Basic Principles

The first principle to understand is that an International Business Company (IBC) can not trade onshore in its place of jurisdiction.  Therefore, if you wish to develop property in the Bahamas, you would not establish a Bahaman IBC with which to do this.  Secondly, a limited company is not you.  A limited company is a separate entity.

Let us consider an individual who owns a limited company in the same country as his/her residence. 

When you work for a company you own, you pay personal income tax on money paid to you by your company. If your company also makes profit, the company pays tax on that profit.  If the company did not pay you for the work you carried out, you would have received no income and therefore no personal income tax would be payable.  The company, however, in not paying you, would make more profit and would pay more tax.

As this company earns more profit, the value of its shares increases and therefore your wealth (as the owner) increases.  However, generally, one is not taxed on this increase in share value until such time as you benefit from the increase.  This is only a theoretical profit until a gain is realised; typically, either by the payment of a dividend; through the sale of those shares to a third party; or a liquidation of company assets.  At this time, you will pay tax on the realised profit (often with some exemptions based on annual allowances).

Now, consider a situation where that company is not based in your home country but is an IBC in the Bahamas, for example.  If you receive an income from a Bahaman company you will typically owe tax on that income to your government - just as in the previous example.  However, the company for whom you work is a 'resident' of the Bahamas and does not pay tax on its profit.  This company may choose to pay all your legitimate expenses but may not pay you a salary; deciding instead to retain the majority of its earnings - this is not unwise as it pays no earnings-related taxes.  This gives this company the advantage of not having its capital significantly reduced by tax payments; thereby allowing it to reinvest money it would otherwise have given away.  The cumulative effect of this is substantial. 

By way of an example; consider a company developing and letting holiday homes.  It invests $1m to develop property valued at completion at $2m.  It rents this out at $200K per annum for 5 years then sells the development for $3m.  This company would have $4m cash (less expenses) in its bank account.  If this was, say, a UK national; he/she would have been expected to pay around $1m in taxes.  The fact that the IBC is owned by a UK national is of no interest to the UK tax authorities until such time as that citizen benefits.  When the next project is being planned, the individual has only $3m to invest; the Bahamas IBC has $4m; and thus it continues. 

One last point on legality; in the example above, the reality is that the UK national, developing overseas properties in his/her own name, would probably not repatriate the profit back into the UK and may, instead, deposit this money in a personal offshore bank account - considering this to be shrewd and tax efficient.  This is not tax efficient - it is tax evasion and it is illegal.  If you earn money as an individual, repatriation is no longer required for a tax liability to be triggered.  It may be ironic; but you need to establish  an IBC to avoid breaking the law in future - but you must (in most cases) pay the tax liability you have already created.  Here is the relevant section (IR139) of HM Revenues & Customs' explanation:

"If you are ordinarily resident and domiciled in the UK, you will be liable to UK tax on all your overseas income, whether or not it is brought to the UK. So you will have to pay UK tax on your overseas income even if you keep it overseas or spend it abroad".

To rub salt in the wound, this also applies to any interest earned on your offshore bank account deposits...including the Channel Islands or the Isle of Man.

There will obviously come a time when one wants to realise the profit made on the value of this company.  When that time comes, who knows what you want from life and where you want that life to be.  The important point is that you have your assets in a tax-efficient environment and you have the ability to decide - you may even be a citizen of a more tax-friendly state by then.

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* These are basic principles which should not be taken as legal advice for any specific case.  Each individual should seek advice based on his/her circumstances, nationality and the laws of his/her citizenship.