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Foreign trading companies are very popular tools in international tax planning.
1. Reasons for setting up foreign trading companies
There are various reasons for setting up foreign trading companies. A ‘non-fiscal’ reason may be credibility vis a vis local customers, making investors decide to set up local companies in the countries where they sell their goods or services. Another reason for opening such companies may be the facilitation of obtaining local banking credit and/or the opening of local bank accounts.
Fiscal reasons for setting up foreign trading companies are usually the possibility to qualify for a low corporate income tax rate (or corporate income tax exemption) for profits derived from the trading activities. Within the EU, the possibility to obtain an EU VAT number may also be an important fiscal motive for businesses to set up (low tax) trading companies in that area.
Reasons such as confidentiality, reduction of withholding taxes in a treaty country and tax sparing credits may under circumstances also, to a more or lesser extent, play a role.
2. Important characteristics for a country to be regarded as tax advantageous trading jurisdiction
A country should meet the following criteria in order to be regarded as tax efficient trading jurisdiction
it should have a low general corporate income tax rate, or, such as Malta, in spite of the high general corporate income tax rate, there should be ways (in the case of Malta; through distribution in the form of dividends of the trading profits) to mitigate the effective tax burden over such profits
in certain circumstances the availability of a double tax treaty network may be helpful for reduction of withholding tax over payments made to trading companies by customers of such companies (e.g. because of re-qualification of payments to the trading companies by foreign tax authorities, therewith subjecting them to withholding tax). Under circumstances, a low general VAT rate in the country in question (or absence of VAT) may be of importance
ideally, the country of establishment of the trading company would not have withholding taxation over dividend payments (or it should be relatively easy to circumvent such taxation)
ideally, the country of establishment of the trading company would not levy tax over gains upon the sale of shares in local companies by non-resident shareholders.
3. Issues to consider
Before deciding to incorporate a foreign trading company, other issues need to be considered as well. Below you will find a couple of these issues.
First of all, the investor’s home country may have so-called ‘CFC (controlled foreign corporation) legislation’, leading to immediate taxation over profits realized by lowly taxed foreign trading companies (even without distribution of such profits) established in certain countries (these may be so-called ‘blacklisted countries’) owned by the investor. Therefore, it is always advisable for investors to liaise with local tax specialists before setting up foreign trading structures.
Furthermore, if a foreign trading company is used for the continuation of activities that are already conducted through a company in an investor’s home country, the tax authorities in this country may deem a transfer of goodwill to arise in connection with such continuation, over the (deemed) profit of which, tax may be due in this country.
Related to that, the so-called issue of ‘transfer pricing legislation’ is often, if not always something to consider. This means that the legislation of the investor’s home country will usually require that the remuneration allocated to the foreign trading company should be in line with the so-called ‘arm’s length principle’, in general meaning that 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 usually advisable to create as much substance as possible in terms of risks, functions, employees etc. in the foreign trading company. The higher this substance, the better justifiable a high allocation of profits to such company would normally be.
Investors should be prepared for a possible challenge of the trading structure by the tax authorities in their home countries. The risk of such challenge depends on various factors, such as the attitude of these authorities in general towards foreign trading structures, their available audit tools and policy etc. Tax authorities could argue that the management and control of a foreign trading company is de facto exercised in the country where the ultimate owner of the company is based (or that the company has a so-called ‘permanent establishment’ in such country). A way to reduce the risk of success of such challenge may be the appointment of a majority of directors resident in the trading company’s preferred country of establishment on the board of directors of the company. These, and other issues, are also aspects, which an investor should discuss with a tax specialist in his home country.
As a (albeit general) rule of thumb, one can argue that investors usually have more flexibility in the structuring of trading profits through foreign companies if the supply of their services requires frequent foreign traveling.
4. What we can do for you
Consulco has offices in two of the most prominent and favorable jurisdictions for the establishment of trading companies in the entire EU, Cyprus and Malta. In addition to that, Consulco has an office in the United Arab Emirates (UAE) where we are licensed to set up and manage companies in the so-called Ras Al Khaimah (RAK) zone. These companies are comparable with offshore companies in the sense that they are in principle not subject to any tax over any of their income, but (unlike typical offshore companies) they have the advantage of eligibility for the benefits of tax treaties concluded by the UAE.
Consulco has almost twenty years of experience in advisory on the use, the set up and the management of trading companies, including typical offshore companies such as BVI companies, Seychelles companies etc. In addition, we have (significant) experience in working with trading companies in venerable onshore jurisdictions such as The Netherlands and the UK. Consulco has unique knowledge of and expertise in the use of trading companies in international tax planning and should be your number 1 provider of choice when you want to set up such company in Cyprus, Malta, the UAE or other jurisdictions.
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