An "offshore" company is any company which is formed in any of the so-called tax favored or "tax haven" jurisdictions. In the past few years, among the most commonly-used countries are the British Virgin Islands, the Cayman Islands, Nevis and the Bahamas and Barbados. The more traditional and longer-established havens include the Isle of Man, Jersey, Guernsey and Panama and Liberia.

What these countries have in common is the fact that they generally impose no (or an extremely low) tax on companies which are formed there but which do not do any business in that country. The type of the entity formed differs country by country but they usually have most of the characteristics of a US corporation or Limited Liability Company. International Business Companies (IBCs) and Limited Companies are probably the most common. These companies can be formed for various reasons - to hold investment property such as real estate and financial portfolios or to engage in international business transactions.

If you are a citizen of a country that does not tax income earned outside of its borders, an offshore company can be most advantageous - your money can grow tax-free (and therefore a lot faster!) until it is repatriated. Some countries have tax systems like the US - "global" taxation where all income is taxed regardless of where it is earned. If this is the case, you must declare any income earned when you file your return so there are few tax advantages.

However, many US citizens find another legitimate advantage to offshore companies - asset protection. In our increasingly-litigious society, many people keep their nest egg offshore. It's much more private (the confidentiality laws of these jurisdictions are usually very strong) and it's much harder for potential creditors in a frivolous lawsuit to get at your money.

NOTE: It's best to begin this planning as early as possible. Many courts can seek to set aside such a transfer of funds as fraudulent if it's within a certain period of time (generally 3 years) of a lawsuit or "in contemplation" of litigation.