Managing Your Profits Through An Offshore Company, In A Tax Efficient Way

Inside Track - Richard Lawrence On Managing Your Profits Through An Offshore Company, In A Tax Efficient Way

So you have bought an offshore company and now you are wondering how best to make use of it? I prefer my clients to do the latter, before the former, because then we can ensure that things are set up properly in the first place. The problem is that many of the large Company Formations Agents, whose adverts you see on the business pages of the Sunday newspapers and In-flight magazines, are only interested in selling you the structure. They do not go on to tell you how you should, and more importantly, should not use it.

In fact some of their sales material is downright misleading. Here is an actual piece from the promotions literature of a large Offshore Company Formations Agent:

Strategy: Re-invoicing
If your business pays high taxes you could alleviate the burden by guiding part of your business through an offshore company. The procedure can be simple. Your company in your own country continues to conduct its business much as before, except that some aspects are now conducted by the offshore company. The offshore company invoices your company at home for the work it has done on its behalf.

Example: the offshore company uses its expertise to negotiate purchases of goods or services and resells these goods and services on to your home company. Alternately, the offshore company negotiates terms on behalf of your home company and charges your home company for it's consultancy services, or there can be a combination of these functions. In either event, the offshore company shows a profit for its efforts. The tax burden on your home company is reduced.

A Matter Of Control
Of course it just is not as simple as this makes it sound. The tax authorities in your home country will almost certainly have anti-avoidance legislation, which determines the residence of a foreign company on the basis of where that company is 'managed and controlled'.

This premise assumes that management and control rests with the directors, and to a lesser extent, the owners, of the company. So if you buy an offshore company, and appoint yourself as the directors or the shareholders, then the offshore company's profits or gains will be treated no differently for tax purposes in your home country, than if you had formed a regular domestic company.

Many who buy an offshore company for such a purpose naively believe The Revenue will never get to know about it. If, however, you are going to transfer assets or profits directly to your offshore company, that would otherwise get taxed in your own country, there is going to be some sort of 'paperwork' connection. Invoicing management charges, or goods from an offshore company to an onshore business, as described above, is the classic attempt at creating what is hoped will be a legitimate tax-deductible expense to reduce profit. The problem is that one of the taxman's favourite occupations is to examine and query what is and is not an allowable expense. The moment he sees payments going directly to an offshore company, he will want to investigate further, and the existence of the offshore company will inevitably be revealed.

A Tell-Tale Sign
Another common and ill advised use of an offshore company is to directly transfer the ownership of property to an offshore company at its cost value or below, immediately prior to selling it on at a large capital gain. The objective being to eliminate the gains tax that might have otherwise been payable. It's true that the final sale of the property, by the offshore company, may not appear as a matter of record, because the shares in the offshore company owning it, may have simply changed hands rather than the actual title to the property. But the first transfer that changed the property from onshore to offshore ownership, is a give-away and is certain to invite inquiry, particularly if it appears to be below current market value. "OK," you say, "but I have been advised to have nominee directors and shareholders, so I can prove that the offshore company is 'managed and
controlled' by offshore individuals quite unconnected with me or any of my onshore affairs."

This sounds good in theory, however, in many jurisdictions some form of public register is kept of the names of directors. It only requires an inquisitive taxman to have those records checked, to discover that the directors of your offshore company are also directors of perhaps hundreds or even thousands of other companies. He will then have the evidence to prove that the nominees are not effectively the controlling directors. The allegation will be that you must be a 'shadow director' and you will be taxed accordingly, in your home country.

Severing The Connection
In this respect, using an offshore jurisdiction that does not require the names of directors to be on any register or public record, provides some confidentiality and thus protection. If there is a suspicion of a connection in a particular transaction, The Revenue have all kinds of tactics at their disposal to identify who is actually running an offshore company.
So if you are going to have direct transactions with any offshore company, you are probably going to need cast iron proof that you are not directly connected with it in any way, and that you are not the beneficial owner of that company. Usually such proof is ultimately not possible because it is simply in conflict with the facts. The effective way around this problem, is to use a specialist intermediary company or individual who could, if necessary, prove beyond all doubt there is no connection to you, your company, or the other entity.

The method of using an intermediary, whether it be a company or an individual, will differ, depending on whether you are seeking to create tax deductible expenses, or wanting to reduce potential gains tax on the disposal of an asset. If you are seeking to create tax deductible expenses, it often involves some form of licensing or consultancy contract between you and an intermediary company. On the hand, if you want to reduce potential gains tax on the disposal of an asset, it will probably require the intermediary to be an individual who can buy shares, stock or title to property, with suitable safeguards in place, to ensure that effective control or ownership is not lost by the beneficial owner.

Tax Advantages
Intermediaries used for such transactions are invariably based offshore, so they do not incur a tax liability themselves on such transactions. This allows them to confidentially rebate the full value of the transactions, while only charging a small fee for their services.
The effective result is that profit or title to assets can be transferred via the intermediary from a high tax jurisdiction to a low tax jurisdiction, from where they can be used or managed as expediency suggests.

This kind of arrangement has many benefits. If done carefully it can substantially reduce the chances that the initial transaction, between your onshore interests and the intermediary, will ever trigger any special interest from The Revenue, or even from your accountants. Some professional intermediaries, although based offshore, conduct their business through an onshore representative office address, so there is no indication of any offshore element in the associated paper work. Many intermediaries are also well established businesses with a mix of onshore and offshore clients. Even if a transaction is questioned by anyone, it is virtually impossible for them to prove it is anything other than genuine.

The Sooner The Better
I do not propose to outline here all the details involved in using an intermediary. Partly because it may provide fodder for tax inspectors or other Big Brother types reading this, but mainly because each arrangement will vary considerably, depending upon the circumstances and the tax saving objectives. Suffice it to say that professional intermediaries are well versed in the best ways to structure such things.

Even though an intermediary will have no ultimate tax liability on their transactions with you, it is in their long-term interests to have a client who also receives no hassle from the taxman. So, all things being equal, their counsel should be sought and taken. Although intermediaries can be used to mitigate tax in an existing structure, it is always preferable if they are involved in a project at an early stage, so it can, from the outset, be set up in the most effective way.

How To Contact Me
Readers interested in contacting me directly about this or any other aspects of tax mitigation or asset protection can do so by e-mailing me at richard-lawrence@mail.com

About The Author
Richard Lawrence is an expert on tax mitigation and asset protection, who has an international portfolio of clients. His modus operandi is to respond to all client email within twenty-four hours, seven days a week. For snoop-proof confidentiality he uses PGP encryption. He is friendly, clued-up, helpful, and if you want to hire him, his fees are reasonable ... so, if you have an asset problem to solve, or an offshore agenda you'd like to fulfil, drop him a line. For more information about Richard, refer to his introductory article in the last issue of The Freebooter (2000, No. 4), page 15.

Quotes

"The Revenue have all kinds of tactics at their disposal to identify who is actually running an offshore company."

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