Generally speaking IBCs are used by businesspersons trying to avoid:
- having to pay tax twice (ie both at home and abroad); or
- high taxes at home
on international business ventures
For example say you are a European resident shoe manufacturer and you hear that a developing Asian country (eg Melanesia), in a bid to try and attract much needed foreign investment, is offering tax breaks for any non-Melanesian who is prepared to set up a shoe factory in Melanesia.
Say the tax breaks include a special rate on business profits tax reduced from 35% of taxable income (ie assessable income less allowable deductions) earned by the factory to just 10%.
If the investor uses his European Company to own the Melanesian factory he will end up paying tax at home on net profits made by the Melanesian business at the usual high rate (say 45%) less what he paid in Melanesia (ie assuming his home country and Melanesia have a Double Taxation Avoidance Treaty; if they don’t he’ll end up paying tax in both countries ie 45% at home + 10% in Melanesia).
To avoid this a savvy businessman will set up an IBC eg in Seychelles (or BVI or Belize or maybe Panama) to own the Melanesian factory The net result? He pays no tax at home, 10% in Melanesia and an annual license fee in Seychelles (say $US1,000-$US2,000).