With the advent of the internet, the spread of economic liberalisation and the rise of the global village more and more professionals (and skilled workers) are being offered the opportunity to work as contractors particularly for International/Multinational business/es.
No matter whether you a Civil Engineer, Software Developer, Accounting/Finance Professional or some other kind of skilled worker if you are able to work online or on the ground outside of your home country (or even if you are simply employed locally on a contract basis) the opportunity exists for you to potentially minimise your tax via “Offshore” Incorporation.
For the purposes of this article I’m going to break down the opportunists into 3 categories (ie Online Contractors, Expat Professionals an Local Contractors) and then explain how each can potentially benefit from “Offshore” Corporate Structuring.
- 1. Online Contractors
Contractors capable of receiving “orders” (ie work instructions) online and delivering services online would include:
- IT professionals
- Design professionals (eg Engineers, Architects, Draftsmen etc)
- Finance Professionals
- Marketing Professionals
If you fit into one of the above categories here’s how an Offshore Corporate Structure could work for you:
(a) A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
(b) An Offshore account is set up in a nil tax banking centre
(c) Customers/clients contract with and pay the IBC. The IBC Invoices the clients from offshore. Payment for invoices rendered are banked free of tax in the first instance.
(d) In the case of an online business typically tax liability lies only in the country from which the Company is managed and controlled
(e) The Company would be structured with a (tax haven based) Nominee Director/Shareholder (ie management and control would be “Offshore” ie in a nil tax environment)
(f) (Thus) any profits earned have been earned (and ideally banked) Offshore ie in a nil tax environment
(g) You or your local company would be sub-contracted by the IBC to actually perform the services
(h) You would invoice the IBC periodically (eg monthly) for this work which income would be assessable income in your home country – though a smart Tax Accountant should be able to assist you to claim a series of expenses against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
(i) The rest of the income earned by the IBC can be held (and potentially invested) offshore tax free.
Note if you live in a country which has CFC Laws (see below which explains what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.
- 2. Expat Professionals
The most common example here is a qualified eg technical professional who is offered a fat contract to work for several years in a faraway place.
If that’s you here’s how an Offshore Corporate Structure might work for you:
(j) A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
(k) An Offshore account is set up in a nil tax banking centre
(l) Your employer contracts with and pays the IBC. The IBC invoices the clients from offshore. Payment for invoices rendered will be banked free of tax in the first instance.
(m) As a general rule tax liability lies only in the country from which the Company is managed and controlled. Hence the Company would be structured with an Offshore (tax haven based) Nominee Director/Shareholder (ie management and control would be “Offshore” ie in a nil tax environment)
(n) (Thus) any profits earned have been earned (and ideally banked) Offshore ie in a nil tax environment
(o) You would be sub-contracted by the IBC to actually perform the services
(p) You would invoice the IBC periodically (eg monthly) for this work – this money you would send home to your family and or to cover your expenses (eg mortgage/loans) back home. These payments would be assessable income in your home country – though a smart Tax Accountant should be able to assist you to claim a series of expenses against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
(q) The rest of the income earned by the IBC can be held (and potentially invested) offshore tax free. (see also below re how to access money banked Offshore).
NOTE: if you fit the above criteria you could also set up an Offshore recruitment agency Company – see below which explains how that can/will work
Note further if you live in a country which has CFC Laws (see below which explains what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.
- 3. Local Contractors
With the deregulation of the labor market world-wide, more and more workers are being shifted from “Full time” to “Contractor” status.
If you’ve recently been asked to (or decided, moving forward, to) work on a contract basis what you could do is set up an Offshore Recruitment Agency Company.
Here’s how that might work:
- You would incorporate a nil tax Offshore Company. It 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 could 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.
Note if you live in a country which has CFC Laws (see below which explain what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.
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 do so I believe would constitute tax evasion.
What you might do then is set up a Private Interest Foundation to own the shares of the Offshore Company.
We used to use Offshore Trusts 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 – see section 71 of the Seychelles Foundations Act attached).
- The Foundation is a legal entity in its own right not a mere Trustee (See section 23)
- The Councillor of the Foundation owes no Fiduciary duty to the beneficiaries (see 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.
There are a number of ways to bring home money from an IBC. Contact me for details.
Note also unless you (have expatriated or) live in a country that does not have CFC laws (and/or unless or are structured in a tax effective/compliant manner) you may still be required to declare and pay tax at home on your IBC’s earnings.
Local laws can have an impact. Hence you should seek local legal/tax/financial advise before committing to set up a Corporate structure such as that described above.