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International Tax Counseling
International Tax Advice
International Tax Planning
Offshore Company setup
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International Tax Counseling
What is international tax planning?
International tax planning is a set of legal strategies with the purpose to optimize tax efficiency and miniminze tax liability. This is achived through varius methods, including, but not limited to, Tax Residency, Base Erosion and Profit Shifting, Transfer Pricing, Tax Treaties, Offshore Companies, Intellectual Property, Holding Companies, and much more.
Some concepts and elements involved in international tax planning include:
Information Sharing Agreements.
Economic Substance Requirements
Corporate and Individual Tax Residency
Being a tax resident of a certain country means you will be treated as such pursuant to that jurisdiction's tax code. Being a tax resident does not mean you will be subject to tax, just as being a non tax resident does not mean you will be subject to taxes. Tax residency will determine how an income is treated in that jurisdictions, and this vary from jurisdictions to jurisdictions, and type of income.
For example, if you, as an individual or company, are non US tax resident, and you receive payments from a client in the USA, the type of income will determine if the income is subject to withholding tax or not. I.e. if you, as a non tax resident, receive payments from providiving professional services to US clients while physically outside of the US, this income will not be subject to withholding tax, but if the income concept is royalties, or capital gains, this income might be subject to income tax at a 30% withholding tax rate (which can be decreased if there is a tax treaty).
In contrast, Being a tax resident does not automatically mean that you will be subject to taxation. For instance, if you have your residency in tax haven or are incorporated in tax havens, you might not be subject to income tax.
Being a tax resident does not mean you are a resident for immigration purposes as you can be a tax resident but not legally a resident of that jurisdiction.
Naturally, the rules to determine if an Individual is a tax resident will vary from the rules to determine if a company is a tax resident.
Corporate Tax Residency
For companies, tax residency is generally determined based on the country of incorporation or the country where management decisions are made and annual meetings are held. In some cases, a company can be considered a tax resident in multiple jurisdictions simultaneously if different countries have different criteria, such as considering residency based on country of incorporation or place of management.
A company can also be deemed a tax resident in another jurisdiction if it has a permanent establishment (PE) or if it has representatives who sign contracts on its behalf in that jurisdiction. The specifics and ways to avoid tax residency will be outlined in the tax code of each jurisdiction. It's important to note that tax laws can be complex and extensive, so this is just a brief overview and guidance to help understand the topic.
Natural Person Tax Residency
From an individual's perspective, tax residency can be determined based on nationality (especially for citizens in countries with a worldwide tax system) or the amount of time spent in a particular territory. Generally, spending 180 days or more in a jurisdiction during a calendar year would make you a tax resident there.
It's important to consult the specific tax laws and regulations of each jurisdiction and seek professional advice to understand the complete implications and optimize tax planning accordingly.
Economic Substance Requirement
Economic Substance Requirements must be taken into consideration, even if the company is taxed at a 0%, 10%, or even if you don’t want to benefit from the tax treaty network.
Economic Substance Requirements are imposed on companies engaged in certain activities, basically to avoid forming a company in a jurisdiction just for the purpose of taking advantage of its tax system.
This also aims to avoid profit shifting.
It is important to note that Economic Substance Requirements do not apply to all businesses. For the Economic Substance Requirements, the company has to meet two conditions:
1. Be a Tax Resident in that jurisdiction.
2. Be engaged in relevant activities.
If a Company is a tax resident in that jurisdiction, to know if the Economic Substance Requirements would apply is to know if the entity is engaged in Relevant activities. If the company is not a tax resident because, for example, has it its place of management somewhere else, Economic Substance Requirements would not apply even if it is engaged in Relevant activities.
In general, Relevant Activities, most of the time, are:
· Banking business
· Insurance business
· Fund management business
· Finance and leasing business
· Headquarters business
· Shipping business
· Holding business (pure equity holding entities) – Intellectual property (IP) business
· Distribution and service centre business (this includes providing services to related companies)
Of course, each jurisdiction will have its own list of Relevant Activities, and what is comprised in each one of them.
These are, most of the time, to have presence and substance, in that jurisdiction, this includes having adequate office spaces, employees, minimum yearly expenditure, etc.
The list requirement will also depend on the specific relevant activity.
In general, you get taxed on your net income. Your net income is your gross income minus your costs and expenses. What results from this is your tax base to what the tax percentage will be applied on. Base erosion is lowering your net income by increasing your expenses, using profit shifting strategies.t.
Profit shifting is moving your income from Company A located in Territory A to Company B located in Territory B. Territory B is a no tax or low tax jurisdiction, so in the end, reporting the income in Territory B will result in less taxes, while in territory A you will report as less net income as possible, and if possible you could even report your tax statement as having losses. Profit shifting is linked to base erosion
Intellectual Property, like royalties or license payments, is one of the most commonly used methods to shift profit from one jurisdiction to another since it is hard for tax authorities to put a price on your intellectual property (IP), and also because they are easier to justify. When I say put a price on your IP, for tax purposes it would be hard for you to claim that you bought an iPhone for ten thousand dollars, the tax authority will value such expense (buying the cellphone) at a fair market value; on the other hand, it is harder for them to put a fair market value on your intellectual property (trading mark, logo, patent, copyright, etc.).
As a general rule, the Company incorporated in a low tax jurisdiction owns the Intellectual Property and grants a Use License to the trading company in the high tax jurisdiction. The Company in the high tax jurisdiction will send its profits to the Offshore company as an expense and deduct it from its gross income.
If you obtain 1,000,000 USD in net profits in Country A, you will be taxed at a rate of 30% for income tax (because income tax generally is a progressive tax) on that 1M. To reduce this tax bill, you send this profit to the Offshore Company where it will not pay taxes or pay less, but Country A may require you to withhold from that Offshore Company an amount on that Royalty payment, which is generally around 15%, sometimes even more. That is when the tax treaty comes in to avoid this withholding tax.
Also one of the most used, but probably one of the easiest ways to shift profit to an offshore jurisdiction, especially because most of the time Professional Services paid to non-residents are withholding tax free.
If you do this, you also have to keep an eye on economic substance requirements on the offshore jurisdiction, as this can be considered a relevant activity as it is a service provided by the Offshore Company to a related party, hence acting as a Service Center.
Some people use some means like hiring the services of nominee shareholders of the offshore company so they are not seen as related entities and hence do not fall under the Relevant Activity concept. This can be tax evasion.
For profit shifting, you have to make sure the country where the income is going is not blacklisted in the country where you want to deduct these payments, otherwise.
Loans are widely used to reduce the tax base. The strategy consists of you grating a loan between a related party, at a high-interest rate, being then that interest payment registered as an expense for the loan grantee.
Loans are used by multinationals (a company owning a company in another jurisdiction) to transfer profits by way of interest payments because such interest in registered as an expense in the objective base erosion company.
Hybrid loans are loans that take advantage of two jurisdictions' tax code mismatch which allows the whole transaction to not be taxed for either party.
Several jurisdictions have implanted rules to regulate hybrid loans in order to reduce tax avoidance, for example setting up a maximum interest rate, related parties rules, loan maturity period, etc.
The above is just said in an easy way. In practice, some countries are implementing an OECD Plan to avoid Base Erosion, which makes it harder for companies to engage in base erosion practice. It is possible to erode the tax base, but a high knowledge of the international tax law, and the countries involved tax codes, is needed.
Withholding tax is a tax levied on payments made by a resident company to a non-resident company. For example, let’s say I have a company in Country A, which levies a 15% withholding tax. Company B, which is a tax resident and incorporated in Country B provides you a service (we could say a consultancy), or Company B grants you a Use License of an intellectual property.
Company A will have to levy 15% as withholding tax on the payment made to Company B because Company B is not a tax resident in Company A. Company A has to withhold that tax, on that income, to Company B because since Company B is not a tax resident in Country A, Company B will not make a yearly tax statement in Country A.
Have you ever wondered if you can open an offshore company, operate through this entity, and keep the money in this entity without paying taxes as you won’t pay yourself distribution/dividends (unrealized taxable event)? Answer to this can be found, most of the time, on the Controlled Foreign Company rules.
Controlled Foreign Company (CFC) Rules are legislations that require tax residents to report certain income of Companies incorporated in a jurisdiction different than the CFC Ruled jurisdiction.
The purpose of CFC rules is to combat artificial deferral of tax by using offshore low taxed entities through profit shifting strategies.
These rules vary depending on your country of tax residency, but in general they require you to report any interest or income from a company from which you hold a certain percentage of ownership. The percentage may go from 10% ownership to 50%+.
Transfer pricing rules regulate the transaction price, for tax purposes, between related parties, since related parties may easily manipulate the transaction price at their convenience. These rules are mostly regulated by the OECD Transfer Pricing Guidelines.
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