International tax planning: Offshore Company Formation

We are an English tax and law office within the network of international tax consultants and lawyers (LowTax Network International), focussing, in particular, on "international tax planning for natural and legal persons". Other focal points are: the setting up of financial services companies and banks abroad, licences for games of chance within the EU and offshore, the setting up of trusts and foundations and, in addition, the transfer of domestic assets into trusts within the English-speaking legal area (asset protection,bankruptcy protection,inheritance law).

Offshore Company Formation: Basic Considerations regarding the Formation of Companies in "Zero-Tax Havens" i.e. in countries that have not entered into Double Taxation Agreements with other countries

Countries, such as Belize, BVI, Cayman Islands, Nevis etc... have not entered into Double Taxation Agreements with other countries, no judicial assistance or Mutual Legal Assistance (MLA) Agreement exist nor do extradition treaties for fiscal offences exist and such countries often do not maintain public commercial registers. In addition, as a rule these countries do not tax income that has been generated outside of the country (exempted companies, offshore companies / corporations). The presumptive advantages can, however, turn into a "tax trap", if specific prerequisites are not met.

To begin with many countries (USA, Germany, EU countries, Switzerland etc...) have laws for the prevention of "tax evasion" i.e. define laws which give the state the right to impose taxes domestically. In the case of doubt, the "suspected tax evader" must provide evidence, that the purpose of a foreign entity is not solely that of tax evasion (reversal of the burden of proof), which has the following consequences in most countries :

Provision of proof, that an orderly place of business has been installed for a company located in a foreign county (e.g. Belize, BVI, Cayman Islands etc...). In most cases, this includes an office, a serviceable postal address and the foreign-based company must be reachable by telephone, and a lease must be entered into between the foreign company and a lessor. A mere "Post Office Box" or a "Registered Office" does not constitute an orderly place of business and quickly leads to the assumption of a "bogus firm".

The proof, that in a foreign country (zero-tax-haven) the personnel prerequisites are given, to even be able to conduct and realize the businesses activities of the company. In the event, normally or comparably, for example a company would need 10 employees, to be able to conduct business activities, and the company does not have any employees at all, naturally the tax authority will pose the question - how is the foreign company able to discharge its business. The same applies with regard to the necessary employee qualifications.

The proof, that the foreign company has an employed Managing Director (Managing Director Agreement, Earnings Statements). It is indeed quite "odd", if a foreign company only invests 200 USD per year in its purported Managing Director (place of business supervision as place of the permanent establishment). In this context the question is legitimate, as to which Managing Director is willing to accept consideration of only approximately 14 USD per month.

One can deviate from this, in the event a production site has been installed in a foreign country (zero-tax haven), construction works, which last for more than 12 months or a site for the exploitation of mineral resources. In this event – it is always operations in a foreign country, independent of the "place of managerial supervision". One can deviate from this, if for example the official Managing Director of the foreign company is a resident of Denmark, and provides proof, that he is routinely present overseas (seat of the foreign country) to execute the managerial supervision of the business. In the case, for example of a mere holding company, the "managerial supervision" is not so extensive that the permanent presence of a Managing Director would be required at the foreign company. In this case, it would be credible, if the client (in this example, a Danish citizen) for example traveled to the country in which the foreign company is located once a month, to discharge the required managerial duties.

If required, provide proof that the company actively transacts business abroad.


The screening effects of a Double Taxation Agreement do not apply

The Double Taxation Agreement's (more correctly: Agreements for the Prevention of Double Taxation), purpose is to prevent companies or persons from being taxed twice - double - in "both countries". In the event the "screening effect" does not exist (which is the case in "zero-tax havens", because they have not entered into Double Taxation Agreements with other countries), then the possibility exists that a company or person can be taxed twice - double. In addition, Double Taxation Agreements define the existence of a domestic and foreign fiscal permanent establishment. As such a mere "activity of auxiliary character", a consultation, a stock of goods or merchandise (warehouse) or a "permanent agent" does not constitute a permanent establishment in the other contracting state. In the event, a Double Taxation Agreement is not applicable; it is exactly these activities that constitute a permanent establishment according to domestic laws. Example: Formation of a company in Belize. This company maintains a stock of goods or merchandise (warehouse) in another country. As a rule, this constitutes a permanent establishment in the other country i.e. the country in which the warehouse is located has the right to impose a tax. Another Case: Formation of a company for example in Cyprus (Has entered into Double Taxation Agreements with almost all countries) and a stock of goods or merchandise (warehouse) is located in a different country. As a rule, this does not constitute a permanent establishment in the other contracting state, because according to Article 5 DBA a stock of goods or merchandise (warehouse) does not constitute a permanent establishment.

Likewise the screening effect is not applicable in the case of "associated companies". The majority of Double Taxation Agreements define that the tax deducted at the source state is, in the case of dividend distribution, 5 % for companies and 15 % for individuals. In the event a Double Taxation Agreement does not exist, as a rule the full domestic withholding tax is due, this tax exceeds 30% in many countries.