Optimising Corporate Taxation

published: December 30-2011

Optimising Corporate Taxation through 

Corporations who work or move their infrastructure offshore for tax purposes have seen their share of bad press. Many newspaper articles have insinuated it is a form of tax avoidance and have claimed that governments around the world have had fewer tax revenues to plough into their respective countries as a result.

The offshore argument has also been coupled with bad practice stories about corporations as well, regardless of the corporation’s industry. Arguably, the reporting of bad practices by corporations such as the recent BP oil disaster, and corporations using the offshore route for tax optimisation, is reported in a similar vitriolic tone in the world’s press despite the differences in the legal position. Often the articles written are misleading as the line between legal and illegal practices are blurred.

Moving the assets of a corporation to a country which has corporation friendly tax rules however, is legal and with the correct advice and infrastructure, can be highly profitable for the corporation.

For a corporation to move whole or operate a subsidiary of the corporation overseas and gain a tax advantage, the corporation must satisfy certain conditions, and show is it has legitimate reasons for basing itself offshore, and the reasons are not just for tax purposes. This is important if the corporation wants a subsidiary based overseas but wants to remain in part in its country of origin and not have to pay the full rate of corporation tax for its offshore subsidiary.

To prove the legitimacy for moving overseas, the corporation must:

  • Adopt the correct legal structure to satisfy the offshore country in question

  • Operate in the offshore country by opening offices, and conducting business from these offices.

  • Form business relationships such as credit card services, solicitors, accountants, and vendors.

  • Build relationships with tax authorities based in the offshore country.

Moving a corporation overseas was made far easier following the Cadbury Schweppes and Cadbury Schweppes Overseas judgement of 2006. Prior to the case the tax laws of the UK where offshore subsidiaries were concerned, was that they were to be taxed as if they were based onshore in the resident country should the “motive test” conclude the offshore subsidiary existed for tax avoidance reasons alone (“wholly artificial arrangements”).

The European Court of Justice however disagreed, and stated the UK’s Controlled Foreign Companies (CFC) Legislation was too restrictive, as the “motive test” which was used by the Inland Revenue to determine whether or not Cadbury Schweppes’s reasons for establishing the offshore company was for tax reasons was too narrow in scope and subjective.

The Advocate-General’s opinion was that in the case of Cadbury Schweppes, the company had shown it had undertaken genuine economic activities in the offshore country, and though tax reasons may have been one of the motives to establish an offshore arm of the company, it could not be stated as the whole reason and was not on a “wholly artificial arrangement”.

In short it is important for the corporation to establish a real and genuine presence in the offshore country to take full advantages of moving assets overseas.

The benefits of basing the corporation offshore

The benefits to moving assets offshore extend beyond taxation. However, their worth as a tax haven cannot be overstated. Corporations can take full advantage of tax havens and in turn the offshore country sees economic stimulation from being home to the corporation. As well as the corporation benefiting from paying less revenue in taxes, if often sees strong investment from foreign investors benefiting from tax advantages as well.

Asset protection is another positive factor for a corporation to move its assets overseas. This ensures that should creditors and similar organisations demand repayment, the assets of the corporation can no longer be seized as they are not in its resident country.

Confidentiality gives a significant advantage to a corporation. Many countries which offer tax havens have strict laws where confidentiality is concerned, and actions such as divulging information on shareholders or customer identities is treated very seriously by authorities in the country and the punishment is severe.

It is worth noting however, that illegal activities such as money laundering is not tolerated either, and again meets with severe consequences.

To ensure true confidentiality for a corporation however, it is important to recognise that countries have access to assets which are physically based in their country. An asset that a corporation wishes to protect has to be based in the offshore country.

Accountants and government

Accountants in a resident country may well speak negatively of moving assets offshore despite the outlined advantages.

Most accountants are only familiar with tax laws in their resident country and are not fluent in the laws and legalities of basing a corporation offshore. To this end they may preach a view that the corporation is better to leave assets in the resident country.

Clearly this is not the case, as corporations based offshore show far greater profits than ones which are based mainly in their resident country as they pay far less in taxes.

It is important to remember that other than the gaps in their knowledge, an accountant’s trade is based around the corporation remaining in the resident country, and for some this will influence their views on moving offshore. Remember once a corporation moves offshore, the accountancy trade will move with it.

Governments are beginning to tighten tax laws where offshore tax havens are concerned. In 2009 world leaders at the G20 summit agreed to take action against “uncooperative” offshore centres.

Nonetheless, the offshore basing of a corporation or a subsidiary is still a highly profitable move, despite the closing of certain tax loopholes.

Double Taxation Agreements

A significant factor in lowering tax paid by corporations involves double taxation agreements. This is where profits made in one country are only taxed once, either by the resident country or the country where the taxation was made. In some instances, a tax credit is issued to avoid a corporation paying the tax twice. Countries with a good double taxation agreement network generally have more favourable tax rates than countries that do not.

The Netherlands Tax Structures

The Netherlands is a country which is considered by many experts in corporate tax as to be corporate friendly. The country has attracted thousands of corporations who have a presence in the country of some kind. Many are there for the following reasons:

  • The Netherlands has a strong double taxation network which allows corporations substantial reductions on interest, royalty payments, and withholding taxes on dividends between treaty countries.

  • Subsidiary companies based outside the Netherlands receive exemptions on corporate income tax under ‘participation exemption’ laws.

  • The Netherlands operates advance tax laws where multinational corporations are given certainty about how much tax their subsidiaries will have to pay.

  • The Netherlands offers corporations political and economic certainty.

Cyprus

Like the Netherlands, Cyprus is seen by many as a “bridge” between onshore and offshore and its reputation and status as such was significantly enhanced when the country achieved EU Accession in May 2004.

In January 2003, Cyprus implemented a fully transparent and respected tax structure, and still retained its status as the most tax-competitive jurisdiction in the EU. Cyprus is used by EU and non –EU corporations alike.

Consider the following:

  • A strong double taxation network

  • A standard corporate tax rate of 10%

  • 0% tax rate for shipping corporations

  • 4.25% tax rate for maritime management corporations

  • A tax authority geared around helping foreign investors and a banking system which truly understands the needs of multinational corporations and familiarity with the tax structures

  • Tax planning where profits are spread thin with an aim to lower taxation levels is perfectly acceptable in Cyprus

  • Offshore company invoices are acceptable entries on the balance sheet, and payments to an offshore company carry no withholding tax

  • Advance tax rulings

  • Corporations can register for the EU rate of VAT

  • Low duties and taxes are paid when a company is established

  • Cyprus is fully compliant with EU, OECD, FATF and FSF organisations.

In short Cyprus offers the most competitive tax haven in Europe.

Advice and consultancy

It is clear that if a corporation is to establish an offshore base in full or in part, finding the best advice and indeed outsourcing the offshore project to an experienced company which can handle the tax and financial implications of such a move is both prudent and necessary.

Each corporation has different requirements, so what is good for one corporation may not be good for another. Each must be assessed separately, and the nuances of their industry taken into account to get the most from moving offshore.

Asset protection can be a complex and involved area of moving offshore, so having a company with a good understanding of legal issues is of paramount importance.

For more information on outsourcing offshore projects and assets, or just to receive the benefits of advice visit http://www.vfsconsultants.com .