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A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Some shell companies may have had operations, but those may have shrunk due to unfavorable market conditions or company mismanagement. Shell corporations are not in themselves illegal, and they do have legitimate business purposes. However, they are a main component of the underground economy, especially those based in tax havens. They may also be known as international business companies, personal investment companies, front companies, or "mailbox" companies.
Shell companies are also used for tax avoidance. A classic tax avoidance operation is based on the buying and selling through tax haven shell companies to disguise true profits. The firm does its international operations through this shell corporation, thus not having to report to its country the sums involved, avoiding any taxes.
An example of a legal use of a shell company is a supplier of store brand groceries that sets up a shell company when dealing with a hard discounter like Aldi. By obscuring its business relation with the discount chain, the supplier prevents diluting the perceived value of its main brand, which sells at much higher prices.
Shell corporations have been used to commit fraud, by repeatedly creating an empty shell corporation with a name similar to existing real corporations, then running up the price of the empty shell and suddenly selling it (pump and dump).
There are also shell companies that were created for the purpose of owning assets (often intangible, such as royalties or copyrights) and receiving income. Reasons behind creating such a shell company may include protection against litigation and/or tax benefits (some expenses that would not be deductible for an individual may be deductible for a corporation). Sometimes, shell companies are used for tax evasion or tax avoidance.
Entrepreneurial behavior in challenging environments
In some developing economies (e.g. some of the post-Soviet states), shell companies allow private entrepreneurship to survive in an environment where an inadequate legal system leads to arbitrariness and corruption. In these challenging environments, entrepreneurs operating a relatively small private business with limited resources sometimes set up shell enterprises to lower or avoid taxes, because tax avoidance or evasion may be a necessity for business survival in situations where the level of taxation is penal, government officials (including tax officials) demand bribes, working capital is in short supply, and tax legislation is hostile to private entrepreneurial businesses, e.g. when tax laws are extremely complicated and change arbitrarily and rapidly.
The type of "shell corporation" described here should not be confused with a "shell" company which is a specific term used by the U.S. Securities and Exchange Commission to refer to a publicly held company with no or nominal assets other than money.
- Alternative public offering
- Collateralized debt obligation
- Dummy corporation
- Holding company
- Internal competition
- Money laundering
- Numbered company
- Register of beneficial ownership, aiming at disclosing shell companies that are being used to launder money from criminal activity, to finance terrorism, or to evade taxes.
- Shadow banking system
- Structured investment vehicle
- Tax inversion
- Transparency (market)
- Nicholas Shaxson, Treasure Islands: Tax Havens and the Men who Stole the World, Random House, January 2011
- Friederike Welter and David Smallbone, "Institutional Perspectives on Entrepreneurial Behavior in Challenging Environments," IEEE Engineering Management Review, Vol. 42, No. 2, Second Quarter, June 2014
- See Rule 12b-2 of the Securities and Exchange Act of 1934
- The Guardian, EU shines light on dirty money with new tax rules
- New Zealand, Ukraine, Latvia, Moldova, Panama, Switzerland: the Shell Company Incorporation Franchises, Introduction (2014-05-06), Part 1 (2014-05-08), Part 2 (2014-05-13), Part 3 (2014-05-16), Part 4 (2014-05-23), Part 5 (2014-06-04), Part 6 (2014-06-17), Part 7 (2014-08-28), Richard Smith, Naked Capitalism
- Sun and Shadows: How an Island Paradise Became a Haven for Dirty Money (2014-06-09), Matthew Shaer, Michael Hudson and Margot Williams, International Consortium of Investigative Journalists
- Coal Companies Are Selling Coal To Themselves To Get More Government Subsidies (2015-01-07), ThinkProgress. "Increasingly, the major coal companies are selling Powder River Basin coal not on an open market, but to an elaborate network of shell companies that they own and control ..."