Shell Corporation Meaning Example How Does It Work

Shell Corporation Meaning

Shell companies are also set up to hide and protect the business owner’s assets or illegal income to prove the same in front of legal authority. They may be used only as special purpose vehiclesSpecial Purpose VehiclesA Special Purpose Vehicle (SPV) is a separate legal entity created by a company for a single, well-defined, and specific lawful purpose. It also serves as the main parent company’s bankruptcy-remote and has its own assets and liabilities.read more to ward off the assets being generated with illegal sources.

How does Shell Corporation Work?

Shell companies usually come into existence to hide the identity of their business owners or the business in which they are dealing. However, they have their address and identity as per the regulatory requirement. For instance, in the United States, the Securities Exchange Commission (SEC) requires every shell company to be registered with SEC to be at least in existence on documents, if not physically.

These companies are mostly established in tax havensTax HavensA tax haven is a place or a country with very low or nil rate of income tax. It provides a business-friendly macroeconomic environment, such as financial and economic stability, as well as financial secrecy from tax authorities.read more regions and countries. Business owners or individuals set up such companies to avoid spending on huge tax payments that can hide the source of illegal income and 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 too.They can deal with financial transactions.They can buy and sell real estate properties.They could even possess the copyrights and receive royalties.

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Examples of Shell Corporation

To avoid the tax obligations, business owners set up shell corporations in the tax havens, for example, in Panama, so their tax liability is reduced to a maximum extent. In addition to Panama, there are other tax havens where corporations set their offshore accounts like Switzerland, Hong 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 insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read more and was bankrupt. Sega Sammy Holdings created shell corporation ‘Sega Dream Corporation’ in September 2013 to transfer the assets of Index Corporation.When the Hilco company bought HMV Canada, Hilco created a shell company called ‘HuK 10 Ltd’ to raise the required funds and minimize the liability at the same time. Later, the HuK 10 sued HMV Canada, resulting in Hilco subsequently repossessing the assets and selling the HMV Canada.

Purpose and Uses

To avoid tax liability: The major objective is to ward off tax liability towards the respective country’s government.To protect assets: With the help of a shell company the 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 because 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 access the international foreign exchange market very easily and make their favorable business opportunities available.

Benefits

There are several instances where active business owners and individuals set up shell corporations due to their benefits. For instance, a new business or company raises capital and transfers the same in a shell company even before launching its products and services to a customer. In addition, 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 benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more for which these companies are being set up. For example, some countries and regions offer tax benefits with reduced taxes or no taxes.

Companies also implement shell corporations for security reasons. For example, such companies could be used as a shield by the company associated with or doing business with the company having negative goodwillNegative GoodwillNegative goodwill is a negotiated purchase made by one company for acquiring the other company whose assets value more than the actual amount paid. Here, the selling company faces hardship and is ready to sell off its assets at a meager price.read more or in the region not so profitable. It is also beneficial for anyone going through a financial ordeal or divorce not to 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 that would have collected higher taxes on the same revenues. Shell corporations have decreased the tax collections in many countries, which seems a major source of government revenue, the absence of which would harm the growth of respective countries and its economy.

Conclusion

Shell corporations are generally established for legitimate business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. 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 the Panama Papers leaks, the number of shell corporations was disclosed, which were used to divert the illegal income of wealthy business owners, including politicians.