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Offshore Company Formation - International tax planning

 

Offshore Company Formation- International tax planning

We are a tax advisory and law practice that is part a network of international tax advisors and attorneys (Low Tax Net), serving clients from many countries (including Denmark, Germany, Spain, England, the US, Italy and France). We specialize in the formation of foreign companies (active companies and holding companies), primarily for the purpose of reducing tax burdens on firms.

We form companies in:

-the EU (European Union): Bulgaria, Germany, England, Cyprus, Czech Republic, Slovakia, Spain, Malta, Madeira (Free Trade Zone).

-Countries with DTAs (Double Taxation Agreements): Switzerland, Singapore, United Arab Emirates (Dubai, including UAE Free Trade Zones), USA

-Non-DTA countries (offshore): Belize, BVI, Liechtenstein, Cayman Islands, Bahamas, Hong Kong

Other areas of interest include:

-Expatriation of natural persons to low-tax countries

-Formation of banks, financial service and insurance companies in New Zealand, Isle of Man, USA, Switzerland, Germany and offshore.      

-Gambling licenses, licenses for sports betting (Malta, Isle of Man, England, offshore)

Setting up a company formation in a foreign country

The client or an appointee does NOT relocate to the foreign company's country of residence (appointment of nominee or permanent General Manager)

As most countries have laws that prevent the abuse of incorporation practices, we choose to distance ourselves from so-called cheap company formation, in which only a mailbox is established in the foreign country and/or, as part of a nominee scheme, a person who is not even an attorney or tax adviser enters into hundreds of nominee relationships. These types of structures become quickly transparent to local financial authorities and often result in a disaster for the client.

Offshore Company Formation: Place of management

If all income earned worldwide is to be taxed in the foreign country, the requirements for a “permanent establishment” in accordance with the DTA rules must be fulfilled. This is essentially the “place of management.” There are several structural options for this purpose:

  • An attorney/tax adviser in the foreign country (i.e., in the country of residence of the foreign company), or the advisory office as a legal entity, acts outwardly (i.e., as a nominee) as director of the company and hands over all rights and obligations to the nominator (beneficiary/client) via a nomination agreement.
  • The client relocates his main place of residence to the foreign country and acts as director of the company. In certain cases, relocation of the “main place of residence” is not mandatory and requires only a management presence (be advised, however, that due to “daily business” requirements, this is seldom possible)
  • An attorney/tax adviser in the foreign country, or the advisory office as a legal entity, acts outwardly (as a nominee) as director of the company, AND the client or his appointee relocates to the foreign country for certain periods of time to conduct management activities, in which case both parties possess only joint signing authority.

ˇ     In addition to these solutions, there is also the option of appointing an attorney/tax adviser/employee from the formation advisory office in the company’s country of residence as General Manager, i.e., with an employment contract (no nominee relationship) and a “regular salary.” The “regular salary” amount must be line with income levels in the company’s respective country of residency and would need to be between EUR 600 - EUR 1,800 per month, depending on required expenses/time.  This internal relationship can be set up such that the foreign-based General Manager operates only under instruction, or the client becomes a secondary director, in which case both parties possess only joint signing authority. In special cases, “internal agreements” may be established in which the foreign-based General Manager “reduces” a part of his salary, if necessary and advisable. As a matter of course, the foreign-based General Manager declares his income when submitting his tax return and pays wage taxes and/or social security contributions in accordance with the laws of his country of residence. The foreign-based General Manager's income is considered part of the foreign company's expenses and is correspondingly deductible. In many countries (e.g., Cyprus), a legal entity may be appointed as the General Manager, which is often more useful for both sides. In these cases, a General Manager's Contract is signed between the foreign company and the "Director’s Limited Company.” No nominee relationships come into play in this scenario.

These laws may be circumvented by establishing in the foreign country a production site, a mine, a quarry or any other site for the extraction of natural resources or by conducting construction or installation activities over a period longer than 12 months. In accordance with Article 5 of the DTA, these are then considered permanent establishments in the foreign country, regardless of the company director’s identity or country of origin.

Offshore Company Formation: Ordinary Place of Business in the foreign country

A “mailbox” is never considered an ordinary place of business in the foreign country. Rather, the company in the foreign country must be reachable by mail, including certified mail, and by phone. The minimum requirements include: A deliverable postal address (including for certified mail), accessibility by telephone during normal business hours, accessibility by fax. So-called “Registered Offices” are generally not sufficient, as these are readily apparent to local financial authorities, or the  foreign company’s country of residence may deny the issuance of a tax ID number (for example, in the UK). Along with Registered Offices, we offer so-called "Head Office solutions" that provide credible documentation for an ordinary place of business in the foreign country.

An overview of our services:

ˇ    -Formation of the corporation, entry in the commercial register

ˇ    -Establishment of an ordinary place of business

ˇ    -Upon request: Establishment of a nominee director in the company’s country of residence, or a permanent director

ˇ     -Upon request: Establishment of a nominee shareholder or bearer stock, if permitted by the respective country

ˇ    -New bank account setup in the name of the company, including online banking and credit cards

ˇ    Referral to a tax adviser in the company’s country of residence for bookkeeping, annual reports and sales tax reporting.

1.   The client or an appointee relocates his main place of residence to the foreign company’s country of residence

In such cases, the client or his appointee (e.g., an employee) acts as director of the company in the foreign country.  A main place of residence is defined as follows:  Presence in the foreign country (company's place of residence) during 51% of the year and a domicile in the director’s own name (hotels or stays with relatives do not count as a main place of residence). Upon request, we can handle all of the required services:

ˇ         -Formation of the corporation, entry in the commercial register

ˇ         -Establishment of an ordinary place of business

ˇ         -New bank account setup in the name of company

ˇ     Referral to a tax adviser in the company’s country of residence for bookkeeping, annual reports and sales tax reporting.

Offshore Company Formation: Foreign holding companies

The establishment of a foreign holding company is an excellent tool for diverting the profits of domestic capital investment firms to a foreign country tax-free. This is particularly true in cases where the EU Parent-Subsidiary Directive applies, i.e., where an EU-based company is involved as part of a foreign holding company / subsidiary relationship.

Legal consequences of an EU holding company: No establishment of a commercial business operation is required (EU Freedom of Establishment), no tax withholdings under the EU Parent-Subsidiary Directive, as long as the requirements of the Directive are fulfilled (minimum participation amount and time).

As a result, Cypriot holding companies are not taxed. The same applies to Swiss companies with holding company privileges (see: Applicability of the EU Parent-Subsidiary Directive) as well as Spanish “SL’s” based on the conditions for holding company privileges. Cyprus offers particular advantages for holding companies, as it not only offers true holding company privileges, but also dividend payouts to non-Cypriot nationals are not taxed.

Is there ONE ideal location for a holding company?

No, not necessarily. It depends on the company’s current situation and its goals. Within the EU, holding companies in Spain, the Netherlands, Luxembourg and Cyprus generally offer the greatest benefits. However, Switzerland is also of interest due to its holding company privileges and the applicability of the EU Parent-Subsidiary Directive. Holding companies in Austria and Denmark are also suitable for many corporate structures. Some countries, such as the UK, present disadvantages. Due to the lack of a DTA, the establishment of a holding company in an "offshore" country (i.e, one with no DTA) is generally not a good option (tax withholdings from the subsidiary, assumption of abuse of incorporation practices, etc.) 

When selecting the appropriate location for a holding company, several factors come into play:

  • Location of the subsidiary (existence of a DTA, EU membership, no DTA)
  • Pros and cons of each potential holding company location in light of predefined goals
  • How are non-holding activities taxed in the potential holding company's country of residence?
  • Are there any holding company privileges (such as in Cyprus, Switzerland, Spain), i.e., no taxes on the receipt of dividends (e.g., Cyprus, Switzerland, Spain, Netherlands) or expatriate taxation?
  • How are disbursements/dividend payouts from the holding company to the home country or foreign country taxed (tax withholdings)?
  • How are interest and license payments to the holding company taxed?
  • What are the rules regarding deductions for losses on the sale of assets and partial value depreciation?
  • What are the rules regarding deductions for affiliated company losses/shareholder debt financing?

Our foreign holding company formation services include the following:

ˇ         -Selection of a suitable location for the holding company

ˇ         -Formation of the holding company, entry in the commercial register

ˇ         -Establishment of an Ordinary Place of Business at the location of the holding company

ˇ         -Setup of tax privileges for holding companies with the local financial authorities

ˇ         -Upon request: Appointment of a nominee director or permanent General Manager at the holding company location

ˇ         -New account setup, including online banking and credit cards

ˇ         -Referral to tax adviser at the holding company location

Offshore Company Formation: Parent companies and subsidiaries in the European Union (EU Parent-Subsidiary Directive) and EU Mergers Directive

Introduction

In accordance with the EU Parent-Subsidiary Directive, after-tax profits (dividends) of foreign companies may be transferred between corporate entities tax-free. Participation limits are as follows:

  • 20% from January 1, 2005, to December 31, 2006;
  • 15% from January 1, 2007, to December 31, 2008; and
  • 10% from January 1, 2009.

Example:

A Cypriot limited liability holding company holds a 50% share in the client's company outside of Cyprus but within the EU. In accordance with the EU Parent-Subsidiary Directive, the Cypriot Ltd receives 50% of the dividends tax-free, as the country of the Subsidiary has no withholding tax requirements.

As part of our international holding company formation package, we offer all the required services:

ˇ         Formation of the corporation, entry in the commercial register

ˇ         Establishment of an ordinary place of business

ˇ    Upon request, establishment of a nominee director in the country of residence of the holding company, or a permanent director

ˇ    New bank account setup in the name of company

ˇ    Referral to a tax adviser in the company’s country of residence for bookkeeping, annual reports and sales tax reporting.

ˇ    Tax classification as a holding company with the financial authorities of the country of residence

 

 

 
 
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