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The following are just a few examples of how offshore companies
may be used.
These illustrations are just the tip of the iceberg, but will hopefully
get you thinking along the correct lines.
PROFESSIONAL SERVICES CORPORATION
Movie stars, pop groups, sportsmen, engineers and consultants of
all kinds are entering into contracts with ‘independent employment
companies’, incorporated in appropriate jurisdictions, which
sell their services outside the individual’s country of residence.
The offshore employment company will not have to pay tax on its
earnings and payments to the individuals are structured in a way
that minimizes their tax liability.
TECHNICAL KNOW-HOW, LICENSES AND FRANCHISES
Our consultants advise many family owned manufacturing companies
on the sale of patents, technical know how, license and franchise
agreements often for a single capital payment to an appropriately
located offshore company, often owned by an offshore discretionary
trust. Upon acquisition of the rights , the offshore company then
enters into agreements with licenses wishing to use the patents,
technical know-how, licenses or franchises around the world.
The income, subject to any withholding tax, is accumulated tax free
in the offshore company. By careful selection of the jurisdiction,
withholding taxes can be substantially reduced by the commercial
application of double taxation treaties.
TRIANGULAR STRUCTURES
Clients from third countries can take advantage of Portuguese treaties
in their dealing with Portugal’s treaty partners where the
third country does not itself have a treaty with Portugal’s
treaty partner.
The Brazilian example is a very useful and illustrative one: A
country that does not have a treaty with Brazil may use a Madeira
company to reduce the withholding on interest or royalty income
emanating from Brazil. For example, a company that is a resident
of the U.S. is normally subject to a 25% withholding tax in Brazil
on interest or royalties.
If payments of such income are directed to a subsidiary of the
American company located in Madeira, the withholding tax payable
in Brazil will be reduced to 15% or even 10% for royalties in certain
cases, due to the double tax treaty existing between Portugal and
Brazil. Subsequently, the income received by the Madeira company
will be exempt and the profits distributed to the parent company
(U.S.) will not be subject to withholding tax in Madeira.
FINANCE CORPORATIONS AND SELF FINANCING
We recognize that there is an increasing body of international
legislation which aims to restrict relief for interest paid in companies
where the high tax jurisdiction concerned considers that inter-group
loan finance is a substitute for "proper" equity funding,
the U.S. authorities’ debt equity ratio comparison being a
classic one.
The use of an offshore financing corporation which is structured
under legally separate beneficial ownership from the trading or
investment company concerned makes it possible to substantially
increase the interest deduction permitted, again in terms of the
U.S., for example, by a factor of approximately 300%.
An alternative method which might also be appropriate is the use
of "back to back" financing. If this is routed through
an offshore center it should be possible to have a deposit in a
low or no tax area matched with a corresponding borrowing from a
bank in a high tax jurisdiction country which creates a claim for
tax relief for the interest paid.
The effect of this will be to legally transfer profits into a low
tax jurisdiction, creating a tax deductible interest expense in
the high tax jurisdiction, the fiscal leverage being considerably
higher than the bank’s loan costs. Get the picture?
PURCHASING AND FINANCING OF OVERSEAS PROPERTY
There are often great advantages in using an offshore property
holding company for the purchase of overseas property. The costs
of doing this are not significant in relation to the benefits that
arise. Using a trust to own shares in the offshore company can give
rise to additional tax advantages in the client’s country of
residence and simplifies procedures in the event of the client’s
death.
The British Virgin Islands, Isle of Man, Mauritius and Madeira
are amongst the safe and stable jurisdictions for property owning
companies and trusts and the Group administers many such companies
and trusts. Our consulting group has made special arrangements with
major Clearing Bank to provide financing on favorable terms for
the financing of property in, amongst others; France, Spain and
Portugal by offshore companies. Loans are available to buyers in
any major currency, for up to twenty years with no penalty for prepayment.
THE "SGPS" STRUCTURE - GATEWAY TO EUROPE
We should recognize that the Madeira type of companies called "Sociedads
Gestoras de Participacoes Sociais" ("SGPS"), which
are exclusively holding companies, constitute today, without any
doubt, the best way to structure non-European Union investments
in Europe.
Because these types of companies effectively pay corporate tax,
they benefit from the Parent/Subsidiary Directive and are entitled
to withholding tax exemption on dividends received from companies
located in other EC states.
SGPS companies are also entitled to a deduction of 95% of their
taxable income derived from profits received, in order to reduce
the double taxation of same, which means that the dividends of these
companies emanating from their shareholdings are effectively taxed
at 1.8%, namely 5% of 36%.
Further, shareholders of Madeira SGPS companies are entitled to
exemption from withholding tax on dividends distributed to them
by the said companies, including those relating to profits generated
from EC shareholdings.
Thus, profits remitted by companies located in EC countries to
their non EC shareholders via a Madeira company, pay a total tax
rate of only 1.8%
OTHER USES
Equipment leasing companies, Invoice/receivables factoring, commodities
purchasing companies can all be set up in advantageous jurisdictions
to perform their respective functions for a high tax U.S. company,
thereby allowing profits to be sent to the low tax jurisdiction
which are deductible expenses stateside.
Ed. Note - WWS uses well placed consultants in the jurisdiction
of choice to assist our clients in every manner of business structuring.
Hopefully this article will open your eyes to some of the possibilities.
Information for this article provided by ETI Group, London, with
offices worldwide. Expanded information on this subject matter and
much more is contained in our Home study course,
HSC001 - ‘Doing Business Offshore’.
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