Well known Italian fashion design gurus Dolce & Gabbana were reportedly sentenced to a term of imprisonment this week when their Offshore Tax Minimixation plan was deemed by an Italian Appeals Court to amount to Criminal Tax Evasion.
The pair were found to be the underlying beneficial owners of a low tax Offshore Company incorporated in Luxembourg to which 268 million euro in pre-tax profits had allegedly been diverted undeclared. Under Italy’s Tax law it was held that the pair should have declared and paid tax in Italy on the said income.
Most developed countries (including Italy) have passed Controlled Foreign Corporation (“CFC”) Laws which require locals to declare and pay tax at home on income earned by an Offshore Company where they have the capacity to own or control the said Offshore Company. Moreover in most countries failure to declare such reportable income is a criminal offence punishable by jail time.
The good news is that with careful Offshore Tax Planning the risk of jail can usually be averted.
By placing management and control of your IBC Offshore and via the use of layered structuring (ie by setting up a non-CFC applicable entity to hold the shares of your zero tax Offshore Company).
There are 2 multi-layered structures which may assist. The first is a tax free Offshore Discretionary Trust. The 2nd is a nil tax Private Interest Foundation. What these entities do is shift underlying beneficial ownership of the zero tax Offshore Company to a person or entity other than the person who sets up the Company.
In the case of a nil tax Offshore Discretionary Trust what smart people do is make themselves potential or contingent beneficiaries. This can get you around the obligation to declare and pay tax at home on the Offshore entities earnings (as most countries only require “presently entitled” beneficiaries to declare income earned by an Offshore Tax Haven Trust).
In the case of a Foundation (a separate legal entity) the argument goes that it doesn’t matter who the beneficiaries are because at law the Foundation is both legal and beneficial owner of any assets it holds. As such the beneficiaries don’t become presently entitled beneficiaries unless or until such time as the Foundation Council resolves to pay them a distribution.
The bottom line?
If it is ever revealed that you are the beneficiary of a Trust or Foundation (which owns the shares of a profit making nil tax Offshore Company) at least you can raise a valid legal argument as to why you haven’t declared the Offshore entity’s earnings such as should enable you to avoid criminal liability.
You’ll want to get local tax/legal advice before setting up such a structure but presumably the worst case scenario if you’re found out is that you’ll have to pay some back tax/fines.
That sure beats rotting in jail for a couple of wasted years….