Category Archives: Company- Management

I’m often asked where can I live Offshore and pay the least amount of taxes?

If you’re earning good profits from your investments there’s no real reason why you need to stay where you are. In the internet age, in most instances, you could just as easily trade from overseas as you could from your current place of residence.

One of the key questions though is where to go Offshore? There’s no point in ‘jumping out of the frying pan and into the fire’. You need to ensure that wherever you move to overseas the net result will be a reduction in the amount of tax you pay each year across the board. If you want to avoid tax altogether on your income and/or capital gains as applicable you essentially have 4 choices:

• Nil tax havens
• Countries with no income tax
• Foreign Source exempt havens
• Countries with no Capital Gains Tax (“CGT”)

Nil Tax Havens

These are simply countries that do not have any of the three main direct taxes:
• No income tax or corporation tax
• No capital gains tax, and
• No inheritance tax

Many of the nil tax havens you’ve probably heard of or read about in novels. You may even have holidayed in some of them. They include:
• The Cayman Islands
• St Kitts and Nevis
• Dubai
• Monaco
• The Bahamas
• Bermuda
• Vanuatu
• The Turks & Caicos Islands
• Anguilla

Although there are no taxes in these Offshore Jurisdictions, the tax haven governments still need to generate some revenue to provide public services. They may therefore impose small fees for Offshore Company Incorporation documents or annual registration fees for companies. However, these charges are fixed and usually small.

If you’re looking at living in one of these Offshore Jurisdictions and generating profits from financial investing or trading most of these charges won’t apply and you should be able to live with little state involvement in your affairs. The only tax charges that would then affect you would be import duties or local sales taxes.

Countries With No Income Tax

The below mentioned countries generally speaking do not levy a tax on income regardless of where the income is/was sourced:

• UAE
• Qatar
• Oman
• Kuwait
• Cayman Islands
• Bahrain
• Bermuda
• The Bahamas
• Saudi Arabia
• Brunei Darussalam

NOTE:

Re UAE: While expatriate employees don’t pay for social security in the Arab country, U.A.E. citizens must make monthly contributions of 5 percent of their total earnings for social security. Employers of citizens also have to make monthly contributions of 12.5 to 15 percent of the worker’s base salary for social security and pensions.

Re Qatar: Qatar nationals have to pay 5 percent of their income for social security benefits, while employers contribute 10 percent for the fund.

Re Oman: Oman citizens must contribute 6.5 percent of their monthly salary for social security benefits.

Re Kuwait: Kuwaiti nationals must contribute 7.5 percent of their salaries for social security benefits; their employers make an 11 percent contribution.

Re Bahrain: For social security benefits, Bahrain citizens contribute 7 percent of their total income to the government, while expatriates pay 1 percent. Employers must also make a contribution of 12 percent of a citizen’s income for social insurance, and pay 3 percent for expatriate employees.

Re Bermuda:  While there is no income tax, Bermudan workers may be asked by employers to contribute just under half of a 14 percent payroll tax

Re Saudi Arabia:  No tax on salaries applies in SA but self-employed expats are taxed at the rate of 20% (Saudi employees also pay 9% social security levy)

Re: Brunei Darussalam: In BD employees must pay 5% to a Social Security Fund

Foreign Source Exempt Havens

These countries do levy taxes and sometimes they can be pretty high. However, what makes them tax havens is the fact that they only tax you on locally derived income. In other words, if all your income is derived outside the tax haven you will not pay any tax.

Good examples of foreign source exempt tax havens are:
• Panama
• Costa Rica
• Hong Kong
• Singapore

Many of these also don’t have any CGT. The net result is that share or financial investors could certainly live in one of these countries to avoid tax on an overseas investment portfolio.

If you are actively trading from the country there is a risk that the local tax authorities could tax the income. In practice though many financial traders, providing they are trading on international markets, would not be subject to any local taxes.

Countries With No Capital Gains Tax

A Capital Gain is a profit made on the sale/disposal of a Capital Asset (eg a piece of real estate, or a business or a parcel of shares).

Countries who do not levy CGT Include:

• Belgium
• Malaysia
• New Zealand
• Belize
• Hong Kong
• Malta (no CGT on gains made outside of Malta)
• Seychelles
• Belize
• Puerto Rico
• Bulgaria
• Barbados
• Isle of Man
• Jamaica
• Sierra Leone
• Singapore
• Sri Lanka
• Taiwan
• Thailand
• Turkey

Note re Singapore: For those who trade professionally buying and selling securities frequently to obtain an income for living (ie professional “traders”) these trading profits will be considered income and subject to personal income tax rates.

Note re Taiwan: No tax is collected from individual investors whose annual transactions are below T$1 billion ($33 million). Transactions above T$1 billion will be charged with a 0.1 percent tax.

Note re Thailand: There is no separate capital gains tax in Thailand. If a capital gain arises outside of Thailand it is not taxable. All earned income in Thailand from capital gains is taxed the same as regular income. However, if an individual earns a capital gain from buying and selling a security in the Stock Exchange of Thailand, it is exempted from personal income tax.

Note re Turkey: The Capital gains tax rate on share certificates for residents is 0% as of 2013 for two years of holding period

A Power of Attorney is a formal document giving another person the authority to make legally binding decisions on your behalf.

There are two types of power of attorney a general power of attorney and enduring power of attorney.

Powers of Attorney are commonly used by Traders (eg Forex Traders) to trade funds for a 3^rd party.

How it works is:

(a)   In the case of forex etc trading an account is opened in the name of the 3^rd party investor (“the Account Owner”).

(b)   The Trader sets up a tax free Offshore Company (“IBC”)

(c)    The Account Owner (ie 3^rd party investor referred to in a PoA as “the Principal”) signs a Power of Attorney with the Trader’s IBC which appoints at law the Trader’s IBC as the Account Owner’s Authorized Trader and attorney-in-fact (the “Agent”).

The Trader/Agent is then given full power and authority on behalf of the Principal to buy, sell (including short sales) and trade in a range of things as specified in the PoA/Authority document including for example:

• Currencies
• Stocks
• Mutual funds
• Index funds and securities
• Bonds
• Options (including uncovered option writing)
• Physical commodities
• Financial instruments
• Commodity futures contracts
• Financial futures contracts
• Equities and single-stock futures contracts
• Foreign commodities
• Foreign commodity futures contracts
• Forward contracts
• Contracts in unregulated foreign exchange markets, and options and other derivatives on each of the foregoing, on margin or otherwise.

In many IBC jurisdictions no form of special license will be required to form a Company of this kind.

What you will need here is:

1. To incorporate a standard (eg Seychelles/Belize/Nevis etc) IBC
2. To have a tailored agreement drawn up that will be signed by the 3^rd party investor and the Trader’s IBC
3. A tailored Power of attorney enabling the Trader’s IBC to trade funds via the Interactive Brokerage
4. An Offshore Corporate Bank Account for the Trader’s IBC’s performance fees to be paid into

1.      Incorporate a standard IBC

If your IBC is seen to be managed and controlled from onshore (ie where the Trader lives) it could be taxed onshore. Hence if you are the Trader, you will want the IBC to be seen to be managed and controlled from Offshore. How that can be achieved is via including a Nominee Director/Shareholder as part of the Corporate structure.

For detailed information on how that can work for you please read these pages:

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/

How it will work practically speaking is the Trader’s IBC will trade the 3^rd Party Investor’s funds (and be paid its performance fees) via the Brokerage account.  If/where you are the Trader (and assuming you’ve included Nominees as part of your Corporate structure), so that you can effectively steer the Company, you would either be given a Power of Attorney or be appointed as a Consultant of your Trader IBC. For detailed information on the pros and cons of each option please visit this page: https://offshoreincorporate.com/faq/should-i-select-a-general-power-of-attorney-or-a-consultancy-agreement/

Ideally you (the Trader) would be appointed as a Consultant or as an arms’ length adviser to the IBC Director with certain areas of responsibility. In such a case you might be paid a commission (eg percentage of business or sales introduced) or a retainer or a combination of the two. As part of your brief you should also be given signing power on a bank account reporting/answerable to the Director. However that relationship is structured for legal reasons, it would need to be seen to be commercially realistic.

The income you generate from this would be paid to you (or your local company) which I imagine would be assessable income at home (but against which your CPA should be able to deduct a significant number of expenses eg home office, car, equipment, travel etc which could eliminate most onshore tax). The remainder of the profit could be held (and/or reinvested) offshore potentially tax free.

2.      A Tailored Agreement Between the Investors & Your IBC

What is envisioned here is that a tailored legal agreement would be created that will in essence (a) give your Trader IBC the authority to trade funds on behalf of the investor and (b) entitle your IBC to an agreed performance fee. Usually this agreement would authorise the Broker to pay your IBC those performance fees directly.

3.      A Tailored Power of Attorney Enabling You To Trade Funds Via the Brokerage

From experience the brokerage, before giving you the power to place trades on behalf of a 3^rd party Investor, will need to see that you have the power at law to open and trade an account for and on behalf of the investor. To meet this requirement you will need to produce a tailor drafted Power of Attorney signed by the Principal (ie the 3^rd party investor)

4.      An Offshore Corporate Bank Account for your performance fees to be paid into 

Of all the things you as a Trader will need this will be the most challenging to deliver. Every week we assist client IBCs to open accounts at “name” banks including HSBC Hong Kong, Barclays Bank Seychelles, Barclays Bank Mauritius, OCBC Bank Singapore etc.

For most Traders working under a PoA you will need to be very careful about what information you provide to the bank as regards the IBC’s proposed business activities. Most banks (especially the bigger/name banks) are VERY conservative and EXTREMELY risk averse. If you come straight out and tell them that your IBC is going to trade 3^rd party funds in Broker’s accounts under Power of Attorney they will almost certainly ask you to show firstly that the Company has a Broker’s License or a Fund Manager’s license or a Financial Adviser’s license in the country of incorporation. Hence you will need to supply the bank with a carefully tailored business plan to maximise the chances of the account being opened.

Another consideration is banking privacy. If you live in a country which has agreed to be part of the OECD Bank Account Info Sharing Initiative (See below for details of what that is) to minimise the chances of local authorities being made aware of your relationship to or involvement with the Trader IBC then ideally you will want to open an account at a Bank in a country which has NOT agreed to be part of this initiative.

As always local laws can have an impact. Hence you should seek local legal/tax/financial advice before committing to embark on an endeavour as envisioned by the above.

What is the OECD Account Info Sharing Initiative?

In 2014 a number of countries committed in principle to the OECD Bank Account info sharing initiative. Under the initiative, a range of OECD and other countries have agreed to pass new domestic laws that will allow them to collect information on any foreign bank account holder (or any non-local underlying beneficial owner of a Corporate bank account holding entity) and then automatically exchange that information with other participating countries. The list of countries who have committed in principle to the initiative include:

Albania

Anguilla

Argentina

Aruba

Australia

Austria

Belgium

Bermuda

BVI

Canada

Cayman Islands

Chile

Colombia

Costa Rica

Curacao

Cyprus

Czech Republic

Denmark

Estonia

Faroe Islands

Finland

France

Germany

Ghana

Gibraltar

Greece

Guernsey

Hungary

Iceland

India

Indonesia

Ireland

Isle of Man

Italy

Jersey

Korea

Latvia

Liechtenstein

Lithuania

Luxembourg

Malta

Mauritius

Mexico

Montserrat

The Netherlands

New Zealand

Norway

Poland

Portugal

Romania

San Marino

Seychelles

The Slovak Republic

Slovenia

South Africa

Spain

Sweden

Switzerland

Turkey

Turks & Caicos Islands

The United Kingdom

The United States

If you want to avoid your interest in an Offshore account being reported to local authorities you have 2 choices:

(a)   Open an account in a country which is not in the above list; and/or

(b)   Set up a Seychelles Private Interest Foundation to hold the shares of the Offshore Company account holder (as this shifts legal and beneficial ownership of the Company to the Foundation by virtue of section 71 of the Seychelles Foundations Act)

I’m often asked How can I close or shut down my IBC? 

Whilst you could, if legal circumstances require it, go down the path of a Formal Liquidation or Winding Up Application (eg if you are owed money by the Company and want to claim priority of payment over other creditors – you should seek legal and/or accounting advice to determine whether it’s in your best interests to proceed that way) the most simple way to bring an IBC to a close is to not pay the annual renewal fees for the company in which case its registration will lapse. It depends on the jurisdiction but generally speaking come 31 December of the current year it will be struck from the register (though it can be restored, depending on the jurisdiction, up to 10 years subsequent to that date). 

A formal winding up or liquidation may give you priority of payment if you are an unsecured creditor of the company and there are creditors pressing, no secured creditors, and not enough funds to pay all the creditors.

To dissolve an IBC it is necessary to issue a Resolution of Dissolution signed by the director(s) of the company. The procedure of dissolution usually takes from 1.5 to 2 months provided that the company does not have any assets which must be attributed to the shareholders, and no debt obligations or other liabilities.

Thus if an IBC does not have any assets or liabilities, it will have to submit:

1. Bank statements
2. A Declaration signed by the directors of the company and confirming that the company does not have any assets or liabilities
3. Resolution of Dissolution signed by the director(s) of the company.

In the case when the company had business transactions and maintained financial records, it will have to provide financial statements, returns, and other documents confirming the financial position of the company at the time of dissolution.

The above documents must be sent to the Company’s Registered Agent, who will prepare Articles of Dissolution, publish a note in a local newspaper and then register the winding up with the authorities. After that the Registrar will issue a Certificate of Dissolution.

Lawyers would have to be briefed at a similar cost to what you would pay in the UK etc for the same legal procedure. Estimated cost is circa $US1,500 -2,000.

Note also the company should be in good standing to apply for liquidation and any unpaid annual renewal fees will need to be met before the procedure can begin. 

To close the IBC’s bank account usually entails the Company Manager and or Account Signatory advising the Bank of that request in a written communication to the bank + details of where you want excess funds to go.

What is a Discretionary Foundation?

If you are looking for maximum Privacy Offshore you should seriously consider including a Discretionary Foundation as part of your International Corporate Structure.

A Discretionary Foundation (like a Discretionary Trust) is a Private Interest Foundation (“PIF”) wherein the Foundation Council has a broad discretion including in terms of:
(a) who to install as beneficiaries and when; and
(b) when distributions are paid, to whom and how much.

In the case of a Discretionary Foundation the beneficiaries do not have a fixed entitlement or interest in the Foundation funds/assets. The Council has the discretion to determine which of the beneficiaries are to receive the capital and income of the Foundation and how much each beneficiary is to receive. The Foundation does not have a complete discretion however. The Council must act in accordance with the Letter of Wishes provided by the Founder at the outset (which commonly provides for the Founder and his/her family to be added as beneficiaries at a later time) and can only distribute to beneficiaries within a nominated class as set out in the terms of the Foundation’s Regulations.

Beneficiaries 

Persons who are to receive a benefit from a PIF are called Beneficiaries. You as the Founder may be a beneficiary though not the sole beneficiary. (Unless you’re setting up a Purpose Foundation) there must be at least one beneficiary nominated from the outset.

There are essentially two ways that you can approach the issue of who to name as Beneficiaries (and when). The first (more traditional) method is to clearly describe to your Foundation Registration Agent (or the Professional person who is setting up the Foundation for you) the names of the persons (which may include you and eg your partner/children) that are to ultimately benefit from the PIF. Some people feel more comfortable if they can see, from the outset, their names appearing as beneficiaries.

Note: in this instance you will need to list the parties which are to be the beneficiaries of the foundation either by name or reference to another party (i.e. the children of XYZ).

You can also provide for your foundation to benefit any future unborn children. If so, in your formation instructions, you would need to clearly specify the full names of the parents or prospective parents (e.g. “the children of my son in the event that he has any children”). You can also give details if you wish to add any age requirements or other conditions for benefits to be distributed.

Discretionary or Potential Beneficiaries

The second, more creative approach is to set up a Discretionary Foundation and to maximize the “Discretionary” nature of the structure to avoid any person’s names appearing anywhere eg in the Regulations or Order form.

One of the key features of Discretionary Foundations is that the Council/lor retains the power to add or substitute further beneficiaries after the PIF has been formed. What you can do in this instance is nominate (in the section of the Order Form asking for details as to beneficiaries) an internationally recognized charity such as Oxfam or Unicef or The Red Cross etc to be the primary beneficiary from the outset.

If you are setting up a Seychelles Foundation this may not really be necessary however as under the Seychelles law there is no deemed entitlement for beneficiaries. Hence if you name yourself/your spouse/family members as beneficiaries it should not give rise to tax consequences onshore (ie unless or until the Foundation actually pays or resolves to pay you/the beneficiaries a Distribution).

Switching Beneficiaries

If your wish is for the Foundation Council/lor to add or substitute beneficiaries at a later time all that needs to be done is to tell your Foundation Registration Agent (or the Professional person who is setting up the Foundation for you) the names of those persons and when, (after formation of the PIF) you would like to see those persons added as primary beneficiaries. By taking this approach if the Foundation’s Corporate document were accidentally found by persons acting on behalf of your creditors (or the Revenue Authorities) they should still be unable to establish whether you (or your partner or family members) are beneficiaries of the PIF.

As with any such structure local laws can have an impact. Hence you should seek local legal, tax and financial advice before committing to establish an entity or structure such as that described above.

When setting up an Offshore Company if privacy is a priority for you (and/or if you want to minimise the chances of having to endure a tax audit) then the ideal is to incorporate your tax free Offshore Company in a country which does not have a TIEA (ie Tax Information Exchange Agreement) with your country of tax residence. (See below which explains what a TIEA is).

But what do you do if, after offshore incorporation, your home country signs a TIEA with the country where your nil tax Offshore Company is incorporated???

For the discerning Offshore Company Owner a key question to ask (as part of the process of choosing an Offshore Company Jurisdiction) is “does this jurisdiction allow its companies to migrate/redomicile???”

The good news is many if not most tax havens allow you to redomicile an IBC to or away from the jurisdiction.

The migration/redomiciliation process is fairly straight forward:

First up the IBC/Offshore Company’s board of directors passes a resolution authorising the change of domicile from country A to country B.

Once that’s done a number of corporate/legal documents need to get drawn up including a board resolution and Articles of Continuation (ie a one page document signed by the Board formally authorising a change of home jurisdiction).

Certain documents then must be delivered to the Company’s new  Offshore Manager/Registered Agent to formalize the process of redomiciling the  company from one jurisdiction to another include the following:

1. Signed board resolution authorizing the change of domicile
2. Articles of Continuation

3.           Original notarized set of documents from previous jurisdiction, containing:

a)            Copy of the Certificate of Incorporation

b)            Copy of the Memorandum & Articles of Association

c)            Copy or original certificate of good standing

Depending on how cooperative the Company’s Registered Agent (Offshore Manager) is the process can take anywhere from a week to 3 weeks. Cost can be anywhere from $500 to $1,500 depending on how old the Company is, what the jurisdiction is and the outgoing Registered Agent’s requirements.

What is a Tax Information Exchange Agreement?

A Tax Information Exchange Agreement (TIEA) provides for the exchange of information on request relating to a specific criminal or civil tax investigation.

Let’s assume that you set up a Tax Free Offshore Company in a country which has a TIEA with your home/taxing country.

How it works in practice is, if your home state becomes suspicious of your connection to or involvement with an Offshore Company (ie if they think an Offshore Company is being used by you to avoid domestic tax obligations), the Tax Authorities of your home country can request of the Tax Haven country Government, as of right, (ie if there is a TIEA entered into between the 2 countries) that they give up the name and address of the “underlying beneficial owner” of the company in question.

Although the information isn’t publicly filed this information must/will be kept by the Tax Free Offshore Company’s local Registered Agent who is obliged by law (as a condition of its International Corporate Service Provider’s License) to hand over this information upon request by/to the local Financial Services Authority (who then pass ownership details to the Tax Haven’s Attorney General’s Office who then pass it down the line to the requesting country).

I am often asked how does one move money to an Offshore Company?

In a 14 + year career specializing in International Corporate Structuring I have seen this done in a number of different ways:

1. You could set up a dual structure (eg a Tax Free Offshore Company the shares of which are held by an Offshore Private Foundation) and have the Foundation set up as a Charitable Foundation. Once the Foundation is registered you could then make regular donations to the Foundation (which would then transfer that money to the Tax Haven Company eg as share capital).

2. You could set up 2 International Business Companies Offshore (ie “IBCs”) ie an Investment Company and a Trading Company. The first IBC you would enter into a speculative (eg high risk/potentially high return) general (long term) investment with. This IBC would then invest money with your trading IBC. The investment with the first IBC could be structured in such a way as to ensure that you won’t be paid a return on that investment for quite a while eg it could be a capital focussed investment. Meanwhile if anyone asks where the money went and why you’ve received nothing back you could truthfully say I’m not yet entitled to a return. Moreover no one can see where the money went to once it landed offshore and no one (eg as can happen in an insolvency claim) should be able to claw back the money from the 2^nd IBC.

3. You could convert your local money into bitcoins then transfer ownership of the bitcoins to your Offshore Tax Free Company (“IBC”). The IBC could then convert the bitcoins into hard currency which the IBC would then use to invest in whatever. The transfer of your local money into bitcoins would be beyond the view of local courts/authorities.

4. You could engage a lawyer to Due Diligence on the Offshore Company you intend to send money to. Whilst the Lawyer’s making inquiries to confirm that the company exists and has been properly incorporated etc, (as you might do prior to a real estate purchase) you could park the money you intend to invest in the IBC in the Lawyer’s Trust/Client/Escrow Account. Once the Lawyer has completed his/her inquiries you would instruct the Lawyer to send the funds from his/her Trust/Client/Escrow account to the Offshore Company’s Bank Account

5. You could “Gift” the money to a family member (or close friend) overseas and then have that family member transfer the money to your Offshore Company

6. If you are holding funds in your own name you could set up a personal account Offshore {eg in/at a Bank located in a country that (a) does not have a Tax Information Exchange Agreement with your home country and (b) which has not agreed to be part of the OECD Bank Account Information Sharing Treaty Network} and then transfer the money from your Onshore bank account to your Offshore Bank Account. Same could be done in the case of funds being held in a Company account onshore (ie you set up an Offshore Privacy Haven Account in the name of your local Company and have funds transferred from the Company’s Onshore account to your Company’s Offshore account. If you open the account in the right place onshore predators will really struggle to find out where the money went once it landed offshore.

Local laws can have an impact. Hence it would be wise to seek local tax/legal/financial advice before committing to embark on such an endeavour.

The UK is considered by many professional tax planners to be an Offshore Tax Haven for non-UK nationals, and the “best kept secret in Offshore Financial Planning”.

Before we discuss the various features and advantages of using UK companies in international asset and offshore tax planning, readers and users must be reminded that all UK companies are liable to UK Corporation Tax (CT) on all sources of income and capital gains. That means UK companies are subject to CT on their worldwide income.

All UK companies are deemed to be tax resident in UK. However, with proper advice and planning, a UK company can function as tax-efficiently as an IBC from a nil-tax Offshore Jurisdiction.

POTENTIAL ADVANTAGES OF A UK CORPORATION

The following is a summary of the core attractions of using a UK company in Offshore Tax Planning.

Tax Treaty Network

The UK has the largest network of double tax treaties (over 100) in the world rendering UK companies a very efficient vehicle for minimizing withholding taxes on dividends received.

In some cases, if the UK company owns at least 10% of the share capital of an overseas company, the rate of withholding tax experienced on non-UK dividends can fall to nil or as little as 5% of the gross dividend.

The UK company can also benefit from the EU Parent/Subsidiary Directive, whereby withholding taxes on intra-EU dividends is eliminated altogether.

The following are the rates of withholding tax on dividends, royalties and interest paid to a UK parent company from various jurisdictions. In all cases, use of a UK company avoids the domestic rate.

COUNTRIES                Dividends           Royalties          Interest         Domestic Rate

China                               Nil                        10%                    5%                     33%

New Zealand                 15%                     10%                    10%                   30%

EU Countries                 Nil                         Nil                       Nil             About 25%

Singapore                      Nil                          10%                   10%                  15%

United States                5%                        Nil                        Nil                    30%

Low Cost of Maintenance of a UK Company

Although the costs of maintaining UK companies cannot be compared with the cost of maintaining IBCs, they are amongst the lowest in developed jurisdictions with comparable reputation, international respectability and protection.

Share Capital

There is no minimum paid up share capital requirement and no capital tax on authorized or issued shares.

Audit of Accounts

There is no audit requirement for companies with turnover below GBP1,000,000 AND net assets of less than GBP1,400,000, unless the company is part of a larger qualifying group.

Ease of Establishment

Shelf companies are available. If required, tailor-made companies can be set up within 24 hours.

International Respectability and Protection

UK companies are often used to acquire assets in certain foreign locations to minimize risks of expropriation by foreign governments.

TAX ADVANTAGES

(a) Reduced corporate tax rates–Profits of GBP10,000 or less are tax free. The next GBP40,000 are taxed at a rate equivalent to 23.75%. Profits between GBP50,001 and GBP300,000 are taxed at the “small companies rate” of 19%. Profits in excess of GBP300,000 are taxed at a rate equivalent to 32.75%. Profit in excess of GBP1,500,000 are taxed at the standard rate of 30% on the whole profits. Note that pure investment companies cannot benefit from the small companies rate.

(b) Exemption from capital gains tax on disposal of shareholding in a trading group– tax exemption is available for capital gains from the disposal of substantial shareholdings” (shareholdings of 10% or more) in a trading group.

(c) There is a qualifying shareholding period of 12 months. The disposal should not result in the UK company ceasing to be a member of a trading group.

(d) The exemption from capital gains tax from the disposal of ‘substantial shareholdings’ also applies to sole trading companies, provided they own at least 10% of another company.

(e) Exemption from Capital Gains Tax on disposal of assets situated in the UK by non-residents –The selling of a UK holding company’s shares does not attract any tax in the UK.

(f) Tax on dividends and royalty–There is no withholding tax on dividends received from other companies and companies in EU countries if the EC Parent/Subsidiary Directive applies. On distribution by UK companies of dividends to shareholders, there is no withholding tax on such dividends payable to non-resident shareholders. With proper planning, there is no withholding tax on royalty payments made by a UK company to a foreign shareholder.

(g) Losses carried forward and backward–Company losses can be set off against income from the previous year or carried forward for many years against profits of the same trade.

(h) Various relief is available on tax on foreign dividends received–Various credits and deductions are available for UK companies receiving foreign dividends to set off against their liabilities to UK corporation tax, as follows:

• Non-UK withholding taxes paid on dividends received by the UK company, and foreign taxes paid on profits from which the dividends are paid can be set off against UK corporation tax liabilities provided the UK company owns not less than 10% of the share capital of the dividend-paying company. Therefore in cases where the UK company owns a 10% stake in an overseas company, foreign taxes incurred on overseas trading profits are fully deductible against corporation tax in the UK.
• Foreign tax paid in excess of UK corporation tax, with certain limitations, can be surrendered between group companies (pooling arrangements).
• Foreign tax paid in excess of UK corporation tax, can with certain limitations, be carried forward indefinitely or carried back to be used in the three immediately preceding years.
• Alternatively, foreign tax can be deducted as an expense in arriving at the foreign income or capital gain liable to UK corporation tax. This will be advantageous if no UK taxes are payable, say, because of the tax losses carried forward from previous years.

Tax Sparing

Taxes may sometimes be forgiven by a developing country to foreign investors in order to attract investment into the country. That is, the tax rate applicable to a foreign investor will be less than the tax rate for locals. To encourage UK corporations to invest in developing countries, the UK has entered into tax treaties with “tax sparing” clauses under which taxes forgiven by the developing countries will be treated as actually paid. Amongst the 30 countries, the most important for Asians are China, Singapore, Malaysia, Portugal, Spain, and Thailand.

The follow is an example to illustrate the operation of the clause:-

Foreign subsidiary’s profit                                                                                 100

Foreign corporation tax payable, calculated according to local tax rate   35

Less: Full exemption by foreign government                                                   35

Tax payable                                                                                                          Nil

UK Corporation tax computation:

World-wide profits                                            100

Corporation tax at 30%                                     30

Less: Foreign tax paid (deemed to be paid) 35

Tax payable                                                      NIL

EXAMPLE OF THE USE OF A UK HOLDING COMPANY: 

                                                         Seychelles Company

                                                        UK Holding Company

              EU Trading Company “A”                              Mauritius Trading Company “M”

                                                  China Manufacturing Company

In the above example:

• For trading company A situated in the EU, the UK holding company can benefit from the EC Parent Subsidiary Directive and there are no withholding taxes on payment of dividends to UK company.
• For Mauritius trading company M, the effective tax rate is 3% (or 80 % tax credit on 15% income tax)
• Withholding tax on payment of dividends to UK company is 10%, utilizing the Double Tax Treaty between Mauritius and the UK.
• Withholding tax on payment of dividends to UK company by the China Company is Nil. China company pays 15% of tax on its profits. However, the official rate is 33%. When these dividends are received by the UK company, they are chargeable to UK tax. However, relief is given for all underlying tax paid in EU on profits, from which dividends are paid and for the official tax payable (in full rate of 15% and 33%) in Mauritius and China respectively The resulting tax credit will leave little or no UK tax liability.
• Dividends from the UK company can be paid to the Seychelles company without any withholding tax.
• There is no capital gains tax on the disposal by the UK company of shareholdings in any of its subsidiaries, provided that the UK company owns the subsidiaries for over one year and the disposal does not result in the UK company ceasing to be part of a trading group. Even if, on a disposal, the UK company ceases to be a member of a trading group, with appropriate tax planning the gains can remain tax exempt in the UK.
• Dividends received by the Seychelles company do not attract any income tax in the Seychelles.

Local conditions can impact on the use of such a structure. Hence UK & domestic legal, financial and tax advice should be sought prior to committing to embark on such a venture.

For most clients looking to defer tax on Offshore earnings the preferred solution is to have one’s Tax Free Offshore Company owned by an Offshore Private Foundation wherein the client + his/her spouse/family are named as beneficiaries.

But for clients who are either:

(a ) concerned about potential tax consequences that may arise onshore from being named as an immediate beneficiary; or

(b) wanting as much privacy as possible

there is a solution.

The solution is to set up a Discretionary Hybrid Foundation. That is a Foundation which can (a) benefit both a charity and natural persons and (b) which can, utilizing the Councillor’s “discretion”, change beneficiaries at any time.

Typically what the client does is (a) he/she nominates a tax free International Charity to be the beneficiary in the first instance and (b) he /she provides the Foundation Council with a Letter of Wishes setting out guidelines as to how and when in the future the client’s spouse/family might be substituted as beneficiaries.

I know of a client who set up one of these dual structures and then ten years later shifted his tax residence to a country that didn’t have income or capital gains tax. Once he’d moved the Foundation beneficiary was changed from a Charity to the client… whereafter the client promptly drew down the capital from/of the structure all of which was receipted/ banked tax free!

To change the beneficiary of a Foundation is easy. Here’s the steps:

1. You send the Council:

(a) a written request (called a Letter of Wishes) addressed to the Councillor advising who you want added as a beneficiary and why

(b) proof of ID and residential address as regards the new beneficiary

2. The Foundation Council then passes a Council resolution authorising a change.

3. The regulations get amended to note the new beneficiary.

4. The register of beneficiaries (usually stored at the Foundation’s registered Office) gets amended to note the changes

Local condition can have an impact. Hence you should always, before enacting such a plan, seek local legal/tax/financial advice.

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:

1. You set up a nil tax Company “IBC”).
2. 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)
3. 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:

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 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 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 – per section 71 of the Seychelles Foundations Act).
2. The Foundation is a legal entity in its own right not a mere Trustee (Per section 23)
3. 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:

1. You would incorporate a new company which 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 would 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.

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.

Offshore Foundations and Offshore Trusts are similar in that each is:

(a) set up by one person (in the case of a Trust a “Settlor”, in the case of a Foundation, a “Founder”)

(b) managed by a 2^nd person (in the case of a Trust a “Trustee”, in the case of a Foundation, a “Councillor”)

(c) for the benefit of a 3^rd group of persons (ie the beneficiaries).

It is usual at the time a Foundation (or Trust) is established, and at certain key junctures (see below), for the Founder of the Foundation (or Settlor of the Trust as the case may be) to provide the Trustees/Councillors with a Letter of Wishes with regard to the administration of the Foundation/Trust.

What is a Letter of Wishes?

A Letter of Wishes to is an important document, particularly in the case of a Discretionary Foundation/Trust,  as it is effectively your instructions to the Trustee/Foundation Council as to how you would like your Trust/Foundation to be administered (and/or funds/capital to be distributed) particularly after your death.

The following points should be considered when completing Letters of Wishes:

1. As opposed to a Will, the Trustees/Foundation Councillor/s usually have a discretion as to who shall benefit from the Trust/Foundation. The Trustee/Councillors will need guidance in this respect.

2. Although a written Letter of Wishes is not binding upon the Trustees/Councillor/s, they would be expected to give careful consideration to the wishes of the Settlor/Founder. As a matter of Law if a/the request as set out in a Letter of Wishes is in the best of the beneficiary/ies the Trustee/Councillor/s should act on the said Letter of Wishes.

3. The Settlor/Founder should remind the Trustees/Councillor/s as to the reasons for setting up the Trust/Foundation and generally who is to benefit. Often at the commencement of the Trust/Foundation it will be the needs of the Settlor/Founder that will be paramount and such wishes should be expressed including a statement as to whether or not assets personally owned are to be considered when the Trustees/Councillors are considering “needs”.

4. On the death of the Settlor/Founder (or the survivor of the Settlor/Founder), mention should be made of who then is to benefit. If children are to have priority, is equality to be maintained or is recognition to be given to an individual’s special circumstances and needs?

5. Is education to be a priority for the children? And if so, what type of education would the Settlor/Founder like to see preferred? For example, private as opposed to public and the option of tertiary and post-tertiary education and at what sort of institutes? Is assistance to be given to children to enable them to buy or build homes or provide support in careers or business activities?

6. At what point should the Settlor/Founder be giving consideration to partial or total distribution to the beneficiaries and is resettlement of a child’s notional share of the Trust/Foundation estate on to another Foundation or Trust for the benefit of that child and his or her direct lineal descendants allowed or appropriate?

7. In carrying out any of the Settlor/Founder’s wishes with regard to the children are the Trustees/Councillors to confer with any particular child to ascertain that child’s wishes?

8. In the case of death or incapacity of a child, are the needs of that child’s children to be considered?

9. Are there specific circumstances relating to a beneficiary such as a drug or gambling addiction which need to be included in the Letter of Wishes?

10. Has the Settlor/Founder any particular thoughts as to the need to keep the Letter of Wishes, or any part of the Letter of Wishes, confidential?

It should be noted that a Letter or Statement of Wishes is a document of a confidential nature (which in the right setup should also be protected by legal professional privilege) and therefore not capable of disclosure.
A Letter of Wishes should not only be in place at the outset but should be reviewed on a regular basis and updated where necessary to record if there is any change in the circumstances of any of the beneficiaries of the Trustee/Foundation or special needs which must be met.

When a certain beneficiary/s is in need of financial assistance it is also appropriate that a Letter of Wishes be provided at the time to the Trustees/Councillors putting the case for why a Distribution should be paid to that person or persons.