Nil tax Offshore Companies are commonly used by persons working as Ship Captains or on Offshore Oil Rigs as a private, tax effective way of collecting payment for services rendered.
Generally speaking how it works is as follows:
- You set up a nil tax Company “IBC”).
- The Company ideally should be set up with a Nominee Director and Nominee Shareholder as part of the Corporate structure so that, for tax purposes, the Company is seen to be managed and controlled from offshore (because a Company seen to be managed and controlled from Onshore can be taxed onshore)
- The Company enters into a contract with your current employers for the provision of services. The agreement will need to be carefully worded to ensure that several things are catered for including:
(a) That you are able to perform the work on behalf of the Company
(b) That the situs of the agreement as stated in the Contract is somewhere “Offshore” – from the IBC’s perspective the source of the income must be the contract itself not your labours. Hence the bargain will need to be seen to be struck and the contract signed Offshore ie in a nil tax environment.
4. Income received by the IBC will be received/banked free of tax in the first instance.
5. The IBC will contract or employ you. Ideally the IBC should pay you just enough to cover your living expenses. Whatever it pays you if you are working in territorial waters (eg UK waters, Norwegian waters etc) you may need to declare and pay tax on that money onshore. The remainder of the income can be held and or reinvested Offshore potentially tax free.
6. If you are considered resident for tax purposes (ie liable to pay tax) in a country which has CFC laws (see below which explains what CFC laws are) you would be wise to include a Foundation as part of the Corporate Structure. See below “Why Set up a Foundation” for more info. (FYI most developed countries have CFC laws)
People in the Shipping/Offshore Oil Rig industries are often attached to and hired out by an Employment Agency. If you want your Offshore Company set-up to look as commercially realistic as possible you might want to characterize the IBC as an Employment Agency (eg when you incorporate your IBC you might want to name it something like “International Oil Rig Recruitment Services Ltd” or “International Ship Captain Recruitment Services Ltd.”). See below “How To Use an IBC as a Recruitment Agency or Labor Hire Company” fmi.
What is a Controlled Foreign Corporation Law?
A Controlled Foreign Corporation (or CFC) Law is one which purports to tax onshore income or capital gains made by Companies incorporated Offshore but which are controlled from onshore.
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 choose 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 detail click on these links:
Why set up a Foundation?
If an IBC alone is used you will still be liable to declare and pay tax at home on your IBC’s earnings if/when you live in a country which has a Controlled Foreign Corporation (“CFC) law. Failure to so declare in many countries would constitute tax evasion.
What you might do then is set up a Private Interest Foundation to own the shares of the Offshore Company.
Offshore Trusts used to widely used for such purposes back in the noughties but the problem there is that you have someone (ie a Trustee) holding property for the benefit of 3rd parties who are inarguably beneficial owners of that property and probably/potentially entitled to the income/capital of the Trust (which can have tax consequences onshore).
A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation. A key advantage of a Foundation is that it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and generally speaking the beneficiaries are not entitled to the income or capital of the Foundation until it’s actually received.
What this means as a beneficiary is that you should be able to defer paying tax at home on the income of investments held by the Foundation enabling you to reinvest 100% of that income not just the after tax component. (One jurisdiction ie Seychelles has even taken this a step further by specifically stating in their law that the legal and beneficial owner of any asset held by the Foundation is the Foundation itself).
If you are a resident or citizen of a country which has the ability to track Offshore Bank account beneficiary details and you would like to keep private details of your Offshore earnings (or if you plan to set up a very sensitive business eg one that might illegal if owned/operated from where you live) again a Seychelles Foundation can help:
It all comes back to the legal structure/operation of the Seychelles Private Interest Foundation.
Bottom line is notwithstanding that individuals (or a class of beneficiary) may be named as beneficiaries in the Regulations:
- The beneficiaries have no legal or beneficial interest in property owned by the Foundation (unless or until such time as that property is transferred to them – per section 71 of the Seychelles Foundations Act).
- The Foundation is a legal entity in its own right not a mere Trustee (Per section 23)
- The Councillor of the Foundation owes no Fiduciary duty to the beneficiaries (Per section 63)
As such there is no “beneficial owner” of the Foundation. The beneficial owner of any property/asset owned or held by the Foundation is the Foundation itself.
How To Use an IBC As A Recruitment Agency or Labor Hire Company
Given we are now living in the Global Village, and as more opportunities exist now than even before for qualified professionals and trades/skilled persons to work as Consultants to (or to take up contracts offered by) non-local Companies, more and more clients are setting up (and hiring out their services via) a nil tax jurisdiction based Recruitment Agency or Labour Hire Company.
It might work something like this:
- You would incorporate a new company which might be called something like International Professional Recruitment Services Ltd (hereinafter, “IPRS Ltd” or the “Employment Agent”)
- This business would be characterized as and appear to the outside world to be a Professional Recruitment Agency or a (Specialist) Labour Hire Company
- You would tell anyone who wants to hire you eg your existing employers (or contract counterparty if you are on a contract) that, as IPRS Ltd can offer you (a) consistent employment + (b) jobs the world over, and as they are experts in finding contracts for your Profession/Trade/Occupation, you are contracted exclusively to IPRS Ltd and anyone who wants to hire you has to sign an agreement with, and must pay, IPRS Ltd.
- Your existing employers (or contract counterparty if you are on a contract), assuming they wish to keep you employed/engaged, would then have to sign a labour hire agreement with IPRS Ltd.
- Your existing employers (or contract counterparty if you are on a contract) would thereafter pay your wages (or contract fees as applicable) to IPRS Ltd.
- IPRS Ltd would keep a percentage of these payments as Agency commission (it would be anywhere from 2.5% to 50%).
- The remainder of monies (ie after IPRS Ltd has retained its agency commission) would be paid to you by IPRS Ltd
- The monies received by IPRS Ltd should be receipted free of tax and could be held and or invested Offshore potentially tax free.
For the above to work the agreement between your employers (and the agreement between you) and IPRS Ltd would need to be (and be seen to be) commercially realistic.
As always local conditions can impact on your ability to deploy such a structure as described above. Hence local legal, tax and financial advice should be sought before embarking on any such venture.