impossible to obtain a tax residence certificate for Scottish LPs, which creates additional difficulties for international activities;

- finally, the use of opaque offshore structures can negatively affect the company’s reputation and cause distrust on the part of clients, partners and investors.

Thus, we recommend abandoning the offshore partner model as part of such a partnership and choosing either individuals as partners or traditional Ltd companies. The simpler the structure, the more profitable its maintenance will be and the easier it will be to open bank accounts.

So what are Scottish LPs for? Despite many limitations, they find application in certain areas:

1) Investment projects: LPs can be useful for formalizing relationships between partners. The transparency of the structure makes it easy to distribute profits and losses.

2) Temporary Projects: LPs can be used for temporary projects where flexibility and no reporting obligations are important. This allows you to focus on the project itself without being distracted by administrative tasks.

Therefore, it would be incorrect to call Scotland offshore and we do not recommend using Scottish partnerships as offshore structures to save taxes. Their use is advisable only in highly specialized cases, for example, to formalize relationships in investment projects, taking into account all the risks and circumstances of your business.

If you are considering using a Scottish LP or need advice on choosing the best legal structure for your business, please contact our experts. We are ready to provide comprehensive legal support and help you find the best solution for your problems.

Lidia Ivanova

International lawyer
Antwort Law