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Trading
One of the most popular uses of companies established in low tax jurisdictions is for international trading. Where ordinarily a trading transaction takes place between two companies, goods flow directly one way and payments the other way. The country where the profit on this particular transaction is shown levies income taxes on this profit, based on the difference between the purchase prices of the goods and their eventual sales prices (and other expenses, for purpose of simplicity to be ignored in this example). A low tax company can be interposed, with the profit accumulating at the low tax company's level. In this way, taxable profits can be allocated to a low tax jurisdiction.
An exporter can use the above scheme to allocate the profit related to the exportation of goods to foreign customers to the low tax company. An importer can use it to lower taxation on profits upon the sales of imported goods in its home country.
It must be mentioned that in the above-described schemes the remunerations allocated to the low tax companies should be in line with the so-called arm’s length principle, i.e. it should be equal to what independent parties agree or would have agreed under comparable circumstances, based upon the functions performed and the risks incurred by the involved entities. Therefore, it is advisable to create as much substance as possible in terms of risks, functions, employees etc. in the low tax company. The higher this substance, the better justifiable a high allocation of profits to such company.
Cyprus and Malta are examples of jurisdictions suitable for trading activities, especially within the EU.
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