[vc_row][vc_column][vc_tta_tabs color=”sky” active_section=”1″][vc_tta_section title=”Types of Offshore Companies” tab_id=”1456151581942-c010de80-238c”][vc_column_text]Typical uses to which an offshore company might be put, and a few actual examples however, this is not intended as an exhaustive demonstration of offshore possibilities and we would always remind clients that the tax and other benefits which can be obtained by use of offshore entities usually depend upon the country of residence of the beneficial owner and its anti-avoidance legislation and regard has to be had, too, for the requirements of any other country with which the offshore entity might carry on its business.

 

Before going on with types of companies, let’s start with comments made by judges during legal cases:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.” 

– Law Lord Clyde, (Ayrshire Pullman Motor Services v Inland Revenue Commissioner [1929] 14 Tax Case 754, at 763,764).

“There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; all do right. Nobody owes any public duty to pay more than the law demands; taxes are enforced exactions not voluntary contributions!”
– US Judge Learned Hand –

 

Trading Companies

An importing or exporting company might establish itself in an off-shore area. The offshore company would take orders directly from the customer, but have the goods delivered directly to that customer from the manufacturer or place of purchase. The profits arising out of the difference between purchase price and sales price would then be accumulated in either a tax free or low tax area. With such trading companies, it is important to choose an off shore area, or at least an operational base, which has good communications as shipping and other documentation may be critical to the scheme.

For European Union transactions, the Isle of Man and Madeira have become very popular locations for conducting cross border trading activities. Both the Isle of Man and Cyprus are able to obtain VAT registration, which is imperative for transactions within the European Union. As an example, if a Cypriot company wished to source products from France for sale to Germany, the Cypriot company would inform the French company of its VAT number so that it could zero rate its sales invoice. The French company would not have to charge VAT to the Cypriot company. The Cypriot company would then obtain the German company’s VAT number so that it could zero rate its sales invoice.

This type of transaction would not normally be possible through other jurisdictions without the requirement of either establishing a branch office or appointing a tax agent within the European Union which can be a complicated exercise and may give rise to taxation implications.

 

Professional Services

Many individuals engaged in the provision of professional services in the professions and in the construction, engineering, aviation, finance, computer, film and entertainment industries can achieve considerable tax saving benefits through the establishment of a personal service company, based offshore.

The offshore employment company may not have to pay tax on its profits which can be reinvested in a tax free climate to generate further income from the offshore company.

The offshore company can contract to supply the services of the individual outside the country in which he/she is normally resident and the fees earned can accumulate offshore, free from taxation in the offshore center. Payments to the individual can then be structured in such a way to minimize income tax.
One example in this regard in respect of an overseas employment is to increase subsistence expenses as against fees as such which would be paid to the individual.

 

Shipping Companies

The use of offshore shipping companies can eliminate direct or indirect taxation on shipping. Shipping companies may own or charter ships, the profits from which activities can be accumulated tax free.

Tax and legal requirements generally dictate that the offshore company owning a shipping vessel should be incorporated in the jurisdiction whose flag the ship flies.

The historic havens for these purposes have been Panama, Liberia, Marshall Islands and Cyprus. Latterly, the registries of other nations have expanded and consideration might be given to registrations in the BVI, Delaware USA,  Isle of Man and Gibraltar.

 

Patent, Copyright and Royalty Companies

An offshore company can purchase or be assigned the right to use a copyright, patent, trademark or know-how by its original holders with a power to sub-license.

Upon acquisition of the intellectual property right the offshore company can then enter into agreement with licensees around the world who would be able to exploit the intellectual property right in various countries.

It is thought preferable to acquire, for example, a patent at the patent pending stage before it becomes very valuable so that the capital payment for the acquisition of the patent can be set at a lower amount.

Often royalties paid out of a high tax area attract withholding taxes at source.

In many cases an interposing holding company may allow a reduction in the rate of tax withheld at source.

Dave came to us a couple of years ago as a (then) struggling inventor, although his full time business was running a small engineering company. Dave had several good ideas in mind which he wished to pursue and, being foresighted, had thought through the tax implications if any of his ideas did make him a great deal of money.

We set up an offshore company on ‘Dave’s behalf, to which he subsequently sold the rights to any and all ideas he may develop, in return for a guaranteed payment regardless of success. OK, so ‘Dave’ pays income tax on money, which as far as we know just recirculates round and round to make it seem like a constant supply (only speculation of course), but a couple of his projects have been taken up by large manufacturing and marketing companies, each for six figure sums.

These royalties are of course paid to the holder of the rights, the offshore company, so they are totally tax-free and in theory John only receives his flat-rate guarantee sum, but there is a nice little six figure cash sum, growing substantially with accruing royalties, that the ‘true’ owner of the company will one day retrieve. We wouldn’t be at all surprised if it turned out to be ‘John’ himself!

 

Investment and Financial Services Companies

Funds accumulated through investment companies set up in offshore areas can be invested or deposited throughout the world and whilst generally returns or interest payable in respect of these funds will be subject to local taxation, there are a number of offshore areas in which funds may be placed either in tax free bonds or as bank deposits where interest is paid gross. Similarly, in many offshore areas no capital gains taxes are applicable. Use of an offshore company incorporated in a suitable country allows the possibility of investing tax efficiently in a high tax country where there is a concessionary tax treaty in respect of investments made by companies incorporated in the offshore country.

A Trader was making very substantial personal profits on trades on the international equity markets and despite ‘bed-and-breakfasting’ to try to gain tax relief decided to move part of his investments offshore.

 

Holding Companies
Use may be made of an offshore holding company which would fund the operation of subsidiaries in various countries so that the subsidiaries obtain the benefit of tax deductions on interest paid. If the holding company is situated in an offshore area where there are no income or corporation taxes and no requirement that dividends must be paid, then the profits which are accumulated in the tax free climate can be used to fund the requirement of subsidiaries or reinvested as business convenience suggests.

 

Probate and Privacy

A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company or trust so that upon his demise probate would be applied for in the country in which his company or trust were incorporated rather than in each of the countries in which he might hold assets. This saves legal fees and avoids publicity. Again, not everybody wishes to advertise wealth and an individual may wish to hold property through an offshore entity simply because of the privacy which the offshore arrangement gives.

The owner of a substantial country estate and several allied ‘country’ businesses was concerned over the amount of estate and inheritance taxes his son and family would have to pay on his death, which, although unknown at the time was fairly imminent.

A family decision was taken that the entire estate was placed under the ownership of a discretionary trust, and a wholly owned management company was formed to run the estate using the son and his family as local Agents. On the father’s death, the family were thus able to stay on living in the style they had long been accustomed to without paying any tax.

 

Property Owning Companies

There are often great advantages in using an offshore property holding company for the purpose of holding an overseas property. Such advantages of offshore property ownership include avoidance of inheritance tax, avoidance of capital gains tax, ease of sale which is achieved by transferring the shares in the company rather than transferring the property owned by the company and reduction of property purchase costs to the onward purchasers.

We were recently approached by a certain small builder who had spied an excellent investment opportunity which stood to make him some €700,000 a year for several years. Not wishing to pay tax, an offshore development company was formed, with nominee directors and shareholders of course, which then registered for sales tax in the EU country where our Builder lives. Due to his geographical location it seemed to any casual observer that the development company was ‘just another  country company operating over here’. But few, if any, realized that the development profits and on-going income from rentals were not just going to another EU destination to be taxed there, but were in fact tax free due to a unique company structure allowable in the country of incorporation, one which even a company register search wouldn’t reveal.

Taking the example of investment in property in London by an offshore company, use of an appropriate offshore vehicle can offer relief from income tax, capital gains tax and inheritance tax.

It should be remembered, in particular, that when a non-resident company disposes of a property investment, no capital gains tax is charged and holding through an offshore company removes the application of inheritance tax which would apply if a non-domiciled investor held a UK property in his personal name.

 

Captive Insurance

Captive insurance companies have been created by many multinational companies to insure and re-insure the risks of subsidiaries and affiliated companies.

Captive insurance companies are particularly suitable for the shipping and petroleum industries and for the insurance of risks which might be insurable only at prohibitive premiums.

Bermuda and Guernsey have long been favored as domiciles for the incorporation of captive insurance companies.

 

[/vc_column_text][/vc_tta_section][vc_tta_section title=”The Keys to make an Offshore Company Rock Solid ” tab_id=”1456151582046-fbe6d90a-c7e8″][vc_column_text]If you’re planning on using an offshore, non-resident company to reduce your Home-Country taxes, there are some tremendous opportunities available.

Inland Revenues have established specific anti-avoidance rules or the CFC rules to discourage the use of offshore companies. There is, however, a golden rule which if is satisfied, it will result the offshore company Not to be considered as a CFC in the Home-Country.

 

An offshore company will not considered a CFC in the Home-Country for tax purposes if its central management and control is overseas.  When looking at this, it’s the high level control that needs to be located overseas, as opposed to the day to day running of the business.

 

 

How to establish the central management and control of your offshore company?

 

Being able to show that the management and control of your offshore company is overseas is crucial in ensuring your company is non-resident (and therefore exempt from Home-Country tax on overseas income and capital gains).

 

It’s essentially a question of fact, so Inland Revenue will look at where in actual fact the company is controlled from (where the ‘real business’ of the company is). However, when they refer to ‘management and control’ exactly what level of control do they mean?

 

Inland Revenue splits a company’s management into three different levels:

  • This is the shop floor management. So in the case of a shop for instance you may have the shop manager or the supervisor.
  • This is the head office or the place where the executives and senior managers are. This is where the company’s operations are controlled from and where the orders are given.
  • The board of directors. The third level is split into two parts. The first one is the location of board meetings and the second, but most crucially, is who member of the boards of directors receives a remuneration from the company

 

** When you’re looking at establishing the central management and control of offshore companies overseas, it’s the level 3 “top level” management that is of key concern**

 

A common scenario is to use nominee directors based overseas to act as the board. There is however no written law that the board of directors represents the level 3 management. In various cases the courts have affirmed that the constitutional position based on company law is not definitive. It’s always a question of fact.

 

To satisfy such strict requirement, we offer management services provided by professional accountants. An accountant is a key figure in the boards of directors, as he/she can understand the company in both financial and non-financial terms.

 

We’ll list below some of the key considerations and structuring opportunities to assist in demonstrating that management and control is located overseas:

  • All meetings of the boards of directors (including nominee) should be held in the overseas country (We’ll assume it’s Cyprus for this article) and the article of association of the company should prohibit such meetings being held anywhere else other than the Cyprus.
  • The majority of the board of directors (including nominee) should ideally be tax resident in Cyprus. The chairman should be resident for tax purposes in Cyprus, particularly if he/she has a casting vote.
  • Remuneration shall be provided to the nominee Director which tax resident in Cyprus.
  • It is possible to form a quorum for decisions to be taken outside the normal board meetings. However, such a quorum should consist of a majority of Cyprus resident board members. Non-Cypriot resident directors of the Boards should not by themselves be able to form a quorum. (This should be confirmed by reference to the Articles of Association). The constitution may also reserve the powers of policy and strategy exclusively to the board acting as a quorum.
  • You should ensure that board meetings are fully recorded in the company’s internal documents.
  • Board meetings should be held regularly. The exact frequency will depend on the amount of activity, but should be at least quarterly.
  • It’s important that the board of directors should take all decisions affecting matters of policy or management of the companies’ businesses at meetings of the board. In addition, there should be documentary evidence that supports the decisions made. This should include financial issues, appointment of staff, capital expenditure, acquisitions, key policy decisions and the final accounts.
  • Books of account and company records, including minute books and other documents required by statute should be kept in Cyprus.
  • Ideally, non-Cyprus resident directors should not have sole signatory authority over the bank account without prior approval from the quorum of board members, where the transfer of funds relates to a major transaction or contract.
  • Hold the meetings in a fixed place or at least usually in a fixed place.
  • Do not hold any board meetings in the Home Country

 

 [/vc_column_text][/vc_tta_section][/vc_tta_tabs][/vc_column][/vc_row][vc_row row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css_animation=””][vc_column][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

[/vc_column_text][/vc_column][/vc_row]