When reviewing a new client’s individual needs/aspirations and in coming up with a bespoke Offshore Corporate Structuring Plan I often recommend that the client set up a tax free Offshore Private Foundation.
Often (a little too often for my liking, truth be told) I’m asked Do I really need a Foundation?
Typically a Foundation is set up to hold the shares of a tax free Offshore Trading Company (or low tax Offshore Trading Company). Consider:
- The Foundation is set up purely so that you should not have to declare and pay tax where you live on your Tax Free Offshore Company (IBC)’s profits
- The Foundation doesn’t do anything. It just holds the shares of the IBC
- The money revolves in and through the IBC
- The Foundation doesn’t receive any money unless or until:
(a) You decide to sell the business (ie the IBC); or
(b) You’ve moved your place of tax residence to somewhere which will not tax you:
(i) on dividends paid to the Foundation; or
(ii) on distributions paid to you by the Foundation.
If you DO NOT Have a Foundation in place to hold the shares of your IBC and you live in a country which has CFC laws you will be required to declare and pay tax at home on all the IBC’s profits. Failure to so declare would be an act of tax evasion the penalty for which is imprisonment.
The IBC should not have to declare income in or pay tax where it’s incorporated. Why not? Because IBC jurisdictions do not tax their Companies on what they earn outside of the country of Incorporation.
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: