Category Archives: Company- Management

A lot of time, money and energy is spent around the world each year by people looking to reduce their taxable income to the lowest possible figure. Some employ high level tax advisers, some set up Tax Free Offshore Companies, some try and disguise their income by engaging in all manner of questionable local tax schemes.

But there is another way…

Have you ever heard of a PT?

PT stands for Perpetual Traveller.

A Perpetual Traveller is a person who has no home, or, in legal speak, is not resident anywhere for tax purposes.

So how do you become a PT? By creating a situation where you are not resident for tax purposes anywhere.

To explain…

Most countries have a multifaceted tax residency test:

(a)   Generally speaking if you are inside a particular country for more than 6 months you would be classified as tax resident in that country and liable to declare income in, and pay tax in, that country

(b)   That said you can be resident somewhere for less than 6 months a year and still be classified as a local resident for tax purposes if you have a “substantial connection” to the country.

In determining whether you have a “substantial connection” the tax authorities would look at a range of factors including do you have a spouse from or living in that country? Do you own a residence there? Do you have children there? Do you own a car there? Do you have a bank account there? Do you own assets there? Do you have a driver’s license there? Do you have insurances there? Are you a member of a club there (eg golf club, tennis club, social club) etc etc etc.

If you want to become a PT the starting point is to create a situation where you are no longer tax resident in your home country.

How might you go about that?

To maximise the chances of being able to escape your home country’s tax system probably what you will need to do is:

• Sell your current business (or quit your local job)
• Sell your local home
• Sell all your locally located assets
• Close down your local bank accounts

Then what you do is you jump on a plane and head abroad. Once you’ve reached your next destination what you do is you send a letter to the tax office/IRS of the country you just left advising them that you’ve departed the country permanently and filed your last tax return.

In the perfect world what you then might do is spend 5 months in one country, 5 months in another country & spend a couple of months travelling.

Then you set up a tax free “Offshore” Company as your business ownership or income receiving vehicle.

It takes courage, time and effort to become non tax resident. But the rewards could be massive; (as well as living a more adventurous/exciting life) you might (LEGALLY) never have to pay income or business tax again!

Pre IPO buyin, and in particular Cryptocurrency speculation, is becoming a popular way to potentially make a lot of money very quickly.

We’ve seen many clients invest in the early stages of the development of new Technologies & Cryptocurrencies and go home with substantial sums of money in their pockets.

So what is a cryptocurrency and why are cryptocurrencies so popular?

In very simple terms a Cryptocurrency is a non-asset based digital means of exchange. Typically value is created by a mathematical process called mining whereby the ”coin’ is birthed once a mathematical equation has been closed. This equation grows mathematically tougher to solve the more coins are mined.

Particularly for those investing in the embryonic stages of a digital currency’s development (eg pre IPO) there is the potential for a massive capital gain to be realised. For example when Bitcoin came to market it started at circa $1 and grew at its height to over $1,200.

For those who get in on the ground (eg if you help fund the cost of bringing such products to market) the returns are potentially even higher.

If you are investing or thinking of investing in a program such as this, the prudent thing to do would be to set up a tax free Offshore Corporate structure to hold this investment before its value booms.

To summarise how it would work is:

• You set up a zero tax Offshore Company eg an International Business Company (“IBC”).
• The IBC would enter into a contract with you to buy the Investment/Cryptocurrency at its present value.
• The sale will need to be seen to be at fair market value (you can’t just sell the Investment to the IBC for one Dollar/Euro!). And the contract of sale will need to be seen to be on normal or reasonable commercial terms. That said the sale contract could be an instalment or vendor finance contract ie where a deposit is paid and ownership is transferred but the seller retains a mortgage until such time as all the instalments have been paid.
• Depending on where you live you may be able to “gift” the property to an Offshore entity. It might be difficult to explain why you’re gifting a piece of property to an IBC hence the smarter thing to do might be to set up (and transfer ownership of the property to) a PIF ie Private Interest Foundation (eg a Charitable Purpose Foundation). This one might survive the “sniff test”. Why? Because all day every day well intentioned wealthy persons gift money or assets to Charitable causes.
• Once the investment booms your IBC sells or exchanges the investment for hard currency (eg USD) and banks the profit free of tax.
• For all intents and purposes the IBC’s trading profits are generated in a nil tax environment tax free/offshore (ie provided the IBC Is structured properly).
• If you structure the Company correctly you should only be liable for tax at home once you draw down money from the Company.
• This should enable you, via the power of compounding, to grow your nest egg MUCH faster than you would otherwise had your company been liable to account for Corporate tax each year (eg up to 40%, depending on where you live).

Timing

Are you involved in an Investment or Trading Program (ie Trading bank/negotiable instruments) or a Private Placement Program and expecting a big pay day soon or in the not too distance future?

If so there are certain things you need to be aware of.

Often we are approached by persons looking to set up a tax free Offshore Company and or Tax Free Offshore Bank Account in anticipation of receiving profits from a private placement or bank trading programs.

The common misapprehension of 99% of such clients is that all they have to do to avoid paying tax at home on such a windfall is to set up an Offshore Company or Bank Account and have the proceeds paid into that

If you are in this position, to avoid tax in your home county, you will need more than just an offshore bank account to receive funds into.

Tips:

1. You will need to ensure that any contracts or instruments held or signed entitling you to a payday are sold to, transferred to or assigned at law to your tax free Offshore Company before you becomes entitled to be paid the profit.
2. Immediately you become entitled to receive the profit, even if you haven’t received the money yet, it’s a taxable event.
3. Hence if you want to avoid having to pay tax at home on the profits of your trading or private placement program you will need to set up a tax free Offshore Company BEFORE he become entitled to the profit.

Local laws can have an impact. Hence it would be wise to seek local legal/tax/financial advice before committing to invest in such a product/offering and before committing to set up an Offshore Corporate structure for such purposes.

We are often asked “What are the differences between a Seychelles Foundation and a Belize Foundation?”

What I can tell you is that the Seychelles Foundation Law is basically a copy of Panama’s and very similar to Belize’s (which is also modelled on Panama) but with a couple of additional (in my view, very attractive) features including:

• The rights of the Founder of a Seychelles Foundation can be assigned. This enables complete privacy because normally the Founder’s name appears in the Charter (which is publicly filed as part of the registration process). With a Seychelles Foundation however you can use a Nominee Founder (who then immediately following registration assigns his/her/its rights to you).
• The Seychelles law specifically states that the Foundation is both the legal and beneficial owner of any assets it holds. This is (a) a fantastic tax planning feature because traditionally onshore tax authorities have taxed such entities on the basis that the beneficiaries are the beneficial owners of the entity and thus entitled to income from the entity. It also means (b) when opening bank accounts or incorporating subsidiaries that you can avoid your name being recorded as the beneficial owner of the Company notwithstanding that you/your spouse/your family may be named as beneficiaries of the Foundation.
• The Seychelles law also states that the beneficiaries are owed no fiduciary duty by the Foundation Council (which bolsters the above proposition ie that it is the Foundation which owns the assets/income for tax purposes)

 The Seychelles law also provides additional asset protection provisions eg:

• It specifically says that a transfer of property to a Seychelles Foundation, shall not be void, voidable, liable to be set aside or otherwise defective in any manner by reference to a foreign rule of forced heirship or any other written law of a foreign jurisdiction
• It also says that a transfer of property to a Seychelles Foundation, shall not be void as a consequence of the founder’s bankruptcy or the liquidation of the founder’s property; or any action, proceedings or other claims against the founder brought by any creditor of the founder. (Note: these asset protection provisions don’t appear in the Belize law).

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. 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
• Etc.

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.

1. 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.

1. 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:

1. 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”)
2. This business would be characterized as and appear to the outside world to be a Professional Recruitment Agency or a (Specialist) Labour Hire Company
3. 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.
4. 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.
5. 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.
6. IPRS Ltd would keep a percentage of these payments as Agency commission (it could be anywhere from 2.5% to 50%).
7. The remainder of monies (ie after IPRS Ltd has retained its agency commission) would be paid to you by IPRS Ltd
8. 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:

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

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

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

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 3^rd 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).

Seychelles Foundations

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:

How so?

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:

1. 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).
2. The Foundation is a legal entity in its own right not a mere Trustee (See section 23)
3. 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.  

An LLC (Limited Liability Corporation) is, effectively, a hybrid of a Limited Company and a Partnership.

An LLC is like a Company in that that liability of the Company is limited to the capital invested and assets purchased by the Company.

Like a partnership an LLC is a flow through entity: An LLC does not have to file a tax return; the nett profits are passed through to the members of the LLC (members are to an LLC what shareholders are to a Limited Company) who are responsible for taxes (if applicable) in their country of tax residence (ie same tax treatment as Partners in the case of a Partnership).

From a member/partner’s viewpoint, in terms of liability, an LLC is superior to a Limited Partnership (“LP”) because in the case of a Limited Partnership (which is constituted by a Limited Partner and a General Partner) one partner can be made liable for the debts of the partnership. In the case of an LLC the liability of the members is limited to the extent of the member’s capital contribution (unless a personal guarantee has been given by a member to a supplier of the LLC).

LLC members can fully participate in the management of the LLC (which is different to an LP – in the case of an LP the Limited Partner usually can’t participate in the management of the enterprise without risking his/her Limited Liability status).

Key Benefits of the Belize LLC include:

• Privacy: There is no public register of owners/members or Directors/Managers in Belize
• Tax Effectiveness: Belize LLCs are not liable for corporate tax or business tax or any other form of tax in Belize
• Simplicity: There is no requirement in Belize to prepare annual accounts or appoint an auditor
• Flexibility: Belize LLCs can be used to own/operate a wide range of businesses as of right
• Asset Protection: Before you can sue a Belize LLC you have to pay into Court a deposit being an amount equal to the greater of (i) one half of the amount claimed or $US50,000 whichever is the greater

Other features of the Belize LLC Law include:

1. A Belize LLC:

(a)   can be structured according to its own rules rather than being dictated to by statute

(b)   is a legal entity with separate rights and liabilities distinct from its members & managers. This means no-one other than the LLC itself can be made liable for the debts of the LLC, (save for the case of a personal guarantee)

(c)    Somebody suing a Belize LLC member at best can only have the members rights assigned to him/her; he/she can’t participate in the management of the LLC

2. Belize doesn’t recognize foreign judgments. Only a judgment made by a Belize Court can be executed against a Belize LLC

3. LLCs from other jurisdictions can migrate to Belize and vice versa (ie a Belize LLC can redomicile and become eg a Nevis LLC)

4. Civil legal proceedings against a Belize LLC must be held in private (and there are penalties for unauthorised disclosure).

There has been a huge explosion of mobile app businesses in the past few years (including businesses which might operate in a similar way to Uber or AirBnB).

Such a business (ie a predominantly Online Business – where services are both produced and delivered online) lends itself particularly well to an “Offshore” Corporate Structuring Plan. See below “HOW TO SET UP AN ONLINE BUSINESS OFFSHORE” which explains in simple/general terms how it can work.

Structuring Options

These kind of businesses usually operate in one of two ways:

1. Where all the marketing and service delivery is done online and the customer deals with one central Trading (nil or low tax jurisdiction incorporated) Company
2.  Where the business has its headquarters Offshore but for credibility/marketing reasons (or for licensing reasons) needs an on the ground presence in each of the country/s where it is selling/providing services

In the latter example a local subsidiary company is usually incorporated to market to or liaise with the customer but certain key functions are exported to (and a large chunk of the sale price diverted to) the business’s Trading Company (or a tax haven subsidiary thereof)

In either example what you normally have is a twin company structure at the top of the tree ie a Trading Company + an IP Company.

How and Why To Set Up An Offshore IP Company

Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.

IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.

An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.

Practicalities

So how does it work from a practical perspective?

At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.

The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.

Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.

Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty payments to fund the cost of the IP).
If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.

Businesses Who Pay Royalties or License Fees for the use of IP

Once it has acquired the Property the Offshore IP Company can then issue (IP) sub-licenses or exploitation rights to appropriate third party structures.
For example, a majority of software companies license their users through companies which are established in an offshore jurisdiction, or through a firm, which is not established in a classical offshore jurisdiction, but is owned or controlled by such a firm.

Typical examples of businesses that might pay license fees to a nil/low tax Offshore Company include:
- Software companies
- Companies doing business in information technologies
- License and copyrights to books, articles, music, films, etc.
- Users of Franchise operating systems

- Trademark product (e.g. Clothes/Consumer Goods/Accessories etc. Brand) manufacturers and or retailers

In some circumstances the royalties may be subject to withholding tax at source, however, the interposing of a second company in another jurisdiction may reduce the rate of tax withheld at source (a carefully selected jurisdiction can withhold taxes on royalty payments with the commercial application of double tax treaties).

Structuring Options

Another option, whilst you are still in the process of creating a new piece of intellectual property, is to involve or engage an offshore (nil tax) company as a foreign partner or financial sponsor. Participation in development at this early stage would entitle it to register as the owner or co-owner of the property.

If you involve an offshore company later, you have to sell or assign the title to the property to the offshore company, and these kind of transactions requires at the least that a fair market price deal be apparent as if no associated parties were involved (+ the transfer may involve the incurring of some CGT on the part of the inventor/creator of the IP).

Benefits of an Offshore IP Company

There are numerous benefits that an IP holding company can deliver including:

• By placing your IP in one entity you are able to streamline the internal processes for inter-group licensing
• Cross-jurisdictional tax issues become simpler as you will be regularly licensing IP between the same jurisdictions
• You can justify staffing that entity with people who have the skills to manage the same so protecting valuable assets of the company further, simplifying the licensing process
• Assets can be valued due to the income stream that accrues for the benefit of the IP holding company
• The value of the shares in the entity can be included into the accounts which will benefit the shareholders of the holding company
• You can split your income streams in two enabling you to sell one chunk of your business first up (i.e. the operational business) whilst retaining the other (i.e. IP) arm of the business which would entitle you to receive passive income
• If your business or trading company ever gets sued and the IP is owned by a 2^nd (e.g. Offshore) Company the most precious asset of your business can/will not be lost.
• You get to retain ownership of your IP in a highly private environment where no one knows what you own or how much the IP is worth. (There have been many documented cases of inventors and artists who rise suddenly to fame only to lose their fortune just as quickly via a law suit filed by a disgruntled gold digging ex-lover or confidante… The chances of that happening if your IP is owned by a privacy haven company are GREATLY reduced)
• You can significantly if not dramatically reduce the tax that your operating/trading company would otherwise have to pay

Proprietors Holding Entities

By the time each of the business owners becomes entitled to a share of the profits he/she would be wise to have already in place a nil tax entity to hold his/her interests in the business.

For many clients all that they will need is a Full Nominee IBC (For those who live in countries with Controlled Foreign Corporation Laws a Foundation should be included as part of the Corporate Structure). Such an entity can enable you, during the lifetime of the business, to avoid paying tax at home on all but the monies the business pays you (eg by way of wages or consulting fees or profit share). The nett result is tax deferral (ie you avoid having to pay tax on the business’s profits until the business is sold or shut down. Meanwhile (without having to pay tax each year on the business’s profits) your capital/asset base should have  grown massively thanks the power of compounding.

How To Set Up An Online Business Offshore

Offshore Companies are commonly used to own/operate online businesses. Please check out these links for some examples of how certain kinds of businesses can be set up “Offshore”:

https://offshoreincorporate.com/common-offshore-corporate-strategies/#1

https://offshoreincorporate.com/common-offshore-corporate-strategies/#2

In principle here’s how it can work:

1. A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
2. The IBC owns/operates the web based business (eg ownership of the web-domain and the website/artworks or trademark/s or any sole distributor rights are held by or transferred to the IBC)
3. An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
4. Ideally the server is located in a country which does not tax business on the basis of server location (eg Singapore)
5. Customers contract with and pay the IBC. All such monies are banked free of tax in the first instance
6. You or your local company would be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever.
7. You would invoice the IBC periodically (eg monthly) for this service which income would be assessable income in your home state – though a smart Tax Accountant should be able to assist you to claim a series of expense against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
8. Often there is some kind of intellectual property (“IP”) created or behind the website based business (even if it’s just the website/design). It may be advantageous to you down the track if ownership of the business and the IP were held by 2 different entities. What you can do there is set up a 2^nd IBC to own the IP. The first IBC (ie the Trading Company) pays license fees periodically to the 2^nd IBC which fees wold be receipted tax free. This could be advantageous if you wanted to bring ownership of the web-business onshore or if you wanted to sell the business but keep a passive (potentially tax free) income stream
9. Ideally once you start to grow you and to add substance you would be wise to set up your MD/Board and or a sales team onshore to take orders and receive income in a low tax onshore environment (eh Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model)

To minimise the chances of the IBC being taxed onshore ideally the IBC should be (and be seen to be) managed and controlled from offshore. How this can be achieved is including a Nominee Director etc as part of the Corporate structure. See these pages for details of how that can work:

https://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/

https://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/

As always local laws can have an impact, so be sure to seek local legal/tax/financial advice before committing to set up an Offshore Company for such purposes.

As alluded to in my last article if you’re going to set up securely Offshore – particularly if you live in a country which has Controlled Foreign Corporation (“CFC”) Laws – you will probably want (and/or need) to include an Offshore Discretionary Trust or (even better still) a tax free Private Foundation as part of your Corporate Structure.

Briefly, how the dual structure works is the Company does the business ie it buys and sells, incurs debt, employs staff etc. The Foundation (or Trust) is completely passive ie it just holds the shares of the Company. It’s there to (a) get around CFC laws and (b) so that (ie in the case of a Foundation) you can honestly answer no if anyone ever asks are you the beneficial owner of XYZ Offshore Company Limited?

I’m often asked Can I set up a Trust or Foundation later?

The answer is yes you can but it might not be the smartest way to go about it. Here’s why:

1. Until such time as the Company is owned by the Foundation (or Trust as the case may be) there is no question that it’s being managed and controlled from onshore and would be classified as a “Controlled Foreign Corporation”. This means almost certainly (until such time as the Trust or Foundation owns/holds the shares of the Company) you would be required by local laws to declare and pay tax at home on the Company’s earnings. If you live in such a country (ie most countries) failure to so declare would be tax evasion the penalty for which is jail time (it’s not worth the risk…AND you’ll sleep better at night).
2. For a Limited Company to be validly formed shares need to be issued. If you decide to set up your Foundation (or Trust) later (ie after you incorporate your Offshore Company) you would presumably start with a Nominee Shareholder and then transfer ownership of the shares to the Foundation (or Trust as the case may be). When you do transfer the shares:

(a)    A Share Sale/Purchase agreement should be entered into on reasonable commercial terms and signed by the outgoing and new shareholder

(b)   The Foundation/Trust will need to be seen to have paid for the shares

(c)    The price paid for the shares by the Foundation or Trust will need to be seen to be fair market value. If the company has done well in the meantime this could be quite a lot of money (which brings into question another quandary ie how do you get money to the Foundation to buy the shares???)

The bottom line is if the above boxes are not ticked the transfer could be set aside later as a sham transaction leaving tax liability in the hands of the former owner (ie you). Hence the wisest thing to do would be to form your Foundation (or Trust) before you incorporate your Tax Free Offshore Company.

Local laws can also have an impact. Hence you should seek local legal/financial advice before embarking on a venture such as that described above.

There has been much speculation in the press on the likely impact of the Panama leaks on the use of Offshore Companies moving forward.

No doubt many people are wondering (possibly even yourself dear reader) is it possible to securely setup Offshore?

The short answer is yes it is still possible to set up a secure Offshore Company but as ever the key is attention to detail (no cutting corners!).

If I was looking for a Secure Offshore Company Formation/Setup here’s what I would do:

• Avoid TIEAs: You will want to ensure that you set up a tax free Offshore Company in a country which has NOT signed a TIEA (ie Tax Information Exchange Agreement) with your home state. Why? Because if you do incorporate your Offshore Company in a country which has a TIEA with your home country (and say the government sees you communicating with or being paid by said Offshore Company) your country’s authorities can simply send an email to the government of the country wherein your Company is incorporated demanding to know the name of the beneficial owner of the Company (and they will be given this info, as of right). Even if what you’re doing is legal the approach governments take here is you are guilty until you prove yourself innocent (which can costs hundreds of thousands of dollars in legal fees). Don’t give your government a free hit. Set up your IBC in a country which has NOT signed a TIEA (ie Tax Information Exchange Agreement) with your home state.

• Management and Control: If an Offshore Company is seen to be managed and controlled by you it can be taxed onshore. Hence you will want to ensure that you include a Nominee Shareholder and or a Nominee Director as part of the IBC’s Corporate Structure. For more information on that and how Nominee Services can work for you please check out these links: https://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/ & https://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/

• Flexibility: You will want to ensure that you incorporate your company in a country which allows redomiciliation to another tax/privacy haven – this will enable you to keep the company alive but change its nationality if your country’s government decides it wants to sign a TIEA with the government of where your IBC is incorporated (most if not all of the “Offshore” jurisdictions we work with meet this criteria)

• Avoid CFC/ laws: A Controlled Foreign Corporation (“CFC”) Law effectively says “we don’t care who the Director or Shareholder of your Offshore Company is; If you own or have the capacity to own 10% or more of the shares of an Offshore Company it is deemed to be a CFC (in which case you’d be liable to declare and pay tax at home on the Company’s worldwide earnings). If you live a country which has a CFC law – and even if your Company is set up with a Nominee Director and Nominee Shareholder – (unless you have set up a Private Foundation to own/hold the shares of the Company –see below) there can be no argument that you are liable to declare and pay tax at home on the Company’s worldwide earnings (failure to so declare would be an act of tax evasion which is a crime punishable by imprisonment).  Briefly a Foundation should steer you around CFC laws because (a) a Foundation is not a Company and (b) under the general law the beneficial owner of any asset held by a Foundation is the Foundation itself (a Foundation, unlike a Trust is separate legal entity in its own right)

• Avoid AEOI: 82 countries (out of a possible 196) have agreed once each year to automatically share with each other the names of non-resident bank account holders (including corporate bank accounts where the beneficial owner of the Company is a non-resident). This is known as AEOI (Automatic Exchange of Information). To get around this there are 2 things you can do: (a) set up your bank account in a country which has not agreed to be party of the treaty cartel and/or (b) set up a Seychelles Foundation to hold the shares of your Offshore Company. Why? Because Seychelles uniquely has included in its Foundation law a specific provision which expressly says that the legal and beneficial owner of any asset held by a Seychelles Foundation is the Foundation itself. What this means is (and even if you are named as a beneficiary of the Foundation) if anyone ever asks are you the beneficial owner of ZYZ Ltd Offshore Company Ltd you can put our hand on the bible and honestly answer “no”

• Commercial Reality: Make sure your relationship with the Company is clearly documented. The most common way to achieve this is be ensuring that there is an arms length Consultancy Contract in place between you and the company which accurately describes the work you will do for the Company and what you will be paid for that work. That way, if ever asked, you can justify why from a commercial perspective you are communicating with or getting paid by an Offshore Company.

• Choose a low key provider: Why were Mossack Fonseca selected as the target? Because they have a huge presence in the Offshore world and have probably incorporated more Offshore Companies than any other provider. The vultures knew they could do the most damage by hitting the biggest target. Simply put they were an easy target. If you want to minimise the chances of your data being leaked make sure you choose an Offshore Company Formation Service which doesn’t fly so far above the radar

• IT Security: Whatever Offshore Company Formation you choose check to make sure that all their devices, database etc are protected by military grade encryption and that they use a VPN (Virtual Private Network) to hide their IP address when on the nett. (FYI OCI ticks both these boxes)

• Email security: Whatever Offshore Company Formation you choose check to make sure that they offer you the chance to communicate with them via encrypted email Such examples of encrypted email services include GpG/PgP, Protonmail, Safe-mail, Tutanota. Hushmail, Safe-mail etc (FYI OCI assists clients to set up secure email accounts and we insist that clients communicate with us via encrypted email – in fact we have email accounts with all of these providers thereby affording our clientele the widest choice of encrypted email service)

I’ve been telling clients for many years, the days of setting up an IBC and just hiding behind the privacy veil (most IBC jurisdictions do not have a public register of shareholders or directors) to get around having to pay tax at home are long gone. You have to be prepared for the worst case scenario ie that your personal details might be hacked or leaked to an outside source such as what happened in the case of Mossack Fonseca.

At the very least you will want to be able to raise a legal argument for why you’ve setup (or for why you’re connected with or communicating with or getting paid by) an Offshore Company . (You DO NOT want to risk being charged with tax evasion and sent to jail).  Hopefully the above paragraphs explain (in easy to understand language) how that might be achieved.

As always, local laws can have an impact, so be sure to seek local legal/tax/financial advice before committing to set up an Offshore Company.

I’m often asked by EU resident clients what’s the most tax efficient way to invest in the USA?

The starting point is to set up (a) a Tax Free Offshore Company(“IBC”)  in a country which does not have a TIEA (Tax Information Exchange Agreement) with your home state + (b) a Private Interest Foundation to hold the shares of the IBC. Such a structure should leave you liable for tax at home only on income actually paid to you by the Offshore Company.

But what if the plan is to hold shares in a US Company or Companies?

When dividends (+ royalties, interest etc) are paid by a US Company to a non-resident US Shareholder for/of the Company the US applies Witholding Tax (“WHT”). The base rate for WHT in the US is 30%.

That said some 61 countries have negotiated Double Taxation Avoidance Treaties (DTA) with the US and many of these treaties provide for discounted WHT rates (including 4 low tax countries ie Cyprus, Ireland, Netherlands and Malta). In short if you/your Company hold shares in a US Company, and you/your Company are a resident of a country which has a DTA with the USA, instead of paying 30% tax in the US on dividends paid to you by the US Company  you could end up paying as little as 5% (or less, see below)

How is it done?

What you do is you interpose a Holding Company (incorporated in one of the 4 low tax centres – see details of each below) between the US Company and your tax free IBC. (ie the Holding Company holds/own your US Shares. Your IBC owns the Holding Company).

Cyprus

If you set up a Cyprus Company to hold the shares of a US Company/s the US charges Witholding Tax (“WHT”) as follows:

(a)   15 percent of the gross amount of the dividend; or

(b)   When the recipient is a corporation, 5 percent of the gross amount of the dividend if:

(i)                 During the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation; and

(ii)               Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received).

Tax Payable in Cyprus

The corporate tax rate for tax year 2013 onwards is 12.5%.The rate is applicable on business income derived by a company (defined as “any body with or without legal personality, or public corporate body, as well as every company”, but it does not include a partnership). Cyprus Corporate tax is not charged on dividends received by Cyprus resident Companies. Income deriving from the sale of securities is also tax exempt. Only expenses wholly and exclusively related to the business activity are deductible.

Note Cyprus does levy a “Special Contribution for defence” tax on dividend receipts at 17% but an exemption applies if “dividends received by a company resident in Cyprus or a company not resident in Cyprus which maintains a permanent establishment in Cyprus from a company which is not resident in Cyprus”. This exemption does not apply if: (a) more than 50% of the activities of the non-resident dividend paying company lead to investment income; and (b) the foreign tax burden on the income of the dividend paying company is substantially lower than the tax burden of the Cyprus tax resident company or the non-resident company which has a permanent establishment in the Republic.”

Cyprus does not levy WHT when dividends are paid from a Cyprus Corp to a non-resident shareholder.

Ireland

The DTA between the USA and Ireland provides that:

1. Dividends paid by a company that is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State (In this case ‘contracting states’ refers to both the USA and Ireland.)
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, except as otherwise provided in this Article, the tax so charged shall not exceed

(a)   5 percent of the gross amount of the dividends if the beneficial owner is a company that owns at least 10 percent of the voting stock of the company paying the dividends;

(b)   15 percent of the gross amount of the dividends in all other cases.

Tax Payable in Ireland

The corporation tax rate in Ireland is 12.5% for active income from the conduct of a trade in Ireland. A corporation tax rate of 25% applies to passive income and to income from certain defined activities. Capital gains are taxed at 33% with a participation exemption for gains on disposals of certain shareholdings of 5% or more of companies resident for corporate income tax purposes in EU or income tax treaty states where the company being disposed of or the Irish parent and its 5% subsidiaries taken together are wholly or mainly engaged in carrying on activities in the nature of a trade.

However a discounted rate of 12.5% applies to dividends received by an Irish Company from Companies tax resident in the EU or from a company tax resident in a country which is a part to the OECD convention on mutual assistance in tax matters (this includes the USA). AND a credit for underlying corporate tax and WHT generally is available for foreign tax paid.

Dividends paid from an Irish company to a non-resident company or individual are taxed at a base rate of 20% withholding tax unless the holding company is another EU company or located in a country which has a DTA with Ireland (which might afford discounts or even complete exemption).

The Netherlands

Per the treaty between the USA and the Netherlands where a Netherlands Holding Company owns shares in a US Company and is paid dividends it may be taxed in the US and according to the laws of the US but if the beneficial owner of the dividends is a resident of the Netherlands, the tax so charged shall not exceed:

a) 5 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 percent of the voting power of the company paying the dividends;

b) 15 percent of the gross amount of the dividends in all other cases.

However the Netherlands, in 99% of the cases, will not charge corporate income tax on foreign dividends and capital gains realised on foreign shareholdings. To qualify for this ”participation exemption” only a few easy-to-meet criteria must be fulfilled:

• The Dutch entity must own at least 5% of the economical and legal interest in the foreign entity (both dividend rights and voting rights);
• The foreign entity must have a capital divided into shares;
• The foreign entity does not have to be subject to any foreign profits tax, unless the entity qualifies as a ”passive” entity as defined by law, in which case the foreign underlying profits tax must be 10% or more.

So if a Dutch company receives a dividend from a foreign shareholding which meets these criteria the Dutch entity will not have to pay corporate income tax on the dividend. The same is true if the Dutch entity should realise a capital gain with the shares in the foreign entity. The Dutch participation exemption covers ”benefits of whatever kind and whatever form realized with qualifying foreign shareholdings” so a dividend is treated the same way as a capital gain when applying the participation exemption.

Tax In the Netherlands

The corporate tax rate in the Netherlands is 20%/25% – The first EUR 200,000 of taxable profit is taxed at 20%. These rates have been in force since 2011. The rate of tax the Netherlands charges is 20% for the first 200,000 EUR of taxable profit, any further taxable profit is taxed at 25%.

Dividends payable by a Netherlands Company to a foreign shareholder are subject to WHT at a rate of 15% which can be reduced to as low as 0% if the shareholder receiving the dividend is located in a country which has a favourable DTA with the Netherlands.

An additional exemption applies – Dutch tax law contains a special provision for dividends paid by Dutch corporations to foreign shareholders which originate from dividends received from other countries. In short, if a Dutch corporation re-distributes dividends which have been subject to a foreign withholding tax, the Dutch corporation is under certain circumstances entitled to a credit on the Dutch withholding tax which it is supposed to pay over the dividends it declares itself (indirect tax credit). The credit can amount to 3% of the dividend declared.

Malta

If the dividends are paid by a company that is a resident of the United States to a resident of Malta who is the beneficial owner thereof, except as otherwise provided in the Malta/US DTA, the tax charged by the United States shall not exceed: i) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns directly at least 10 percent of the voting stock of the company paying the dividends; ii) 15 percent of the gross amount of the dividends in all other cases.

The corporate tax rate in Malta is 35%. Malta operates a full imputation system of taxation for both residents and non-residents, which ensures the full relief of economic double taxation upon the distribution of taxed profits by companies resident in Malta.

On the distribution of taxed profits, the shareholders may opt to claim a partial/full refund of the tax paid by the distributing company. As a general rule, the tax refund amounts to six-sevenths of the tax paid. The refund will be reduced to two-thirds if the shareholder claims double-taxation relief and five-sevenths in those cases where the distributed profits are derived from passive interest or royalty income being subject to foreign tax at less than 5%. Dividends and capital gains derived from participation holdings will qualify for a full refund. The Malta tax suffered on distributed profits hence ranges between 0% and 10%. The tax paid on profits derived, directly or indirectly, from immovable property situated in Malta is not available for refund.

In cases such as this (ie where you have a Maltese company which has claimed double taxation relief) a two-thirds (2/3) refund of Maltese corporate tax (35%) paid by the Maltese Company should be available to the shareholder of the Maltese company.

Here’s how that would work practically…

Say you set up a Malta Company and it receives a dividend of $US100,000 from a US Company. 5% of that is paid to the US govt for WHT. Of the $95,000 remaining the Malta Company pays 35% tax ie $33,250. But Malta operates a tax refund system whereby the shareholder, in the case of a dividends receipt, can claim back two thirds of the tax paid by the Company (ie $22,166). That means the Malta Company would have paid $11,084 tax on a receipt of $95,000 ie 11.67%.

Malta Holding Company Potential 100% Tax Exemption

Apart from the preferential tax treatment offered to trading companies outlined above, a Malta Holding Company may benefit from a total exemption on corporate tax in Malta, provided the criteria listed below are satisfied.

Qualifying as a Participating Holding

The special treatment offered to a Maltese Holding company is that it provides a choice between a full-refund (i.e. 100% of tax paid will be refunded to the shareholder) or a total tax exemption (i.e. no need to proceed to tax payment) on any dividend income or capital gains, provided it qualifies as a ‘participating holding’. Opting to be exempt rather than getting the refund has a number of advantages, including cash flow advantages and non-disclosure to the Maltese Revenue in Tax Returns.

A Maltese Company qualifies as a participating holding (total tax exemption) in a non-resident entity if:

• it holds directly at least 10% of equity shares of an entity (eg a US Company); or

• it is an equity shareholder in a company and is entitled to acquire the entire balance of shares; or

• it holds equity shares in an entity and is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares; or

• it holds equity shares in an entity entitling it to either (i) sit on the Board of Directors or (ii) appoint a person to sit on the Board of that company as a director; or

• it holds equity shares in an entity having an investment value of €1.164.000,00 and held for an uninterrupted period of not less than 183 days; or

• it holds equity shares for the furtherance of its own business and is not held as trading stock for the purpose of a trade.

Additionally to the above-referred criteria, in the case of dividend income, the full refund or exemption will only be made available to the Maltese participating Holding if the non-resident entity held, paying the dividend satisfies any one of the below three conditions:-

• Is resident or incorporated in the European Union; or

• Is subject to a minimum of 15% foreign tax; or

• Does not derive more than 50% of its income from passive interest and royalties (i.e. must be a trading entity).

If none of these three is satisfied, in order for the full refund or exemption to be made available BOTH of the below conditions must be met:-

• The equity holding by the Maltese Company in the body of persons not resident in Malta is not a portfolio investment; and

• The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

As I read it if you can’t meet the above criteria the maximum amount of tax you would pay in Malta would be 11.67%

Malta also does not charge withholding taxes on dividends paid by a Maltese Company to a foreign shareholder, only in the rare cases that the company issuing the dividend received its income from tax free sources.

Conclusion

In conclusion if you’re looking to minimise WHT tax on your US share portfolio both Malta and Cyprus seem to present themselves as interesting Holding Company jurisdictions.

Bear in mind local laws can also have an impact. Hence, before committing to incorporate an Offshore Holding Company, you would be wise to seek Legal and Financial advice from a local professional adviser (in both your Home Country + the Holding Company jurisdiction).