Re-domiciliation

When you are ready to move your offshore legal entity to another jurisdiction, you may apply to redomiciliation. Redomiciliation is an instrument of transferring a company to another country as if it has been incorporated under the laws of that country. For example, a foreign company incorporated under the laws of any country other than Malaysia may apply to be registered as being continued in Labuan.

Many low-tax jurisdictions provide for redomiciliation both in and from the jurisdiction. Generally, companies wishing to change their domicile are to get approval from the company’s directors and shareholders and from the authorities of both jurisdictions. The latter is normally easy if the company has paid its fees due to the register and the registered agent and keeps in good legal standing.

Some countries, e.g. Panama, allow for redomiciliation of foreign corporations regardless of provisions in this respect in the country of origin. However, if you plan to move your company to another jurisdiction, make sure in advance that laws of both jurisdictions provide for redomiciliation, or that your new jurisdiction of choice accepts foreign companies unilaterally.

Mergers and Acquisitions

Another way is to incorporate a new legal entity in a desired jurisdiction and then apply to arrangement and reconstructions instruments, such as:

• A merger or consolidation of both offshore companies with the new company surviving or the consolidated company remaining under the new jurisdiction;
• A separation of two or more businesses carried on by the first company;
• Other ways of reorganization and reconstruction of business through mergers and acquisitions, or a combination of those specified above.

Besides, you can undertake a simple sale of business to a new offshore company where possible, and after that the first company can be dissolved, voluntarily or administratively at your choice.

Before the transfer of assets and rights is finalized, make sure to keep both companies in good legal status all the time. This advice might seem unnecessary, but from our experience, it’s never extra. Many clients get too relaxed dealing with tax haven companies not subject to any financial reporting and simply forget to pay annual renewal fees in time.

Read more articles on Offshore Advisor.

• Why to Incorporate in Dominica
• Are You Happy with Your Registered Agent?
• How to Choose the Right Offshore Bank for Your Account
• Anti-Avoidance Regulations: Continued
• Dominica - One of the Best Choices for Economic Citizenship

The current world financial crisis having started with the United States and spread to other countries will continue developing in 2009 to probably involve every country in the world. It will touch everybody to this or that extent.

However, the financial crisis is not the worst thing by itself. Stronger economies have chances to get recovered quite soon, in a year or so. But countries having the world financial crisis overlapping their own national economic difficulties already existed years before that, might have the worst times ahead.

Insolvency, bankruptcies in the countries’ key industries, unemployment and permanent drop in the living standards are the reasons why the governments may undertake emergency stabilization measures, such as nationalization of private property, imposition of taxes on wealth, introduction of foreign exchange control regime and so on. Very unpopular measures, but there are historic precedents of them, including in the USA and in many other first world countries, so they are very real ones.

Each person might have its own set of reasons for keeping money offshore, but obviously no one would like to get all his funds locked in a country, or even seized, one day.

There are more than 70 offshore jurisdictions, with low or no tax, no bureaucracy, no foreign exchange control, having stable political regime. Most of them broadly specialize in financial, corporate and administrative services promoting them as the key industries, which is another guarantee of stability and the reason to go for an offshore place rather than your home jurisdiction. Financial problems touch every country but to a different extent. There are “safety islands” at your choice.

Incorporate your company, corporation, LLC or trust offshore, open a bank account and deposit your funds with an offshore bank. You can transfer your title to different assets to the company. This will technically separate your money from yourself, to keep them in a safer place. Besides that, you will get access to a comprehensive choice of foreign currencies and other saving instruments (precious metals etc.) to create your own savings portfolio fighting with inflation.

Due to liberal legislation and well-established procedures, registration agents and banks in most low-tax jurisdictions do not require your personal presence. You can easily set-up a company and open a bank account staying at home, with no need to travel. You can operate your funds from your home computer using secure internet-banking systems. All major debit and credit cards are available to cash the money through ATMs in nearly any country in the world.

These steps are easy and affordable to many. Depending on the choice of jurisdiction where to set-up a company and open a bank account, the total first year expenses may limit with mere US$ 900. And your timely action is of importance to make these measures efficient.

Read more articles on Offshore Advisor.

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• Why Would Somebody Need a Second Passport
• 10 Most Common Myths About Offshore Banking

Generally, there are two main principles that may define a tax residence of your offshore company: place of incorporation and source of income.

Place of Incorporation

Most countries charge their residents, be it an individual or a legal entity, to tax on their worldwide income. A number of countries, such as Panama, Hong Kong, BVI, have a territorial principle of taxation, meaning that only a domestic sourced income is charged to tax. And there are a vast number of so-called pure tax haven countries that provide for incorporation of companies exempt of taxation: international business companies, non-resident companies, offshore companies etc. The main principle a tax haven country follows is granting a company tax-free status in exchange for restriction to trade on its territory.

So, indeed your offshore company may not be taxable at the place of incorporation. But it might be taxed at the source of income.

Source of Income

Many highly developed countries have adopted similar legislation in this regard.
Normally, for an offshore company, i.e. a foreign company, to be recognized as a tax resident in a high-tax country two main requirements are to be met:

• the company carries on business on the territory of the country, and
• the central management and control of the company is located in the country (CM&C), or the voting power is controlled by shareholders who are residents of the country.

Generally, the company is to meet both requirements. The mere fact of carrying on a business in the country is not sufficient to make the company liable to tax in that country.  If no business is carried on in the country, there is no need to go further and check whether its CM&C is located in the same country.

On the other hand, depending on circumstances, merely meeting the second requirement, the CM&C location, may lead to qualification of the company as a tax resident. There is also a concept of specific business activities inferring that place of business of the company is where its management is located. For example, in such business as investments in property or shares to generate rental or dividend income, acts of control and management are acts for carrying on business.

Central Management & Control

One or a scope of the following can evidence the location of CM&C of an offshore company:

• residence of the majority of its board of directors
• place of the majority of meetings of the board of directors
• residence of controlling shareholders, in cases where the company’s board is not in fact a strategic decision maker
• residence of “shadow directors”, or real directors, managing the company’s business, if the company’s board is recognized as nominee people with no power to control
• residence of another persons holding general power of attorney and acting on behalf of the company
• existence and residence of a parent company with substantial controlling powers over its offshore subsidiary
• etc.

Generally speaking, it is about who is the high-level decision maker and where he resides when he makes decisions. Having authority to make high-level decisions does not automatically make a person the CM&C of the company. Most countries’ regulations require the exercise of such power or authority to a substantial degree.

If your company is recognized as a tax resident in the country where it carries on business, it is subject to tax on all income from sources in this country.

Double Taxation Treaties

It might happen that a company is recognized as a tax resident in more than one country. This can lead to double taxation of its profit, say, in the country of the profits’ origin and at home upon repatriation of the profits. Many countries with close taxation systems have concluded agreements on prevention of double taxation of their residents. They are often known as Double Tax Treaties (DTT). Most treaties contain a tie-breaking provision for dual residents, allowing them to pay taxes once, at home, unless they received the profit through a permanent establishment in another country.
Another benefit of using a DTT is lower withholding tax rates on dividends, interests and royalties received from the other country, which otherwise would in most cases be substantially higher.

In practice, this is not the case of offshore companies incorporated in most low-tax jurisdictions. “Pure” tax havens cannot provide their exempt companies with protection by a DTT with high-tax countries; there are no such agreements in place. Very few low-tax countries and territories, like Cyprus or Labuan (Malaysia), have a substantial DTT network with high-tax countries that can be beneficial under certain circumstances. In any way, a DTT can reduce a tax burden, but not exempt your offshore company from taxation.

CFC Attributed Income

Even if your offshore company is not paying taxes anywhere, it might happen that you are to pay tax on its profit yourself. Many developed countries have in place controlled foreign companies (CFC) regulations to prevent deferral of income repatriation and payment of taxes. If you have interest in such legal entity, a part of its profit as per your interest share may be attributed to you as your personal income, even if no formal dividends were ever distributed to you.

Tax Residence

It is also appropriate to mention that very few tax havens offer exempt or low-tax regime to resident companies, as opposed to those non-resident ones mentioned above (international business companies, non-resident companies, offshore companies).

In some business, you may successfully use a properly structured non-resident tax-exempt company, dealing worldwide and paying taxes nowhere. But in some circumstances it might be very important for a company to have a certain and transparent tax residence.

Read more articles on Offshore Advisor.

• Nominee Director as an Extra Layer of Privacy and Protection
• Labuan - Good Option as a Low-Profile Offshore Jurisdiction
• UK Tax Haven Legislation
• Why to Incorporate in Dominica
• Capital Gains Tax Exemption for Non-Resident Traders in the U.S.

Offshore IP Holding Company

Intellectual property, like computer software, technical knowledge, patents, trademarks or copyrights, can be held in a jurisdiction with a lower or zero worldwide income tax rates. You can incorporate an offshore company, then transfer it the title to intellectual property with the right to sub-license and further exploit it in other countries. This offshore intellectual property (IP) holding company will receive franchise fees and royalty payments from the franchisees or licensees, including from the associated companies, and accumulate income in a low-tax area.

Royalty payments are often subject to withholding tax in the country of origin. And most probably will be taxed again in the country of domicile. To mitigate double taxation it is recommended to incorporate an IP holding company in a country with a substantial double tax treaty network, like Cyprus, Gibraltar, Ireland, Luxembourg, Malta, The Netherlands Antilles and some others.

By including more offshore entities in the scheme, to merely separate IP holding and royalty collection processes, it is possible to bring the effective tax rate nearly to zero.

Just like that, many advisors propose more or less sophisticated offshore schemes attractive on the face of it, however, missing the key point of how to implement it all in practice. To develop and employ a reliable business structure the IP planning is to be more insightful.

Tax authorities in high-tax countries always pay much attention to IP transactions involving offshore jurisdictions, especially with the associated companies. It’s quite obvious that the main intention of such offshore business is to save on taxes. To make it all legally is vital indeed.

Transfer of Intellectual Property Offshore

While being in the process of creation of a new piece of intellectual property, it might be more prudent to involve an offshore company as a foreign partner or financial sponsor at this stage. Participation in development would entitle it to register as the owner or co-owner of the property.

If you involve an offshore company later, you have to sell or assign the title to the property to the offshore company, and this kind of transactions triggers the transfer-pricing regulations. The latter require a fair market price deal as if no associated parties were involved. Consequently, in most cases you will have to pay capital gains tax.

Management of Intellectual Property Held Offshore

If you put your intellectual property offshore, you cannot continue using it as if nothing changed. The IP holding company is supposed to become a virtually independent business entity making a balance of its economic interests, internationally accepted business customs and requirements of the law.

The associated companies are to pay royalties on the arm’s length principle. Charging excess royalties in favor of a low-taxed company is a sign of uncovered expatriation of profits earned in a country with high taxes. Charging under-market or zero royalties from low-taxed foreign affiliates might be easily qualified as illegal reducing the local tax base in a high-tax country.

To develop and implement a really working intellectual property strategy covering tax efficient ownership, management and exploitation, you have to plan it carefully, in advance and with assistance of professionals.

Read more articles on Offshore Advisor.

• European Holding Companies: Denmark
• Why to Incorporate in Dominica
• Tax Residence of Offshore Companies
• Why a Private Investor May Need an Offshore Company
• Labuan - Good Option as a Low-Profile Offshore Jurisdiction

We don’t speak about good and bad providers. We speak about what you should pay attention to before engage in business relations with your registered agent for incorporation of an offshore company and what to do if one day you realize that you are not happy with your choice.

The Internet is speckling with online incorporation services and all of them are so welcoming. You are tempted to arrange your business as soon as possible and can miss very significant details. This, in fact, may lead you to unnecessary headache in the future. Make sure you read below notes and apply them in practice.

Incorporation and First Year Fees

You established a contact with an agent ready to incorporate your company. Check carefully what is included in the first year fees invoice. Even if they call it “all-included”, some items you may need can be omitted. This is often the case of a company seal or a set of documents legalized with Apostille. And vice versa, items like nominee or business office service, you may not need them at all.

Bank Accounts

Pay attention that what many providers offer as “bank accounts” is only bank introduction service. That means, first, they do not guarantee opening of the account, second, you are to make quite a lot yourself to get the account opened. This is normal practice, though. You are just to be aware of this. No one, even the bank itself, can guarantee the account opening with no issues. Besides, as you are the beneficiary to the funds on this account in the future, you better be in control of this strictly confidential issue from the very beginning.

Nominee Director

Probably you know what is the main purpose of nominee director service. However, did you have a chance to think over what you really expect from your nominee director? Have in mind that nominee director service offered by default is absolutely nominee. The person, corporate body or individual, is merely giving his/her/its name as the director of the company. This normally does not cost much. But any real act of administration by the director is charged on a time-rate basis. And what’s more important not every director is able to provide any administration service at all. If you have specific requirements to what the director is to be able to do, ask about it in advance and in as many details as you can.

Bearer Shares

Some jurisdictions still allow for bearer shares option. On the face of it the latter seems to be a good one for the purposes of confidentiality. However, you should be aware that many of such jurisdictions require immobilization of bearer shares, i.e. they are to be kept by an authorized agent. In practice you will receive only a notarized copy of it. It also means that you are not able to transfer the shares anonymously as probably was desired. Besides, even if you have got your original bearer share certificate in hands, as soon as you approach any respectable banker to open an account, most probably you will be requested to deposit your bearer share certificate with the bank. In this regard, a nominee shareholder option might appear to be more reasonable.

Nominee Shareholder

Should you be looking for more confidentiality, you are offered a nominee shareholder service. This instrument proved to be rather reliable in years. Many providers offer it free upon incorporation and then during the lifetime of the company. But if you don’t take it upon incorporation and decide to switch to the nominee shareholder sometime later the charges can be quite substantial.

Annual Fees

Whether you have dealt with that before or not, you should know that any legal entity needs ongoing maintenance in terms of reporting and paying fees and taxes. It is normally done once a year. Some offshore jurisdictions do not require financial reporting and get by with a flat governmental fee; others want the company to provide audited accounts. Anyway, once a year, either on anniversary basis or following the calendar year, you will be receiving annual renewal reminder notes from your registered agent. If you didn’t get the proper information on how much you are to pay the figures in the invoice amount might appear to be a surprise. Many providers conduct a policy to incorporate cheaply but charge expensive annual fees. Many clients having received shocking invoices for annual services that they cannot sustain or never planned in their budgets, they are just simply lost in what to do next.

Below are some tips how to reduce your annual renewal invoice.

• Check the items included in the invoice, whether you need some of them at all. In most jurisdictions the required minimum is the annual governmental fee and report filing, registered office/agent service. Add accounting and audit fees where reporting is required. But that is it. Anything else is optional: nominee director/shareholder service, business office facilities, phone answering, fax/mail/email forwarding, virtual office facilities. If you don’t really need them, make the according changes with the registered agent to adjust the invoice amount.
• Another option is that you can change your registered agent for your company within the same jurisdiction. This is a requirement of the law to have a licensed registered agent in that jurisdiction providing a registered office service for your company, but there are many licensed companies that might offer you better prices. The procedure to file changes is normally very simple, but it is important to take care about this in advance, before the renewal fees are due. Request your annual renewal invoice and take a decision whether you would like to go on with your current agent. With a new agent the only real change for the company’s business is the new registered office address.
• Besides that, you can change the jurisdiction itself. In fact some jurisdictions are generally more expensive in maintenance than others. But luckily, most of them recognize change of domicile. If you realized that your current jurisdiction is really expensive and the nature of your business is not really particular about it, go ahead and choose something more suitable. The process of re-domiciliation is generally simple, but, again, you have to think about it in advance, as certain formalities are to be done in the current jurisdiction before the renewal date comes.

Read more articles on Offshore Advisor.

• Nominee Director as an Extra Layer of Privacy and Protection
• Why to Incorporate in Dominica
• Change of Offshore Company’s Domicile
• Why a Private Investor May Need an Offshore Company
• Capital Gains Tax Exemption for Non-Resident Traders in the U.S.

Facts to Know About Second Citizenship

There are only three official economic citizenship programs in the world today. Those are being offered by the Commonwealth of Dominica (not the Dominican Republic), St.Kitts & Nevis and Austria, and require contribution of at least US$ 75,000 in case of Dominica and millions of dollars in case of Austria. They also call it citizenship-by-investment programs.

Countries like Belize, Grenada, Panama and some others that offered the same a while ago have already stopped their programs.

There are still very few countries where you can opt for a so called fast-track naturalization program. And there are countries that indeed support a kind of instant citizenship programs granting a citizen’s status to foreigners on a case-to-case basis in exchange for a certain contribution to the country’s economy. However, they do not advertise nor legalize it as a governmental program. It’s not necessarily a stop-light for you, but you should be aware of the other side of it. Programs that are not put in the form of a law are vulnerable. After the government or particular high-ranking officials are gone their policy and activities might be revised and admitted illegal. As a result the entire series of issued passports might be cancelled. The history knows such cases.

The non-official nature of such policy is also another reason why so many fraudulent websites still exist and thrive. You never know whether you deal with the “right” person. We would like you to be aware of the signs that might mean the company offering you its services is a scam.

Bad Signs to Beware Of

• Too cheap offers. More or less reasonable prices for legal citizenship and passport start from US$ 30,000 for one of the Central or South American countries. Even if you received your long-awaited passport purchased for 5,000-15,000 US$ sooner or later you will meet the trouble. Most probably crossing the first boundary. An ordinary interview can find you out to have no relations with the country having issued the passport. A little check and the passport might appear to be “non-existent” or, even worse, blacklisted by Interpol. The official economic citizenship programs will secure you from having such kind of problems.
• Too quick passport programs. No matter what, but a real citizenship cannot be obtained within 7-15 days. You should count for at least a month, and in very rare occasions for a shorter term. Again, we’re speaking about those “non-official” programs here.
• No need to travel. Be especially careful here. The only official program that does not require a personal visit is the one of St.Kitts and Nevis, which is due to a really thorough due diligence check. In this case your documents will really be shipped to you by a courier mail. Another exception is within the program of Dominica with its option to arrange a meeting with the Dominica authorized official person in your country for an extra fee. But that’s it. Every other no-need-to-travel program is a fake.
• Citizenship for anyone. Hardly possible to be true. There are always restrictions. Even with the official programs having no explicit limitations there is no guarantee of approved application from, for example, citizens of Pakistan, Iraq, Afghanistan and some other countries.
• Citizenship through marriage or adoption. This one will most probably fail, unless you’re amazingly lucky and prepared for big risk. If you want to obtain citizenship through marriage, there will be an interview. Simple but unexpected questions, for example about your family life. Your and your wife’s answers will be compared and you’ll fail. Citizenship through adoption is another risk and may occasionally work if you’re under 21.
• Diplomatic passports. Be wary of companies offering diplomatic passports, especially in many countries. Diplomatic passports require visas involving both countries’ governments and specific information to be provided, like the official reason for the trip etc. Which government wants this kind of trouble ladling out its diplomatic passports for a rather insignificant compensation?
• Non-existing citizenship programs. Some websites still offer their assistance in obtaining citizenship through official citizenship programs in Grenada, Belize, Panama, etc. The only problem is that, as we mentioned above, those economic citizenship programs have been officially terminated years ago.

Do Your Own Due Diligence

We would recommend you to always deal only with licensed agents and law firms in the country where you wish to get a citizenship. If you’ve got dealing with an intermediary make it sure to get through to the source. If possible have a lawyer to travel with you and check every step you do.

Do your own due diligence check to sift out obvious scam before proceeding. Talk to them by phone. Arrange a meeting if possible. Search for the company’s name or website in Google, add “scam” or “fraud” at the end of the query. Check the website’s history in archive.org: was it totally different in the past or is there any history at all? Try to get second opinion from authoritative sources engaged in this area, not ordinary people on forums who will tell you that it’s absolutely impossible to buy citizenship.

The good news is that most of the existing scam websites have already built their reputation. People don’t just sit quietly - sooner or later scammers get unmasked by fraud alerts on forums, blogs or even specially created websites like this one. We use all available information, including our own experience and official public advisories of the ministries of different countries to create a list of companies presented below.

Some of them are 100% fraudulent, some offer no longer existing citizenship programs along with the twice higher prices for the existing ones, some appear on the list of public advisories as not authorized to deal with citizenship, some try to sell documents that lead people to troubles once used or appear useless at best and received a good portion of negative feedback from their customers. Should you come for our advice, below are the companies that we do not recommend you to deal with.

Second Citizenship Providers Blacklist

1. South American Citizenship Program (www.gosacp.com)
2. Shustak Morris & Heller Inc. (www.new-citizenship.com)
3. Gerald Associates (www.geraldassociates.com)
4. Goldstein Associate (www.goldsteinassociate.com)
5. Greenway (www.valeho.com)
6. P&L Group Inc. (www.plgroup-eu.com)
7. Ashbridge Consulting Limited (www.ashbridge-consulting.com)
8. Goldstein Associates (www.goldstein-lawyers.com)
9. Right Way (www.right-way.net)
10. Coldwell Diplomatic Consultants (www.diplomaticsecondpassports.com)
11. Viza.cc (www.viza.cc)
12. D & T Group (www.second-passport-citizenship.com)
13. First Business Group (www.firstbusinessgroup.com)
14. EuroHome (www.euhome.info)
15. Immigration Club (www.immigration-club.info)
16. KLP Trade Company (www.europassport.org)
17. General Council of Diplomacy (www.generalcouncil.info)

Last update: Dec 28 2008.

We’re going to keep this list updated. Your comments and new information are very welcome. If you have any evidence of fraud as to the second citizenship, please let us know and we will put it on the list.

Should you require assistance with official citizenship programs, contact us, we will be glad to help.

Read more articles on Offshore Advisor.

• How to Easily Obtain Instant Alternative Citizenship
• How to Legally Obtain a Second Citizenship
• Dominica - One of the Best Choices for Economic Citizenship
• Why Would Somebody Need a Second Passport
• Economic Citizenship Comparison: Dominica, St.Kitts & Nevis, Austria

UK introduced its Controlled Foreign Companies Regulations in 1984. Part XVII of Chapter IV ICTA 1988 charges UK resident companies to tax in respect of the income of certain controlled foreign companies in which they have interest. It targets mainly UK companies having foreign subsidiaries in low-tax areas, who do not wish to repatriate any profits on a regular basis thus trying to save on the UK tax liability. It is also known as Haven Legislation or Tax Haven Legislation.

It’s being constantly developed and updated and is rather complex. The latter is due to the fact that the right of the government to levy taxes is restricted to the worldwide income of local entities, incorporated and/or resident under its jurisdiction, and/or local source income of foreign entities.

Status of Controlled Foreign Company

A company is recognized to be a Controlled Foreign Company (CFC) for the purposes of the Haven Legislation if it is residing outside the United Kingdom, but controlled by persons resident in the United Kingdom (individuals or companies), and subject to a lower level of taxation in its territory of residence.

Meaning of “control” is well established and “control” test is far not a mechanical one based only on shareholding and voting rights figures. It means the power of a person to arrange that business of the company is being conducted in accordance with his wishes, and finally encounters many tricks like holding through nominee people or related persons, sophisticated joint venture schemes etc.

Lower level of taxation is defined by less than 3/4 of the tax, which would be payable on the same income of a resident in the United Kingdom.

The company may not necessarily be a CFC in each accounting period. If the according test rules do not prove it to be a CFC in a given period, it is excluded from the tax charge requirements.

Tax on CFC Income

The general scheme requires a computation of the CFC profits (excluding capital gains) on the lines of Corporation Tax profits, an apportionment of those profits among shareholders or those having an interest in the CFC, and self-assessment to tax by those UK resident corporate shareholders (not individuals) that have been apportioned 25% or more of the profits. The apportioned amount is used to check if associates have a relevant interest in a controlled company, i.e. if it fits the 25% threshold. When calculating the tax due double taxation relief is given, as well as tax allowances that the UK company is entitled.

Exclusions of CFCs from Charge to Tax

Apportionment of profits is not due if during the accounting period in question the company satisfies one of the statutory exclusions. The Treasury, however, reserves the right to designate any jurisdiction as having a specific status, when any CFC from such jurisdiction would automatically fall within the requirement to apportion profits and charge to tax accordingly.

Other than that the exclusions are as follows.

• Excluded countries regulations. If a company is resident in a territory listed in the list of excluded countries and satisfies the income and gains requirement if falls within the excluded countries exemption. “Income and gains requirement” states that at least 90% of the company’s profits should be from local sources.
• Acceptable distribution policy (ADP). If a CFC pays out dividends of 90% or more of the net chargeable profits to its UK resident associates within 18 months of the end of the accounting period, it may fall within the ADP exemption. There are certain rules to be observed in computation of profits for the further distribution of dividends.
• The exempt activities exemption. To meet the exempt activities test a CFC must have a business establishment in the territory of residence, with its business effectively managed in there, and with its main business at NO time consisting of certain defined activities (e.g. investment business, dealing in goods to/from associated persons and some more.
• Public quotation condition. A CFC trading its shares on a recognized stock exchange and having 35% of its shares hold by the public falls within this exemption category. There’s only one limitation that voting power of principal members should not exceed 85%.
• De minimis exclusion. If CFC’s chargeable profits are £50,000 or less in the accounting period in question it meets de minimis exclusion test.
• Motive test. A CFC can satisfy the motive test if it shows that by means of transferring transactions into another jurisdiction it achieved an insignificant reduction in the UK tax or it was not the main purpose nor the main reason to get a tax reduction.

Practical Notes

To define whether a foreign subsidiary is a CFC the total interest of both corporate and individual UK resident shareholders of this company is counted, but apportionment of the profits is required only to those corporate shareholders (not individual) having at least 25% of interest. In practice this is mostly the case of the foreign subsidiaries wholly owned by the UK resident companies.

International holding companies experience difficulties to meet any of charge exemption tests.

Sources

• International Manual: INTM200000 - Controlled Foreign Companies
• International Tax Handbook: ITHCONT14 - The Haven Legislation

Read more articles on Offshore Advisor.

• European Holding Companies: UK
• European Holding Companies: Denmark
• Tax Residence of Offshore Companies
• Lower Your Taxes with International Tax Planning
• Anti-Avoidance Regulations: Continued

That is why each country develops and implements anti-avoidance measures, both on national and international levels. Anti-avoidance rules may equally refer to tax exempt and low-tax companies from tax havens as well as companies incorporated in developed countries with high taxation.

Tax Treaties

Many countries conclude tax treaties on a bilateral basis to prevent double taxation of their citizens on the same income (profit, capital gain, inheritance etc). Such tax treaties are also known as double taxation agreements (DTA) and double tax treaties (DTT). Tax treaties provide mechanisms for tax authorities to exchange tax information between each other to prevent both double taxation and tax avoidance or evasion.

Exchange of Tax Information

Besides double tax treaties there also exist bilateral Tax Information Exchange Agreements (TIEA). The purpose of TIEA is to facilitate access by the tax authorities of one country to business and tax records, books and accounts, information from banks, as well as shareholding and beneficial ownership details in the other country, and thus make it easier to detect and prevent avoidance of tax.

Many of such agreements have been signed between tax havens and highly developed countries. Obviously in most cases the information is flowing one end only, as tax havens hardly need to inquire any information from tax authorities of the other party to the treaty.

Controlled Foreign Corporations

Controlled Foreign Corporation (CFC) is generally a corporation incorporated and existing under the laws of one country, but owned and controlled by a taxpayer of the other country. The control test normally requires 50% of stock value or voting rights holding. The qualifying CFC-company is subject to joint taxation with shareholders at the shareholders’ home tax authorities. In practice that means implementation of so called anti-deferral regime, when the shareholder is treated as receiving its share of the CFC-company income on a current basis even if the company does not make any distributions to its shareholders.

In some countries CFC regulations are less broad. Thus in Denmark CFC rules apply only to a foreign subsidiary being a low taxed financial company. The latter is defined by 50% share of financial income and 10% share of financial assets in total income and assets accordingly, and 3/4 income tax ratio comparing to the Danish tax.

Japan has a similar anti-deferral regime for so called “tax haven subsidiary”, which is any foreign subsidiary paying income tax at a rate less than 25%.

Transfer Pricing

Transfer pricing refers mainly to setting the prices for goods and services transferred between the related parties, such as “parent-subsidiary” or “brother-sister” companies. Transfer Pricing Manipulation (TPM) is a matter of particular importance for tax authorities when it comes to international transactions, as managers tend to use TPM to shift the income from a high-taxed jurisdiction to a low-tax area. Tax administration in its turn requires the transfer prices to be set basing on an arm’s length principle and that the appropriate contemporaneous documentation be provided to prove the prices are market-based.

Thin Capitalization

Thin capitalization regulations mainly touch companies with foreign parent corporation, which are consequently not free in their capital structure choice. The company is considered to be thin capitalized when it’s capital is made up by loans from shareholders rather than stock investment and its debt-equity ratio exceeds certain thresholds. It is widespread to impose limitations or deny interest deductions on inter-company debt for thin capitalized companies.

Flow-Through Entity Regulations

This definition mostly refers to foreign parent-subsidiary companies relations. Any company, which is not the final beneficiary of the distributed dividends and acts solely as an administrator to provide a tax-free link between two other jurisdictions, can be recognized as a “flow-through entity” (FTT). Whereas such or similar regulations exist any dividends received from or being distributed to a foreign flow-through entity are subject to taxation in that country, i.e. regular tax exemption provided by a holding company status will not work here.

Withholding Tax on Payments to Tax Haven Residents

A number of countries with high taxation do not provide for other anti-avoidance measures, but introduce a high rate withholding tax on income received from their source by residents of low tax jurisdictions. It may refer to a particular type of income (e.g. interests in Brazil) or any payments in favor of such legal entities in general. Withholding function is normally levied on a paying source. As to what jurisdictions are considered low tax, certain countries maintain specific “black lists” naming each and every jurisdiction believed to be a tax haven. Many countries instead have a certain rule to define a low tax country, for example it may be any country with effective corporate tax rate of less than, say, 20% or 25%, or less than 3/4 of their own tax, etc.

The above list is not restrictive but a good start for a preliminary analysis.

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Federal Territory of Labuan is part of Malaysia, with the Prime Minister’s Department responsible for its administration. Official language is Bahasa (Malaysia), but English is widely spoken. Official currency is Malaysian Ringgit, though offshore companies are normally prohibited to make transactions in local currency.

In November 1989 Labuan was declared an International Offshore Financial Center and in October 1990 first offshore companies laws were enacted. Labuan Offshore Financial Services Authority (LOFSA) is responsible for administration of the offshore industry in Labuan.

Tax Benefits of Labuan Offshore Companies

Labuan Offshore Company (LOC) incorporated and registered under Offshore Companies Act of 1990 and the Labuan Offshore Business Activity Tax Act of 1990 are allowed to carry on any lawful business in, from and through Labuan, except with residents of Malaysia. To conduct business such as banking, insurance, fund management, leasing, factoring and company management offshore companies need to obtain a special license. They are prohibited to involve in shipping operations in Malaysia.

Offshore companies enjoy a special taxation treatment comparing to other Malaysian companies. There are two types of activity that define a tax regime of an offshore company: trading and non-trading. Non-trading companies, such as those holding equities or involved in other investment activities, are tax-exempt.

Trading companies are subject to taxation. They may pay a flat fee of RM 20,000 per annum or elect to pay a 3% income tax to the Inland Revenue Department. The company is allowed to choose the lowest amount to its own advantage. It may also choose to pay the same amount flat fee as its annual registration fee to the Registrar of Companies instead of Inland Revenue Department. In this case the company is not required to appoint an auditor and file financial statements.

Holding and Investment Companies in Labuan

Labuan offshore companies are commonly used for investment purposes, in particular to China, Korea and Indonesia. It is also known as good vehicle for cross border investments from Europe into Asia.

Generally, if a Labuan offshore company invests in a high tax country it might be tax efficient in case there is a concessionary double tax treaty in place.

Holding companies incorporated in Labuan can be tax beneficial under the same condition. They also proved to be a good vehicle for avoidance of the inheritance tax, capital gains tax, ease of sale of the property by means of transferring the company’s shares rather than its property.

Labuan Insurance and Captive Insurance Companies

The Offshore Insurance Act 1990 (OIA) provides for establishment and licensing of a wide range of insurance activities including captive insurance, direct insurance (life/general/composite), offshore reinsurance, insurance manager, underwriting manager and insurance broker.

Labuan also intensively develops its captive insurance opportunities. A protected cell company (PCC) structure was recently adopted and endorsed. Set-up costs are nearly twice lower than those of similar offers by most of jurisdictions competing for captive insurance market.

Offshore Trusts in Labuan

Labuan Offshore Trusts are being governed by the Labuan Offshore Trusts Act 1996. Any offshore trust validly created in Labuan or abroad may be registered with LOFSA. Offshore trust entity set-up in Labuan provides for the whole range of tax and non-tax advantages from using offshore trust structures, including saving on inheritance tax, avoidance of probate, continuity of the trust structure over the settlor’s death, general asset protection from creditors and spendthrifts.

Labuan Double Tax Treaties

Malaysia has signed more than 60 double tax treaties. Many of them have tax sparing provisions when dividends paid from profits tax exempt in Labuan are deemed to be payed from the profits subject to taxation in Malaysia. This allows the beneficiary to claim tax credit at home.

Many of the treaties have been signed before the offshore legislation in Labuan was enacted, which means that Labuan companies may enjoy same tax treatment as traditional Malaysian companies within the frames of such double tax treaties. A number of countries though have their own domestic anti-avoidance regulations that do not allow Labuan offshore companies benefit from the treaty.

Generally, it is assumed that those Labuan offshore companies that are paying 3% tax on audited profits should be considered tax residents of Malaysia. However, a professional advice from a local expert in the beneficiary’s country should be sought in each particular case.

There also exists a so-called “Malaysian Satay” structure consisting of three entities: foreign subsidiary company owned by a Malaysian company being hold it its turn by a Labuan parent company. The structure allows the Labuan offshore company to receive dividends from the foreign subsidiary through the intermediary Malaysian company finally tax-free.

Other Features

• Labuan offshore companies are subject to a separate exchange control from Malaysian companies with no limitation of movement of capital. They are allowed to conduct business operations in any currency except for the national currency Malaysian Ringgit.
• There is no capital duty and no stamp duty either, which makes transaction costs lower.
• 100% foreign ownership is permitted. The company can be formed by one or more shareholders, which can be corporate entities or an individuals, of any nationality and residence. Bearer shares or no-par value shares are not allowed.
• The company may have one or more directors appointed and there are no requirements to their nationality or residence. Board meetings may take place anywhere unless proof of residence is required. For these purposes meetings are to be held in Labuan.
• All offshore companies must employ a local trust company providing the registered address and resident secretary service. The company is also to keep its books and records at the registered office.
• Foreign companies incorporated and existing under the laws of another country may register to continue business in Labuan.

Privacy Considerations

There is no public register of directors and shareholders. Information about ownership is kept in strict confidentiality subject to the Secrecy Act provisions and cannot be revealed without High Court order. Hearings against any offshore company are held in camera.

Labuan is not the cheapest Offshore Financial Center but it has a good geographical location, developed professional and financial infrastructure, wide range of offshore services, favorable tax regime and high level of privacy. Besides, it is a low-profile, less-known jurisdiction, which contributes to the matters of privacy and makes it even a more attractive base for international business.

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There are a number of benefits available to you through a corporate offshore bank account even if you do not conduct any business activities.

Reason number one is the fact that personal bank accounts may fall under European Savings Tax Directive. The consequence is automatic exchange of information between the joined states about customers who earn savings income in one EU Member State but reside in another, or withholding tax of 20% (as of July 2008) at the source of income. If you and your bank are residents of one of the EU Member States, or UK Crown Dependencies (the Channel Islands and the Isle of Man), or UK Overseas Territories (Anguilla, BVI, Cayman Islands, Montserrat, Turks and Caicos Islands), as well as the Dependent Territories of the Netherlands (Aruba, Netherlands Antilles), and certain other non-EU countries that have voluntarily agreed to apply same or similar measures (such as Andorra, Liechtenstein, Monaco, San Marino, Switzerland, USA) this Directive may apply to you. If you use a company and hold a corporate bank account these regulations do not touch you.

You may want to keep your money in an offshore bank for purposes of increased safety and security as comparing to your home country conditions. A number of countries simply do not allow their citizens to have personal offshore accounts without special permission of an authorized state body, which in most cases is nearly impossible to obtain. You still can open a personal account offshore, because many offshore banks do not require you to provide any permission from your home authorities, but that would be definitely illegal. Instead, it might be more reasonable to incorporate an offshore company, open a corporate bank account, and use it as “a purse” for your money, keeping it within the letter of the law.

Having an account in the name of a company rather than in your own name lets you keep your offshore banking even more anonymous and confidential. It’s not that transparent how and where you spend your money and does not attract unwanted attention of a certain category of people such as con artists and blackmailers.

Your funds on the company’s bank account are legally separate from you. It’s not that easy to encumber assets of a company with your personal liabilities. Thus you build another layer of asset protection.

Certain offshore investment products that could be of interest to you may appear to be only available to corporate clients rather than individuals. This is the case when you should consider incorporation.

Transfer of shares of the company to future inheritors in many cases will allow you to mitigate inheritance tax and/or waive probate procedures.

Incorporation of an offshore legal entity involves extra expenses for set-up and account opening, as well as ongoing administration fees, at least fixed annual governmental fees with no reporting.

However, considering the wide choice of offshore jurisdictions and competition between them, you can always find a cost-effective solution to fit your case.

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