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: Why form a company in a foreign country with a tax accountant specialized in international tax law?

The prospect will find numerous agencies specialized in foreign company formations in the internet. As a rule, however, these companies do not employ Tax Accountants specialized in international tax law. Frequently, such formation agencies are not – or only insufficiently - versed in international tax law, or are not permitted to provide advice on legal or tax matters in countries as a consequence of the Legal Advice Act. Formation agencies - or even Tax Accountants – located in the forming countries (for example: Cyprus, Belize etc…) often are only knowledgeable in domestic tax law. If one takes a look at the relevant internet offers, it quickly becomes apparent, that a great deal of the providers publish incorrect or insufficient information, working according to the strategy "The cheaper the better".

The following factors, among others, are to be observed within the scope of international tax planning / company formation in a foreign country:

Most countries have laws for the prevention of tax evasion and/or have laws that formulate the right to impose taxes domestically. It is not in the interest of these countries, that companies and individuals have their income taxed in foreign countries, even though "in truth" the managerial supervision is located domestically and / or the activities are transacted / performed domestically and / or "in truth" the taxpayer resides in country and/or a production site is not installed in the foreign country. In many countries, (for example: USA and Germany) "tax evasion" is, in fact, a criminal offense. For this reason, it is somewhat naive to believe, that the right to impose taxes can be relocated to a foreign country, by simply investing a few hundred Euro for the formation of a company in a foreign country. It is true, that almost everything can be done, however domestic tax laws must be observed and – to the extent a production site is not installed in a foreign country, or no site for the exploitation of mineral resources or construction works, whose duration is greater than 9-12 months exist (in the event a Double Taxation Agreement exists this will always constitute a permanent establishment), the impression must be avoided that the foreign company is just a "bogus company".

 

The permanent establishment in a foreign country:

1. Managerial supervision

A production site, a site for the exploitation of mineral resources or construction works, whose duration is greater than 9-12 months, always constitutes the establishment of a place of business in the formation country - at least in the event of a DBA-situation (Double Taxation Agreement). Otherwise the definition of a permanent establishment is based, among other things, on the "place of managerial supervision". As a rule, this means that a resident of the formation country (ordinary residence) acts as the Company Director. Either the client relocates his ordinary residence to the formation country and acts as the Director of the company himself OR a citizen of the formation country is hired to take the position of Director OR the client himself acts as the Director, and provides proof that he is present in the formation country to perform customary managerial supervision OR our Law Firm in the foreign country provides a Nominee Director.

In the event, a Nominee Director is provided the following factors must be observed:

- The responsibilities of the Nominee Director should be performed by an Attorney or Tax Consultant in the formation country of the company (in the case of a legal entity as a Trustee Director of a Law Firm). This ensures, that the trustee relationship is not disclosed for "incidental" grounds. Only attorneys can effectively protect the trustee relationship from third party access. It goes without saying, that attorneys will demand the corresponding fees and will not just demand a few Euros for their services as a Trustee Director.

Under certain conditions, it can even be required or useful, that a person in the formation country is employed as the Director of the company, i.e. with an employment contract between the company and the Director, payment of payroll taxes and social security contributions; to the extent they are collected. We are also able to provide such an "employed Director".

The so-called "Formation Directors" are "absolute nonsense", who resign after the company has been registered and transfer the company and position to the actual beneficiary. In this situation, the "actual Director" can quickly be identified. A Trustee Director must of course be registered and reachable during the entire agreement term.

One "can" deviate from such an arrangement, if the foreign company is formed in a country, which has not entered into a Double Taxation Agreement and / or a Mutual Legal Assistance (MLA) Agreement.

An "Offshore Director is also "absolute nonsense", an example of this is that a legal entity acts as the Director of an English Limited in Belize. Such a constellation is "asking for it" i.e. asking to be accused of "Avoidance Abuse" and of course, such a company will not be able to open an account or be issued a Value Added Tax ID Number.

 

2. The place of business in a foreign company

A "Post Office Box" or an "Answering Machine" does not constitute an ordinary place of business. Accordingly, "Registered Office Addresses" do not meet the prerequisites for a proper place of business.

 

The minimum requirements of a proper place of business are:

 

  • Serviceable postal address, also for registered mail
  • Reachable by telephone during normal office hours, personal call reception with the name of the company.

It does not always have to be "large offices", but it must not be a post office box. The configuration / structure of the place of business is to a high degree dependent upon the company activities. If one assumes that a company can only perform its business activities, if it has 3 offices and 4 employees on-site, then a pure virtual office would indeed appear rather odd. In this situation a "sense of proportion" is required, everything must be plausible.