Offshore Companies: What Makes Them Illegal? Between Lawful Planning and Suspicion of Fraud

Offshore companies are legitimate instruments of international law but are widely known for their frequent use in schemes involving tax evasion, asset concealment, corruption, and money laundering.This article analyzes, from a technical and legal perspective, when an offshore company becomes illegal, why its name carries a negative connotation worldwide, and how to objectively distinguish lawful use from fraudulent use, based on Brazilian and international legislation.

1. What Is an Offshore Company — and Why Is It Viewed Negatively?

An offshore company is a legal entity incorporated outside the country of residence of its controllers, usually in jurisdictions with low or no taxation and strong bank and corporate secrecy protection.Examples include the British Virgin Islands, Panama, Belize, and Seychelles, among others.

Although legally permissible, offshore structures are often associated with unlawful practices due to:

·         International scandals (Panama Papers, Pandora Papers, SwissLeaks);

·         Their relevance in money laundering schemes;

·         Use by politicians, businesspeople, and organizations to hide illicit assets;

·         The inherent difficulty of tracking and oversight.

Result: when people hear “offshore,” they think “fraud.” Yet, this is not always the case.

2. When Does an Offshore Become Illegal?

An offshore company itself is not prohibited in Brazil, but it becomes illegal when used for:

a) Tax Evasion (Concealment of Income or Assets)

·         Failure to declare offshore assets in the Individual Income Tax Return (IRPF);

·         Concealing profits abroad or masking the source of funds;

·         Using “front men” or intermediaries to hide the true beneficial owner.

b) Fraud Against Creditors

·         Transferring assets to an offshore company to evade judicial executions or hide assets from heirs, spouses, creditors, or business partners.

c) Money Laundering and Corruption

·         Receiving bribes or illicit funds through foreign accounts owned by offshore companies;

·         Moving money through shell companies or entities without real business activity.

d) Simulation and Fraudulent Interposition

·         Creating an offshore company to disguise the real controller and hinder judicial or tax accountability.

3. What Differentiates a Legal Offshore from an Illegal One?

Element	Lawful Offshore	Unlawful Offshore
Tax Declaration	Assets and profits duly declared to Brazilian tax authorities (DIRPF/DCBE)	Assets concealed or falsely declared
Economic Purpose	Estate, succession, or investment planning	Asset concealment, abusive shielding, money laundering
Accounting Transparency	Proper bookkeeping and financial control	Lack of accounting or forged documents
Identified Beneficial Owner	Real shareholders and controllers identified	Use of nominees or shell entities
Bank Compliance	Bank account opened with verified source of funds and KYC procedures	Accounts opened with false documents or under investigation

4. International Reactions: Combating Misuse

International organizations such as the OECD, FATF, and IMF have intensified efforts to curb the misuse of offshore entities through:

·         Automatic exchange of banking information between countries;

·         Lists of non-cooperative jurisdictions (“tax havens”);

·         Anti–money laundering and transparency agreements;

·         Pressure for disclosure of beneficial ownership.

In Brazil, the Federal Revenue Service (Receita Federal) requires the declaration of foreign assets (Normative Instruction RFB No. 1,527/2014), in addition to the new automatic taxation of offshore profits starting in 2024 (Law No. 14,754/2023).

5. Conclusion: Legality Depends on Purpose and Transparency

An offshore company is a neutral legal instrument — it can be used for either lawful or unlawful purposes.Its legality depends on:

·         The origin of funds;

·         Transparency of the structure;

·         Proper tax declaration;

·         Real economic purpose;

·         No intent to shield assets from creditors or the judiciary.

Therefore, offshore structures should not be demonized per se. What is essential is rigorous legal and accounting compliance to ensure they are used as legitimate mechanisms for international estate and investment planning — and not as instruments to circumvent the law.