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Planning Ideas

 

It should be stressed that the ideas discussed below are general in nature and will likely not be available to resident individuals and companies of more sophisticated tax jurisdiction, where for example, controlled foreign companies or strict anti-avoidance legislation is employed.

 

Advice should always be sought on individual case by case basis as to whether the structures suggested below can be applied or not.

 

Finance Companies

Offshore finance companies are normally established for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the standard corporation taxes. Many large companies with offshore companies have been able to mix dividends of subsidiaries and thereby to derive maximum advantage from tax credits. Interest paid from loans and credit agreements can be often a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company can also result in tax saving.

 

In certain countries, foreign exchange losses are not deductible for tax purposes. From a planning perspective, it is therefore always advisable to make use of such losses in favorable tax jurisdictions where this is possible.

 

Offshore finance companies can also be used for leasing, particularly where an offshore structure is rich in funds which, if they are not invested, may be repatriated or subject to high levels of corporate taxation in the home country.
 
Offshore finance companies are often utilized in practice as part of structures for acquiring foreign entities, real estate and other investment related projects.

 

Other benefits of such a company to the multinational entrepreneur are:

  • Protection of capital funds introduced from abroad to foster a self-owned project.
  • Tax relief on the cost of borrowing the funds.
  • Freedom to return interest on funds lent to the tax haven, so they can be reinvested in the most tax-efficient tax manner.

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Venture Capital Corporation

Offshore companies are regularly employed to raise venture capital through equity or debt issues in capital markets. Many corporations have sough to mitigate risk by accessing markets through offshore companies while at the same time reducing certain taxes.

 

This technique is a refinement of the offshore investment holding company. With prudent management, it can prove very profitable by itself, apart from the advantage of often being able to accumulate tax-free profits.

 

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Plant Rental Corporation

If a company in a service industry operates affiliated companies in various countries, the formation and financing of an offshore company to acquire capital equipment used in its operations could prove beneficial. The equipment can be rented to the affiliate at market rates, with net income accumulating in the offshore company. Alternatively, it can be attractive for a company in a high tax area to purchase the capital equipment, claim the usual allowances, and lease the equipment to the offshore company at commercial rates. Hence, profits are generated, which may not be liable to tax assessment, while rental payments in most cases are tax deducible in their countries of origin.

 

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Family Protection

One of the major objectives of many tax mitigation clients is to ensure that wealth established during their lifetime is not lost by future generations/circumstances. To avoid this, tax planning firms can often provide a whole range of 'tailor-made' companies, trusts, foundations and establishments which can be used together with many other tax mitigation mechanisms already outlined. In particular, they can often be formulated to allow, whilst the original "settlor" is alive, for initial investment flexibility followed by a "fixed" structure upon his or her demise. In addition, with the correct advice, "asset protection schemes" can also legally avoid the almost universal "forced heirship" provisions of civil law jurisdictions.

 

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Inheritance Tax Protection

Where a person is domiciled outside a territory and owns assets located in that territory, for instance property, this asset may be protected sometimes against inheritance tax and higher rates of taxation by holding the assets through an offshore investment company.

 

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Probate and Privacy, Wealth Protection

A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company so that upon his demise probate would be applied for in the country in which his company was incorporated rather than in each of the countries in which he might hold assets. This saves legal fees and avoids publicity. Again, not everybody wishes to advertise wealth and an individual may wish to hold property through an offshore entity simply because of the privacy which the offshore arrangement gives.

 

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Stock Market Listings and Capital Raising Exercises

Many large corporations in economically and politically uncertain countries often seek to diminish the perception of risk by moving ownership of assets and the base of their operations offshore. Often such movements can result in significant influxes of working capital, more favorable commercial rates and more favorable taxation as well as heightening corporate profile.

 

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Banking Companies

Many offshore banking institutions have been established in tax havens in recent years. Many of these institutions are subsidiaries of major international banks. Such institutions pay interest free of withholding tax and engage in international financing from offshore bases which are free from exchange controls. Such banking institutions and their associated trust companies are able to provide a wide range of financial services to their international clientele. Offshore banking institutions are also used by the smaller business organisation and indeed in some cases by individual owners to act as offshore cash management centres.

 

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Insurance Companies

There are a number of offshore havens which are keen to encourage the establishment of insurance companies which like banking companies bring employment and investment to the country of incorporation and generally enhance its reputation and its range of financial services. In a number of offshore havens it is possible to incorporate insurance companies which pay no tax in respect of their premium or investment income.

 

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Captive Insurance

Captive insurance companies have been created by many multinational companies to insure and re-insure the risks of subsidiaries and affiliated companies. Captive insurance companies are particularly suitable for the shipping and petroleum industries and for the insurance of risks which might be insurable only at prohibitive premiums.

 

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Real Estate Planning

A very popular practice is that a real property item is purchased by an offshore company which is registered as the proprietor in the Land Registry, and if the proprietor of this company (i.e. the beneficiary owner of the real property in question) wants to sell the real property, it is sufficient to sell the shares of his or her offshore company and thus avoid in certain jurisdictions real property transfer tax. The above mentioned structure is only possible in those jurisdictions where it is possible that a foreign entity owns the real property in question. In jurisdictions where this is not possible, the real property could perhaps be owned in such a way that it is purchased by a company there which is owned by a further foreign offshore company.

 

This way it is possible in certain circumstances to achieve:

  • Asset protection
  • You can avoid tax inheritance (after the death of the proprietor the bearer of the shares becomes a new proprietor)
  • avoid real property transfer tax, etc. (the proprietor is the person who owns assets of the offshore company)
  • protection from forced inheritance or from heirs at law.

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Property Holding Company

Another form of offshore holding company that has gained a lot of interest and popularity in recent years is using a company to hold property and property rights in an offshore location. Advantages of offshore property ownership can include avoidance of inheritance tax, avoidance of capital gains tax, ease of sale which is achieved by transferring the shares in the company (sometimes avoiding stamp duty payable by the purchaser) and reduction of property purchase costs to onward purchasers.

 

In certain circumstances there are significant tax advantages in having properties held by appropriate domestic and/or offshore mechanisms. For example, for non-domiciled individuals, a local company owned in turn by a tax-free company can sometimes legally avoid capital gains and inheritance taxes. Further, under appropriate tax treaties it may also be possible to arrange loan financing to substantially reduce domestic tax liability on rental payments.

 

The main benefits of the property holding company are:

  • Avoidance in most cases of local inheritance taxes on the property in the event of death of the beneficial owner.
  • Avoidance in most cases of local succession laws which can, in certain countries, stipulate to whom the property must pass.
  • Elimination in most cases of local transfer and capital gains taxes upon resale of the property.
  • Simplification of procedure upon resale of the property through the sale of the real estate holding company to the buyer saving both time and costs.
  • Exclusion of foreign exchange controls restrictions in certain countries, in the event of the beneficial owner taking up residence in the property.
  • Ease of transfer to heirs in the event of the beneficial owner’s death.
  • Confidentiality of ownership.

A high net worth individual with properties or other assets in a number of countries may wish to hold these using a personal holding company so that upon their demise the need to obtain probate in each country is avoided. This will save on legal fees and avoids publicity.

 

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Holding Companies

Many clients use offshore Holding Companies to own and fund subsidiaries in various countries, implement joint venture projects, hold publicly quoted companies, and so on. It is possible, in certain circumstances, for capital gains arising from the disposal of investments, to be made free of tax. In the case of dividend payments, reduced levels of tax on income can be achieved where a company incorporated in a zero or low tax jurisdiction has favorable double tax agreements with the contracting state.

 

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Personal Service Companies

Many companies utilize offshore companies for the employment of staff working on overseas assignments. This helps to reduce the costs associated with payroll and travel expense administration, often enables employees to be paid in convertible currency and may provide a tax and social security saving benefit for the employees.
 
In certain situations the offshore employment company may not have to pay tax on its profits, which can then be reinvested in a tax free climate to generate further income from the offshore company. Payments to the individuals concerned can be often structured in such a way as to minimise their local tax liabilities. One example in this regard in respect of an overseas employment is to increase subsistence expenses as against fees as such which would be paid to the individual.

 

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Investment Holding Company

There are a number of offshore areas in which funds may be placed either in tax free bonds or as bank deposits where interest is paid gross. Similarly, in many offshore areas no capital gains taxes are applicable.

Depositing free financial means in various currencies in foreign banks on term deposit or current accounts can serve to protect depositors and can also sharply reduce the risk of economic bankruptcy connected with the economy of one country through diversification of assets into foreign jurisdictions. Another advantage is represented by the fact that the yields of term deposit accounts are often not subject to taxation in offshore banks.

 

Both individuals and large companies regularly use offshore companies as vehicles to hold investment portfolios, which may consist of cash, stocks, bonds and other investment products. Cash assets held by offshore companies can earn deposit interest gross (free of tax) or can be placed in collective cash funds.

 

Personal offshore holding companies are often used by high net worth individuals to hold investments made in different markets and countries. Personal holding companies also provide the confidentiality required by more sophisticated investors, while at the same time, saving in professional and other fees associated with other structures.

 

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