OFFSHORE COMPANY MANAGEMENT
Buying an offshore company is easy.
Running it in a proper, safe and smart manner is not easy.
An offshore company is a high-powered legal instrument. Operated improperly and recklessly, it can cause legal trouble and tax liability to its owner. Operated in the right way, an offshore company can boost business efficiency, reduce costs, protect assets and, yes, also provide tax advantages. A properly structured and prudently operated offshore company will save its establishment and running costs countless times over.
This chapter explains how, in the modern time and age, offshore companies should be set up and operated in order to achieve the great benefits that they are designed to provide.
INTERNATIONAL BUSINESS
An offshore company is not for everyone.
Generally, an offshore company fits well into genuinely international business models. If the potential client base of a business is confined to one single country and there is no “international” aspect to it, involvement of an offshore company in such business model is usually impossible - or illegal.
As the name suggests, International Business Company is inherently designed for just that – international business. Not local. Trying to conduct the business at home through an offshore company is a recipe for disaster.
Cross-border transactions are the natural realm of the offshore company. If your business plan is international by nature, conducting it through an offshore base can work very well indeed.
COMMERCIAL SENSE
An offshore company should possess a rational commercial reason for its existence. An offshore arrangement must not be created solely for the purpose of avoiding tax! Rather, it must also be able to demonstrate real substance and a real commercial advantage of carrying out its business from an offshore location – apart from the tax advantage alone.
Many owners of corporations registered in tax havens do not realize this aspect – to their potential detriment. The problem is that a majority of tax laws, especially in the developed industrialized countries, include a blanket provision that a taxpayer can not engage into a scheme whose sole purpose is to avoid tax.
In order to be recognized as a bona-fide business enterprise, and not as a tax-scheme, an offshore company must have a business sense, a rational commercial reason for being located in the jurisdiction where it is located.
What could serve as such rational commercial reason? Indeed, apart from tax benefits, why should one set up an offshore company, instead of incorporating the same business at home?
In fact, there can be a wide array of reasons. Here are just some of them:
- - The potential client base is global, and only a fraction of them are from “home”.
- A closer geographical location to the main target markets.
- Logistics advantage - central location in the middle of supply routes.
- Local personnell has better understanding of target markets.
- Local personnell speaks the predominant language of target markets.
- Main competitors are already located in the same jurisdiction.
- Lower overhead costs, thanks to more relaxed record-keeping rules.
- Lower accounting costs, due to simpler accounting and reporting regulations.
- Important business processes can be cost-effectively outsourced.
- Lower overhead, due to a lower direct and indirect employment costs.
- More flexibility due to easier “firing and hiring” regulations.
- Specialist professional services easier or cheaper to obtain.
- Financing or insurance available on more favourable terms.
- A better legal protection or regulation for the particular industry.
- Applicable mandatory licenses or permits are easier to obtain.
- More favourable import-export regulations – lack of quotas or tariffs.
- Availability of investor protection or deposit protection laws.
- Better or cheaper communications.
- Better political or economic stability.
All-in-all, if a company that is registered in a tax-haven can demonstrate that a lower tax bill is not the only logic behind its location there, such company (and its owner) stands a much better chance against potential scrutiny by a foreign tax authority.
FOREIGN TAX LIABILITY
Incorporation of a company in a tax-haven jurisdiction is the easy part. A typical tax-haven incorporation will not be considered resident there for tax purposes. Yes, this means that the country of incorporation will levy no taxes from the offshore company.
But what about other countries? What about the countries, to which the offshore company will ship the goods, or provide the services? Can these other countries claim and charge tax from a foreign (offshore) company – or, God forbid, from its actual owner?!
You bet they can.
It all boils down to two legal concepts.
One is known as “mind and management”.
The other refers to the “location of the transaction for tax purposes”.
MIND AND MANAGEMENT
In very simple terms it means that a legal person (a business corporation) will be considered resident for tax purposes in the country where its mind and management is located – regardless of where the company was incorporated in the first place.
This, in turn, means that if the owner of a tax-haven corporation happens to live in a well regulated, high-tax country (think the United Kingdom, Germany, France, Sweden, Italy, Spain, Canada, Japan, Australia, the United States …) and if this individual personally carries out the practical management of the tax-haven corporation (signs contracts, issues invoices, collects funds, operates bank accounts, etc) – then he is creating, at his own home, what the taxman calls “a permanent establishment” of the offshore company.
Under the tax laws, a “permanent establishment” of a foreign company will be treated the same as if it was a regular, domestic business. This way, through a “permanent establishment” or, in other words, through placing the mind and management of an offshore company within a high-tax country, the tax-free, offshore company ceases to be tax-free! Instead, it becomes subject to the full brunt of local taxation in the said highly regulated, high-tax country. If discovered, the unfortunate owner-operator of such company will be called to report and pay tax on behalf of his offshore enterprise.
How to prevent this from happening? The only real defence in such situation is to prove that the company is tax resident elsewhere. This is where the “mind and management” concept comes into play. For a company to be considered resident in a certain country, it must demonstrate real physical presence, control and management situated there. A mere fact of registration is not enough to establish a credible residence for tax purposes. This is the “Achilles heal” for many of the thousands of international business companies that get registered every day in the various offshore tax havens of the world.
A mere establishment of a business company in a tax-haven will not render it genuinely tax free! Usually, an international business company will have only an absolute minimum of presence in the country of incorporation – the registered address and the registered agent. These two are legal formalities, but they are just the “skeleton” of the company. They not nearly enough to withstand a serious scrutiny by a foreign tax investigator.
In order to be perceived and considered as a bona-fide business, an offshore company must also have a “flesh” – a business substance and the usual attributes pertaining to it.
When considering how your offshore company will be managed, try answering these questions, as if they were asked by a tax officer:
- - Where is the actual business office of this company?
- Are its directors and managers normally present in that office?
- Where can I obtain the marketing brochures or business offers from this company?
- Can I call and talk to the management of this company? On what number?
- Can I contact the management of this company by fax? On what number?
- Can the director advise in detail what is the business of the company?
- Who, exactly, approves entering into and a conclusion of a particular contract?
- Who signs contracts and other legal documents on behalf of this company?
- Who prepares and issues invoices for this company?
- Who controls and operates the bank accounts of this company?
- Where does the company hold its meetings of shareholders and directors?
In order to have coherent answers to these questions, and still maintain tax-exempt status, an offshore company must also have its physical management and control function located in a country that does not impose local tax on foreign companies!
In order for a jurisdiction to offer such benefit, it must have a suitable (“territorial”) taxation system. There are not so many jurisdictions that offer such environment. Gibraltar is one of them.
“PLACE OF BUSINESS” FOR TAX PURPOSES
The other aspect that may create a tax liability for an offshore company is its possible engagement into the sort of business that is inherently treated as “local”.
The “place of business” concept largely determines who (which country) can tax the profits, gains or value added in a certain business transaction – regardless of where the contracting parties come from. The “place of business” is determined by a multitude of conditions. Each country will have its own rules in this respect. These rules can be very intricate, and they also vary a lot from country to country. Therefore, this material does not attempt to analyze some particular country or business model - it just sketches the issue in general terms.
Here are some typical examples:
Real estate. An offshore company may purchase and own real estate in a high-tax country. However, the rental revenues generated by such property are subject to income tax or withholding tax “at source”, in the country where the property sits. Any unpaid tax may be assessed against the property itself (meaning, the property can end up in a forced sale by the local government to cover such tax liability).
Equipment. The “source” rule generally covers pretty much any property that is placed in a high-tax country and generates rental or lease income locally. Vehicles and industrial equipment are a typical example.
Services. The “place of business” for some types of services can be defined by tax laws as the place where the recipient of the service is located. If so, the revenues from such transaction will be taxable in the recipient country. Services are generally subject to extremely detailed tax regulations, in particular what concerns the definition of “place of business” for tax purposes. The final classification can depend on a multitude of conditions. For example, whether the provider of consulting or training services physically travelled into the host country to provide the service or, alternatively, whether the recipient of the services travelled abroad to meet with the consultants. The “place of business” will be different in each of these situations.
Investment income. Many countries will impose witholding tax on repatriation of profits, especially if paid out to a tax-haven jurisdiction.
The “place of business” will also be determined by a number of formal factors. Where and how the business negotiations were conducted prior to the conclusion of the contract? Who carried out such negotiations? Were they performed in person or over distance? If in person, by whom and where? Who signed the business contract on behalf of the offshore company? Where the contracts were signed? Where, physically, the contractual obligations were carried out?
There is not a single definitive recipe for resolving the “place of business” issue. Each business is different, and much will also depend on the place of permanent residence and domicile of the company owner. In order to avoid nasty surprises, one should simply do the homework – obtain sufficient advice “on the ground”, in the country from which the offshore company expects to derive income.
A WORD ABOUT SECRECY
For decades, offshore tax-havens have been associated with secrecy. It has also created a very wrong perception of how an offshore company should be utilized and managed. Many business owners have relied on the fact that everything they do with their offshore company will remain completely secret forever, including their beneficial ownership of the company. While this still is largely true, an offshore arrangement must never, ever rest on secrecy alone! It must be built on legality, not on secrecy!
For one thing, because in certain situations the owner of the offshore company may be asked to positively prove and provide facts about how that company is being managed and how it does business. Under most tax laws, it is the duty of the taxpayer to prove that his transaction is legitimate and tax-deductible. The tax authority will automatically presume that the taxpayer is wrong - it will be his duty to prove that he is right! Silence and secrecy will not be an option here.
An offshore company and its daily business must be construed in a way that it withstands legal and regulatory scrutiny, not just hides from it!
PROPER MANAGEMENT OF OFFSHORE COMPANIES
To recap, in order to run an international business company properly and avoid conflicts with the various local tax laws, several things must be taken care of.
First, the owner of the offshore company must explore the local tax regulations in the country or countries where the company expects to do sales or to engage into any business transactions. This pertains to the “place of business” issue.
Second, the owner of the offshore company must peruse the tax laws in his own country – the one whose passport he is carrying and the one where he permanently resides. This pertains to the “management and control” issue.
As a general rule, a business owner, who lives in a high-tax country, must not be seen as directly managing and controlling an offshore company – especially, if that offshore company actively engages into transactions with his domestic business.
Great care must be taken to ensure that the substance of trading and the effective management of the company is carried out outside the fiscal jurisdiction of the beneficial owners.
Professional company management services must be sought from a country, where such management function does not create a tax liability.
Fidelity Corporate Services Ltd, through its offices located and licensed in several tax-neutral jurisdictions, is specialized in providing the company management services for offshore companies.
By providing professional directors, business administration facilities and comprehensive day-to-day management service from a tax-neutral base, management and control of the company outside a high-tax jurisdiction can be properly demonstrated. This way, an offshore company would be able to withstand potential scrutiny and still retain its built-in efficiency.
Källa:
http://www.offshoregibraltar.com/index.php?page=1_4_5