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Offshore Company Formation: Company incorporation in the EU by EU residents Typical tax traps when founding a company abroad
Company incorporation in the EU by EU residents Typical tax traps when founding a company abroad
The following describes the advantages of a company formation in the EU by clients who as EU residents. In doing so we assume that the client does not relocate his main residence abroad. Afterwards we describe typical tax traps when founding a company abroad that mere incorporation agencies (not tax consultants for international tax law) like to conceal.
In addition we describe the difference between an incorporation in the EU by clients who have their residency and main residence in the EU (residents of the EU), and incorporations in third countries or typical tax haven countries like e.g. Belize or Seychelles.
1. General Information
An incorporation in the EU by EU residents hat generally the following advantages:
In all cases the foreign company cannot be an unlawful controlled foreign company. Such a unlawful controlled foreign company is a mere letter box company and/or i fit can be assumed that the company is „remote controlled“ from abroad provided that the existence of the permanent establishment subject to tax is defined through the „place of management“ (Article 5 double taxation agreement).
If the foreign location is a production facility, a location for the extraction of natural resources, an agricultural or forestry business, a construction site that last longer than 9-12 months, or a fixed place of business in which the activities of the company are performed (e.g. hotel): then it is always a permanent establishment abroad regardless of the place of management. Basis for this is article 5 in the double-taxation agreements:
Article 5 Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
3. A building site or a construction, assembly or installation project constitutes a permanent establishment only if it lasts more than twelve months.
2. Lox-tax countries in the EU/EEA
* Deviating from above, when making use of the EC parent subsidiary directive, no tax at source, provided that parent subsidiary joint-stock companies are in the EU, the subsidiaries are active, the minimum holding period is visibly at least a year and the capital ownership is at least 10%.
3. Intellectual Property (IP)
Intellectual Property (IP) can be one of the most valuable assets of an organization. Choosing the right location for the centralization and management of IP is a very important strategic business decision. The ideal location to establish an IP structure is one that can serve the organization’s business strategies/model, safeguard and protect its IP and contribute to its tax optimization.
IP covers a wide range of intangibles including:
The above is a non-exhaustive list.
The following EU /EEA countries know an IP Box:
4. Provision of a local resident as director (nominee or employed director)
In the following EU countries we can provide a nominee or employed director (Article 5 Double-Taxation Agreement: Place of management as place of permanent establishment for taxes…): Madeira, Ireland, Gibraltar, Malta, Cyprus, England and Liechtenstein (EEA).
In all other above listed countries we cannot provide a nominee director. When using a nominee director this trustee relationship should not be recognizable: A local resident (natural person), who is visibly steering the affairs of the company.
The remuneration should not be absurdly low, so one can suspect a trustee relationship because of the low wages. One can forego the use of a nominee or employed director in the country of incorporation of the company (where appropriate) if:
4.1. Assignment of a local director and the client becoming second director
It is possible to design the company structure with the provision of a local director and the client becoming second director, in which they only have joint power of attorney.
Beside the registered office a permanent establishment is required in the foreign EU countries (not a mere “letter box company”). In case the client does not rent an office, we can realize a link-up to business centers in all countries: Company name plate, individual phone number, personal call reception with the name of the company, post mail forwarding, fax services. Optionally, temporary or long-term rental of fully equipped offices at the business center.
6. Low-tax countries outside of the EU/EEA, but existing double taxation agreement
None the less, if it is an incorporation outside of the EU and the double taxation agreement is applicable, for the effectiveness for tax purposes a rented office (submission of rental contract) and where necessary employees are required. Even if one meets all the preconditions, negative effects of the national regulations on taxation of foreign sourced income still remain.
There are central:
In Switzerland, Mauritius and Singapore we can provide a nominee or employed president/ director, as well as a permanent establishment. The UAE/Dubai are a special case, please request our information.
7. Company formation in tax haven countries, not DTA circumstance
We strongly advise against incorporations in tax haven countries (e.g. Belize, Panama, BVI, Seychelles, Panama, etc.): Suspicion of unlawful controlled foreign company, abuse of law, tax measures.
These negative effects can only be prevented if:
Additionally, the existence of a permanent establishment is not defined on the basis of article 5 DTA, but by the domestic tax law.
All this, because the positive effects of the EU freedom of establishment / EU legal protection don’t apply or rather no double taxation agreement exists.
The national regulations on taxation on foreign sourced income take full effect.
8. What do national regulations on foreign sourced income mean?
One advantage of an incorporation in the EU by EU residents is that national regulations taxation on foreign based income are unlawful. Underlying principle for this is the respective decision by the European Court of Justice. All member states have amended their laws accordingly. Taxation on foreign sourced income means:
The foreign company’s gain is charged to the partner / shareholder, even if no distribution of dividends takes place (notional distribution assessment).
It is taxed with the full income tax rate and not with the rate for taxes on dividends.
9. To prevent that an incorporation abroad doesn’t become a tax trap
9.1. Formation with nominee or employed director
Typical tax traps would be:
9.2 Incorporation abroad and business location abroad (permanent establishment):
A mere registered office is not a permanent establishment within the rules of violation (suspicion of letter box company). There should be at least a head office (deliverable mailing address, individual phone number, personal call reception with name of the company, not an answering machine, fax services, mail forwarding) in the company’s country of incorporation. The contract should be signed by the director (with trust the nominee director or the employed director) of the foreign corporation. Mandatorily to avoid are structures with a simple “registered office”, so a “mere letter box company”.
If rented offices and/or employees are required depends on various factors. There is also a big difference if the incorporation takes place in a third country or in the EU:
9.3 Account for the corporation abroad and account authorization
A solution has to be found with which our clients have sole access to the assets/account of the foreign corporation. On the other side when assigning a nominee or employed director he would need limited access to the account to be able to handle ongoing payments (government fees, head office, etc…).
For this we offer as ideal solution our two-account system: 1. Main Corporation Account: Here all revenues are received. Account authorization has according to the shareholder’s resolution only the client. 2. Account: Director Account: Here the director and respectively the client have account authorization. The client ensures that through transfers by the main shareholder to the director account sufficient funds remain on the director’s account to pay the director’s ongoing expenses.
10. Nowadays the nondisclosure of the company structure is no longer possible
Due to the international treaties on information exchange in tax matters between the countries, the G20 agreements and the new CRS (OECD Common Reporting Standard), structures abroad and/or accounts can barely be kept a secret. Therefore, it is vitally important today to realize a “legal structure”, which withstands a review! This is why incorporations in so called zero tax havens (like e.g. BVU, Belize, Panama, etc..) and/or incorporations with only a mail box as head office and/or a local director, who visibly does not steer the fate of the company should not be considered. Who cuts back expenses in the wrong area, will quickly be taught a lesson here.
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