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    Offshore Company Formation: Example for a legal incorporation abroad  

Offshore Company Formation: Example for a legal incorporation abroad  

Please also note our remarks:

The client John Q Public resides in Denmark (residency and main dwelling) and therefore subject to taxation in Denmark. He wants to found a corporation for online marketing (service). 

Because the tax rate for companies and individuals are very high in Denmark he is thinking about founding a company abroad. However, he does not want to relocate his residency and domicile abroad. As Denmark belongs to the EU Mr. Public decides on an incorporation in an EU low-tax country. As Denmark belongs to the EU, Mr. Public decides on an incorporation in a EU low-tax country:

  • Positive effect of the EU freedom of establishment, EU legal protection, EC parent subsidiary directive, no negative effect of national regulations on taxation on foreign sourced income, as long as it is not a mere letter box company in the EU country.  

  • No taxation on the undisclosed reserves when relocating to the foreign EU country: Fiscally there cannot be a difference if a Hamburg GmbH is relocated to Munich or to Malta.   

  • The EU freedom of establishment even to specifically capitalize on the differences in tax levels through incorporation of an EU company (European Court of Justice Decision Cadburry Schweppes).

Therefore the following countries are to be considered for Mr. Public:

Country

Corporate tax

Tax at source for distribution of dividends abroad*

Remarks

Madeira

5%

Depending on respective double taxation agreement

Stipulations in regards to employees and investments

ZEC, Canary Islands Special Zone

5%

Depending on respective double taxation agreement

Stipulations in regards to employees and investments

Malta

5% with the Malta Holding Model, Tax Refund

On principle no tax at source

Required are Malta Trading Company and Malta Holding

Gibraltar

10%

On principle no tax at source, with Holding 1%

Gibraltar does not belong territory under the turnover tax law

Hungary

10%

Depending on respective double taxation agreement

 

Bulgaria

10%

Depending on respective double taxation agreement

 

Ireland

12,5%

Depending on respective double taxation agreement

 

Cyprus

12,5%

Generally no tax at source

 

Liechtenstein

12,5%

Generally no tax at source

 


Mr. Public decides in favor of Cyprus (12,5% taxation). In order for the Cyprus Limited not to be considered a unlawful controlled foreign company by the Danish tax authority, Mr. Public needs a permanent establishment in Cyprus and a natural person residing in Cyprus, who visibly steers the fate of the company (Article 5 Double Taxation Agreement: place of management as place of permanent establishment).

This is why Mr. Public assigns our law office with the realization of the following services:

-Incorporation of Cypriote Limited, Entry in Companies House Cyprus, tax number, VAT, registered office

-Link-up to a Cypriote Business Center: company nameplate, individual phone number, personal call reception with name of the company, mail service, fax and permanent rental of a fully equipped office at the Business Center. Possible is also the service Virtual Office Plus at the Business Center, with this 40 hours of office use per month are included.

-A locally residing natural person is assigned to be director of the Cypriote Limited (Article 5 Double Taxation Agreement: Place of management as place of permanent establishment). Mr. Public decides in favor of a nominee director, in which the structure is designed so the trust relationship is not obvious. With this it is essential that the local director doesn’t receive an absurdly low remuneration, which would make the trust relationship obvious right away.

Therefore a monthly fee of 550 Euros is agreed upon based on the transaction volume and the director’s effort needed in Cyprus. Included are 35 hours of labor time per month. In case the director has additional work, it will be invoiced separately according to work hours.

-Account opening for the corporation in Cyprus. A two-account system is installed:

1. Main Company account: All revenues are received here. Mr. Public has sole account authorization in accordance with the shareholder resolution.  

2. Account: Director-Account: Here the director has the account authorization. Mr. Public ensures that by transfers from the main shareholder - to the director account sufficient funds remain in the director’s account in order to pay the director’s ongoing costs.

-Certificate of tax residency from the Cypriote tax authority

The costs for a registered office, Business Center, director etc.. can be deducted as business expenses with the Cypriote Limited, therefore reduce the taxable revenue. Mr. Public becomes 100% shareholder (owner) of the Cypriote Limited. In case he distributes dividends (profits after taxation in Cyprus) to himself in Denmark, these are subject to taxation according to the Danish tax law (taxes on dividends).

For the time being Mr. Public doesn’t want to distribute dividends and considers realizing the Non Dom status (Remittance Base taxation) in Ireland later. With this dividends are not taxed legally as long as Mr. Public relocates his residency and domicile to Ireland and the dividends flow to an account outside of Ireland and Denmark. For this an apartment in Ireland is required and Mr. Public has to be present for a minimum of 182 days a year in Ireland, at least “theoretically” (in practice with clever structure most impossible to prove). Besides Ireland, the Non Dom Status is also known in England, Malta and e.g. in Turkey.  

Mr. Public installs a settling according to article 5.3 Double Taxation Agreement in Denmark. A settling is not a taxable permanent establishment, but only a place of consultation. In Denmark for this purpose there cannot be a business establishment installed which is set-up in a businesslike manner.

Discussion with Mr. Public about an incorporation in a third country e.g. Switzerland

As Mr. Public is residing in the EU (in this example in Denmark), initially the positive impacts of the EU freedom of establishment and the freedom to provide services take effect. This is why there is less substance needed (office/s, employees) with an EU corporation than with a non-EU corporation. In addition Denmark also knows (like many other countries) provisions for taxation of foreign sourced income (Controlled Foreign Corporation (CFC) Rules): If a foreign company only generates passive income according to the active catalogue, then the dividends (after tax profits) are subject to taxation at the shareholder, even if the dividends were NOT distributed (=Notional taxation of distribution) in fact with full income tax and not with the reduced taxation on dividend income. As these provisions for taxation of foreign sourced income (Controlled Foreign Corporation (CFC) Rules) are unlawful within the EU they are therefore only applied for incorporations outside of the EU.

In order to avoid the negative effects mentioned above with an incorporation outside of the EU (e.g. Switzerland) Mr. Public would have to build-up in regards to “office and employees” tremendously. The so called arm‘s length principles are to be interpreted restrictively. There is also the issue of tax at source with the dividend distribution to Denmark. In case of Switzerland it is 15% tax at source in Switzerland. Cyprus and e.g. Malta generally don‘t know taxation at source with dividend distribution abroad.

Other alternatives to Cyprus

Real alternatives for Mr. Public would be the EU countries Malta (5% taxation with the Malta Holding Model) and Ireland (12,5%). With Malta one needs two companies, the Malta Trading Company and the Malta Holding (tax refund to the Malta Holding). Madeira and the Canary Islands special zone require investments and local employees, which takes too much time and effort in case of Mr. Public.

 

 

 

 

 

 

 

 

 

 
 
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