The process of incorporation of a business into a limited liability company offers a number of attractive advantages. These advantages, coupled with specific incentives offered by certain International Business and Financial Centres, can form the basis for the design and implementation of an effective international tax strategy.
A company, once incorporated, is a distinct legal entity, separate from its proprietor, shareholders or directors. The separate legal entity effectively limits the liability of the shareholder to the invested capital. The creditors of the business look to the assets of the company for payment rather than the assets of the persons who invested in the company.
The profits generated by a company are generally taxed at lower tax rates than the rates applicable to individual shareholders, even in the same country of residence. This tax consideration is in many cases a strong incentive to incorporate a business into a limited liability company.
An individual and a company become liable for tax in a certain country if they are deemed to be tax resident in that country within a fiscal year.
Most countries will tax an individual who spends six months within their borders.
Most countries consider any company that is incorporated within their jurisdiction to be a tax resident but also consider any company which is managed and controlled within their jurisdiction to be a tax resident. A company is generally considered to be managed and controlled wherever its directors habitually meet and reside.
An individual and a company can be a tax resident in more than one jurisdiction at one time.
On this basis they would be liable for tax in both jurisdictions.
Careful tax planning of the business and financial affairs of individuals and companies can change the bases of taxation and reduce or eliminate the overall tax liability.
An individual resident in a high tax country may set up a company in a low or zero tax country and may arrange for all the profits from the business activity to flow through this company. Under such a structure the overall saving on tax that would arise will be the difference between the high personal tax rate and the low corporate tax rate in the tax incentive jurisdiction.
The shareholder may be subject to anti-avoidance legislation in his country of residence, which may have an impact on the effectiveness of these arrangements. However, a well-structured tax strategy may make the anti-avoidance legislation inapplicable.
The management and control test applicable in the case of the company may be by-passed through the use of nominee shareholders and directors resident in the country of incorporation.
When a company makes payments and distributions, these are normally taxable in the hands of the recipient. The greatest advantage is achieved by letting the profits accumulate within the company so that tax is deferred indefinitely or avoided completely.
If profits can remain untaxed offshore then not only is tax saved on the original profit but also on the investment income generated by reinvesting those profits so the benefit is cumulative and substantive.
The basic principles of the interaction between high tax and low tax jurisdictions can be applied in more complex structures involving Trusts, International Partnerships, utilisation of Double Tax Treaties, the EU Directives, Hybrid Entities and other.
Furthermore, a tax strategy can be extended to cover issues of exit from an offshore structure or the timing of the repatriation of accumulated profits or the settlement of these in an estate planning structure.
Further to the primary tax related benefits of utilising International Business and Offshore jurisdictions, a number of non-tax benefits can be achieved from such structures. These may include: