Making Use Of Offshore Companies For International Trade And Real Estate!

By Edward Leigh, Managing Director

By Edward Leigh, Managing Director

OCRA Aerospace (Isle of Man) Limited

Offshore Companies can be used for International Trade and Real Estate to either mitigate or avoid tax altogether.

The following case studies provide valuable insight into how offshore companies can be used to structure your affairs so as to maximise your assets.

International Trading Companies

Yuri Ivanov lives in Russia. He is purchasing and selling shoes. He buys the shoes from Italy and sells them to department stores in France, Germany and Spain.

Mr. Ivanov wonders whether he can structure his business in a tax-effective manner, for example by using an offshore company.

Suggested solution:

Mr. Ivanov can set up a trading company in a low tax country, thus ensuring that his trading profits will not be taxed in Russia (his country of residence), nor in France, Germany or Spain (because the tax authorities argue that he has a taxable presence in these countries).

As all the transactions concerned are European Union transactions, Mr. Ivanov must obtain a VAT registration. A good location for conducting trading activities where one can obtain such a registration is the Isle of Man. Thus, if such an Isle of Man company intends to ship the shoes from Italy to Spain, the Isle of Man company would inform the Italian company of its VAT number, so that it could zero rate its sales invoice. The Italian company does not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the Spanish company's VAT number and subsequently issue a zero rate invoice to the Spanish company.

For setting-up the Isle of Man company, there are a couple of possibilities: an LLC (taxed as a transparent entity, so effectively no tax in the Isle of Man on the profits obtained) or a tax exempt company. None of these companies are required to withhold tax on dividends.

Real Property Companies

Ferenc Kiss, a Hungarian high net-worth individual living in Budapest, is investing substantial amounts of his wealth in real property, both in Hungary and in other Central and Eastern European countries.

Mr. Kiss wonders how the return on his investment can be arranged for in a tax-effective manner. The same question arises in case he sells the property in these countries and he realises a gain.

Suggested solution:

Assuming that Mr. Kiss is not engaged in developing real property, the nature of his income is rental income or, in the case of sale, a capital gain. In many countries, this is considered "passive income" for tax purposes.

The acquisition of the real property in the countries concerned can be made through local companies directly or indirectly controlled by Mr. Kiss. These local companies can be wholly owned by a holding company in a country with a favourable holding company regime. Any dividends distributed by the companies in the countries where the real property is situated should:

1. Not be subject to withholding tax on dividends (or only at a low rate)

2. Not be subject to corporate income tax upon receipt by the holding company

3. Not be subject to withholding tax on dividends paid by the holding company

Moreover, if the holding company sells the shares in the real property companies, any capital gains resulting from the sale should not be subject to corporate tax.

A country meeting the above conditions for the holding company regime is Luxembourg. A Cyprus company holding the Luxembourg company and directly or indirectly owned by Mr. Kiss would be a tax-effective solution. See the diagram below.

Conclusion

It is clear from the above examples that careful and tailored tax planning is required to ensure that the right tax vehicles are used.

Notwithstanding, until taxation rules are aligned globally and whilst double taxation treaties remain in force, the use of offshore companies in tax planning will continue well into the foreseeable future.

by: Edward Leigh

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