Controlled Foreign Corporation Laws & Offshore Company Structures

A lot of people think that all they have to do to legally avoid paying tax in their Home Country on their non-local earnings is set up a tax free Offshore Company (eg an International Business Company ie IBC).

 

But depending on where you live there is at least 1 (and possibly 2) other hurdle(s) you’ll need to jump in order to achieve your aims.

 

The first thing you’ll need to address is Management and Control. In short if your tax free Offshore Company is seen to be managed and controlled from onshore it can be taxed onshore. How that issue can be addressed is by deploying a (tax haven based) Nominee Director and Nominee Shareholder as part of the Corporate Structure.

 

But that isn’t going to fully address the issue if you live in a country which has a Controlled Foreign Corporation Law.

 

A Controlled Foreign Corporation (or CFC) Law is a local law which purports to tax onshore income or capital gains made by Companies incorporated Offshore but which are controlled from onshore. Most western countries have them (see below which lists ALL countries with CFC laws presently).

 

Essentially how a CFC law works is if an individual owns or has the capacity to own the overriding majority of shares in an Offshore Company (the percentage of which varies from country to country) the that person is required to declare in his local tax return profits made by the Offshore Company.

 

How CFC laws came about was around 30 years ago the big western countries began to realise that certain of their citizens were using nil tax Offshore companies to avoid having to pay tax at home on their non-local sourced (ie international) income. In particular the CFC laws target the use of Nominee Shareholders and Directors. If you live in a country which has CFC laws (regardless of whether you are the director/shareholder of the Company or not) if you have the capacity to own and control the company by reference to shareholdings then you would be required to declare and pay tax at home on your Offshore Company’s earnings.

 

There are several ways to get around CFC laws. Historically clients used commonly to deploy an Offshore (Discretionary) Trust to own the shares of the Offshore Company. However with more and more “Onshore” tax systems claiming tax from any Trust with an onshore resident beneficiary discerning clients these days usually prefer to establish Private Foundations (in particular Seychelles Foundations) as the ultimate holding entity as such entities should not caught by CFC laws or by CFT (Controlled Foreign Trust) Laws. For more details click on these links:

 

http://offshoreincorporate.com/private-interest-foundations/

 

http://offshoreincorporate.com/seychelles-foundations/

 

http://offshoreincorporate.com/seychelles-foundations-fact-sheet/

 

Countries with Controlled Foreign Corporation (“CFC”) Laws include:

 

Argentina

Australia

Brazil

Canada

China

Denmark

Egypt

Estonia

Finland

France

Germany

Hungary

Iceland

Indonesia

Israel

Italy

Japan

Korea

Lithuania

Mexico

New Zealand

Norway

Portugal

Russia

South Africa

Spain

Sweden

Turkey

UK

USA

Venezuela

 

 

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