Advantages of an Offshore Company in a Double Tax Treaty Country

In continuation of recently discussed Tax Residence and Exchange of Information topics, we would like to pay your attention to upsides of double tax treaties, say, bringing your business better international image, tax transparency, stability and unequivocal legality. Let’s look at this closer.

Tax Residence

Though it might not yet be obvious for everyone, but transparent tax residency is becoming more and more important for any company involved in international business. Striving to pay no taxes at all may be a short-sighted position. If a part of your income is currently subject to taxation, and you intend to avoid it by mere hiding behind an offshore company, this is not really wise.

An offshore company not taxable in the place of incorporation (e.g. Bahamas, BVI, Hong Kong, Belize etc.) still may be charged on tax at the source of income, and in very special circumstances it can avoid paying any tax at all. But if the company didn’t get to prove being a resident for tax purposes in the country of incorporation/assumed business residence, it will definitely be taxed in full in the country of source of income. Besides, in case the company is properly paying taxes in a non-double tax treaty country, it is risking to be charged again with the same income in a high-tax country.

Benefits of double tax treaties

Presence of a double tax treaty (DTT or DTC) provides for the following advantages:

  • double taxation relief – a tie breaking article infers dual resident companies to be considered residents solely of one of the contracting states, where the place of effective management is located;
  • if  the company has no permanent establishment in the other contracting state, its business profits sourced in that other state are secured from the source country taxation; plus its interest, royalties and unfranked dividends are subject to withholding tax at lower rates;
  • dividends to corporate shareholders in the other contracting state are normally exempt from taxation in that contracting state.

Using a double tax treaty country may be particularly beneficial in the course of financial holding and investment activities, leasing and franchising (royalty collection) and a number of other activities.

Not every DTT provides same opportunities for every company though. Professional advice is strictly recommended to allow for your particular case.

Below is the list of countries offering your company tax resident status, low rates of taxation (and thus referred to as tax havens) and a wide network of double tax agreements with high tax countries.

Cyprus DTTs: Armenia, Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hungary, India, Ireland, Italy, Kuwait, Kyrgyzstan, Lebanon, Macedonia, Malta, Mauritius, Moldova, Montenegro, Norway, Poland, Qatar (signed, not in force), Romania, Russia, San Marino, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Sweden, Syria, Tajikistan, Thailand, Turkmenistan, Ukraine, UK, Uzbekistan.

Labuan, being a part of Malaysia, enjoys Malaysian DTTs* with: Albania, Argentina, Austria, Bahrain, Bangladesh, Belgium, Canada, China, Chile, Croatia, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Jordan, Korea, Kuwait, Kyrgyzstan, Lebanon, Malta, Mauritius, Mongolia, Morocco, Myanmar, Namibia, New Zealand, Pakistan, Papua New Guinea, Philippines, Poland, Romania, Russia, Soudi Arabia, Seychelles, Singapore, South Africa, Spain, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Thailand, Turkey, UAE, USA, Uzbekistan, Vietnam.

* Six countries have expressly excluded Labuan companies carrying on offshore trading business subject to s2 (1) of LOBATA from DTT protection: Australia, Japan, Luxembourg, Netherlands, Norway, UK.

Mauritius DTTs: Barbados, Belgium, Botswana, China, Croatia, Cyprus, France, Germany, India, Italy, Kuwait, Lesotho, Luxembourg, Madagascar, Malaysia, Mozambique, Namibia, Nepal, Oman, Pakistan, Russia (signed, not in force), Rwanda, Senegal (signed, not in force), South Africa, Sri Lanka, Switzerland, Sweden, Thailand, Tunisia (signed, not in force), Uganda, UAE, UK, Zimbabwe.

To be updated.