Tax haven jurisdictions have always been popular mainly because of giving ways to save on taxes. There are still many businesses when using of offshore companies is very beneficial. Apparently existing anti-avoidance rules make them merely “tax-neutral”. First world countries with high level of taxation are very unhappy with existence of tax havens and take all measures to eliminate benefits of using offshore companies by their citizens.
Double Tax Treaties
There is such an instrument as a double tax treaty (DTT). Countries that conclude this agreement mean not only to eliminate double taxation but not least of all to prevent tax avoidance. If you are eligible to use benefits of a double tax treaty you are normally subject to a lower rate withholding tax in the income source country. However, don’t forget that there is always the other side of the treaty. You still owe your home taxes that will be calculated as per national rates minus foreign tax paid credit allowed.
Therefore, if you do not repatriate incomes directly to home jurisdiction and only want them back to business it makes sense to choose a well-established offshore jurisdiction with multiple double tax treaties but having a lower level of taxation in general. Cyprus is a good example.
Transfer pricing regulations are designed to prevent attempts of multinational groups from inappropriate reduction of taxes. It involves international transactional flows between the associated enterprises located in different jurisdictions. Since the companies are related being actually the parts of one organization the transfer price appears to be controlled beyond typical market mechanism and may affect allocation of the group’s total profits outside of the source country. To prevent abuses an “arm’s length principle” is being applied to such transactions making involved companies act as if they were independent economic entities with their own interests.
Controlled Foreign Corporations
Controlled foreign corporation (CFC) is deemed to be a company incorporated in one jurisdiction with control and management vested in taxpayers located in other jurisdictions. Most countries have in place their own controlled foreign corporation regulations developed especially to prevent their citizens from using benefits of companies incorporated in low or no-tax jurisdictions. Criteria, means and ways to define whether a corporation in matter is a CFC vary from country to country. Some countries target having interests in foreign companies, others focus on “mind and management” location. It’s normally never illegal to have a controlling interest in a foreign legal entity. The main implication is that you have to report it and pay the appropriate income taxes.
Many developed countries have a practice of “blacklisting” tax havens to make it easier for local authorities to control transactions of their citizens with companies from no-tax jurisdictions. Such regulations mostly follow “non-reporting” issues. However, some countries have recently introduced such an extreme anti-avoidance measure as a substantial withholding tax on all payments in favor of legal entities located in a blacklisted country, no difference if the beneficiary of the payment is a controlled corporation or an absolutely independent business entity (Blacklisted Offshore: Private Consultant’s Opinion).
Thanks to all the above listed and some more anti-avoidance regulations it is quite difficult now to structure your international business tax-free. There are still plenty of opportunities to build a perfectly legal low-tax scheme instead.