What is a 'Shell Corporation'

A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public. Legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise, funds, conduct a hostile takeover or to go public.

BREAKING DOWN 'Shell Corporation'

Shell corporations are used by large well-known public companies, shady business dealers and private individuals alike. For example, in addition to the legal reasons above, shell corporations act as tax avoidance vehicles for legitimate businesses, as is the case with Apple's corporate entities based in the United Kingdom. They are also used to obtain different forms of financing.

However, the tax avoidance is sometimes seen as a loophole to tax evasion, as these corporations have been known to be used in black or gray market activities. It's natural to be suspicious of a shell corporation, and it's important to understand the various scenarios in which they arise.

Reasons to Legitimately Set Up a Shell Corporation

The number one reason for a domestic company to set up a shell company is to realize a tax haven abroad. Large corporations, like in the Apple example, have decided to move jobs and profits offshore, taking advantage of looser tax codes. This is the process of "offshoring" or "outsourcing" work that was once conducted domestically.

To remain within legal bounds internationally, American corporations will set up shell companies in the foreign countries in which they are offshoring work. This is legally allowed by the United States, and some say that it's the U.S. tax code itself that's forcing domestic companies to create shell corporations abroad.

Another way that shell companies help with taxes surrounds the need for financial institutions to conduct financial activity in foreign markets. This allows them to invest in capital markets outside of domestic borders and realize potential tax savings.

Ways That People Abuse Shell Companies

Even though there are legitimate reasons to set up a shell company, many wealthy individuals abuse shell companies for personal gain. Progressive taxation within the United States, that is, tax brackets, slowly caused people to seek personal tax havens. Significantly high earners set themselves up as shell companies in one or many locations, like the Cayman Islands. This is a gray area of tax evasion where people funnel earnings through shell companies in such a way that it isn't counted toward personal income.

RELATED TERMS
  1. Shell Branch

    A shell branch is a branch location of a U.S. chartered bank ...
  2. Cross-Firing Scam

    A cross-firing scam fraudulently secures credit using a web of ...
  3. Shell Lease

    A commercial lease in which a tenant rents a property with an ...
  4. Corporate Tax

    A corporate tax is a levy placed on the profit of a firm, with ...
  5. Offshore

    1. Located or based outside of one's national boundaries. The ...
  6. Earnings Stripping

    Earnings stripping is a common tactic used by U.S. corporations ...
Related Articles
  1. Investing

    Royal Dutch Shell Strategy Update

    Royal Dutch Shell held its twice a year strategy update and is well along in meeting goals set out in 2010.
  2. Investing

    Shell to Invest 1.7B in New Energies Division

    As oil giants face a political economy demanding its evolution, Shell is not alone in its strides towards shifting from oil to harnessing green energy.
  3. Investing

    Royal Dutch Shell Suffers 78% Plunge in Q2 EPS (RDS.A, RDS.B)

    The integrated oil giant reported a more than 78% plunge in second quarter profits, driven by a combination of weak oil prices and poor refining margins.
  4. Taxes

    Do U.S. High Corporate Tax Rates Hurt Americans?

    The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
  5. Taxes

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  6. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  7. Managing Wealth

    Offshore Banking Isn’t Illegal. Hiding It Is.

    If you want to put your money into an offshore account, go ahead. But be aware that it won’t be exempt from taxes.
  8. Personal Finance

    Sometimes Paying Down Debt Isn't a Good Idea

    If instinct tells you to pay off debt, make sure you evaluate all the details first.
  9. Taxes

    Highest Corporate Taxes By Sector

    The amount a U.S. company pays in tax depends upon the sector it is in.
  10. Financial Advisor

    Inversions and Transfer Pricing Will Hurt the US Economy

    Corporate inversion, while it benefits large corporations, costs the U.S. economy billions of dollars in federal tax revenue. How does that affect you?
RELATED FAQS
  1. Why are the Cayman Islands considered a tax haven?

    Find out why the Cayman Islands is considered a tax haven and why this location is so popular among those looking to reduce ... Read Answer >>
  2. Why is Andorra considered a tax haven?

    Find out why Andorra is considered a tax haven and how developments have lessened its appeal due to increased taxation and ... Read Answer >>
  3. Why is Switzerland considered a tax haven?

    Learn how Switzerland is considered a tax haven, even though its government has signed agreements to disclose information ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center