Shell Corporation

Shell Corporation Meaning

Shell corporation refers to a dummy company whose existence is confined in documents and has no physical presence, no office, and no employees. It does not have any active business operation running with no tangible assets or plat, property or equipment in its possession. In addition, any products and services and don’t trade on the stock exchanges.

Shell company may also be set up with the objective of hiding and protecting the business owner’s assets or illegal income in a manner with which it can prove the same in front of legal authority. They may be used only as special purpose vehicles to ward off the assets being generated with illegal sources.

How does Shell Corporation Work?

Shell companies are usually coming into existence to hide the identity of their business owners or the business in which they are dealings. As per the regulatory requirement, they have their own address and identity. In the United States, for instance, the Securities Exchange Commission (SEC) requires every shell company to be registered with SEC so that they are at least in existence on documents if not physically.

These companies are mostly established in tax havens regions and countries. Business owners or individuals set up such companies so that they can avoid spending on huge tax payments that can hide the source of illegal income and they can access the global markets at the same time.

Shell corporations can do the following operations:

  • They can open Bank Accounts and can move the funds at the same time.
  • They can deal with financial transactions.
  • They can buy and sell real estate properties.
  • They could even possess the copyrights and receive royalties.

 

Shell Corporation

Examples of Shell Corporation

To avoid the tax obligations business owners set up shell corporations in the tax havens for example in Panama so that their tax liability is reduced to a maximum extent. In addition to Panama there are other tax havens where corporations are setting their offshore accounts like Switzerland, honk Kong, Cayman Islands, and Belize.

Following are the instances where shell corporations are used:

  • In June 2013 Sega Sammy holdings bought Index Corporation which went into insolvency and was bankrupt. Sega Sammy holdings created shell corporation ‘Sega Dream Corporation in September 2013 to transfer the assets of Index Corporation.
  • The moment when Hilco Company bought HMV Canada, Hilco created a Shell Company called ‘HuK 10 Ltd so that it can raise the required funds and minimize the liability at the same time. Later shell co. ‘HuK 10 sue HMV Canada which resulted in Hilco subsequently repossess the assets and sold the HMV Canada.

Purpose and Uses

  • To avoid tax liability: The major objective is to ward off tax liability towards the government of the respective country.
  • To protect assets: With the help of shell company original entity can easily transfer assets from a low profitable location or region.
  • SPV or Special purpose vehicle: They are used as a special purpose vehicle in the sense that many assets are transferred to this SPV to avoid the regulatory reporting requirements or for many other various reasons.
  • To access global markets: They help their original counterparts to access the global foreign exchange market very easily and made available them favorable business opportunities.

Benefits

There is a number of instances where active business owners and individuals set up Shell Corporation due to the benefits they offer to them. For instance, a new business or company raises capital and transfer the same in shell Company even before it launches its products and services to a customer. A company that is subject to merger and acquisition could transfer the assets and property to a shell company to ward off its assets from being transferred to the acquirer.

There are also tax benefits for which these companies are being set up. There are countries and region which offers tax benefits in the form of reduced tax rates or no taxes at all.

Shell corporations are also implemented by companies for security reasons. For example, such companies could be used as a shield by the company it is associated with or doing business with the company having negative goodwill or in the region not so profitable. It is also beneficial for anyone who is going through financial ordeal or divorce so that he or she could not be called for to shell out on this diverted income.

Drawbacks

Shell corporations are more often created to hide the original entity’s recognition so that assets can be easily diverted. It is very difficult or impossible to determine who owns the explicit money in such companies in the absence of real sources from which it has generated the economic sources. Shell corporations are created to iron out the tax bills of the concerned company.

Due to shell companies, revenues are being reported lower as otherwise which is subsequently lost to the respective countries which would have collected on the same revenues higher taxes. Shell corporations have decreased the tax collections in many countries which seems a major source of government revenue the absence of which would have a negative impact on the growth of respective countries and its economy.

Conclusion

Shell corporations are generally established for legitimate business operations. Business owners set up shell corporations to handle the assets of original entities to mask the real identity of the owners who are providing the financial resources. For instance, for around $900, any individual can find an associate company to create a shell company for them offshore. Due to the aftermath of Panama Papers leaks, the number of shell corporations was disclosed which were used to divert the illegal income of very rich and wealthy business owners including politicians.

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