Protecting Your Privacy with Nominees
Using an IBC as a nominee or for re-invoicing purposes are two common uses for offshore companies, so it's worthwhile looking into them in a little more detail.
A nominee arrangement is not really in itself a tax-saving option, although the privacy benefits would mean it could be used in conjunction with other tax-planning structures.
The basic premise is that one of the disadvantages of using an offshore IBC is that the tax authorities in some of the high-tax developed countries may pay close attention to your Cayman Islands or Panamanian IBC.
However, by using a company in an 'onshore' jurisdiction you are less likely to raise suspicion. Of course, there should be nothing to hide in the first place but often it's a case of avoiding long protracted tax enquiries.
This arrangement is really only suitable for a trader.
How Does it Work?
Well, taking the UK as an example, a UK company is incorporated to be used as the nominee company. The UK company acts on behalf of an offshore IBC which is itself based in a tax haven.
This is basically an agency arrangement with the UK company being the 'agent' and the offshore IBC being the 'principal'. Therefore any business that the UK company conducts is on behalf of the tax haven IBC.
The type of activities the UK company could get involved in would include negotiating deals, marketing, administration and so on. The UK company could invoice UK clients for services performed and then pay the cash received to the tax haven company, less a small charge for the services provided. The tax haven company is effectively kept out of the trading operations and for all intents and purposes the clients deal directly with the UK company. This may also reassure any client companies that may otherwise not want to deal with a tax haven company.
Note that in order for this to be a proper commercial arrangement, the agency company should charge a fee to the tax haven IBC for the provision of its services, and in its accounts the amount of trading income handled on behalf of the offshore IBC would not normally have to be shown.
Given the strict transfer pricing laws in many countries the amount of the fee would need to be carefully considered and based on a market rate -- as a rough guide 5% to 15% of the gross turnover. Any expenses of the agency company are set against this and tax will be paid in the UK on the taxable profits. The cash could then be extracted by any non-resident shareholders free of UK income taxes.
The benefit of this arrangement is that a resident company is less likely to be subject to scrutiny than an offshore company based in a tax haven. Clearly if any enquiries are made by the tax authorities the arrangement should be fully disclosed and provided an arm's length basis is used and adequate documentary evidence is retained to back up the nominee structure, this should alleviate any concerns.
When Can the Agency Structure Be Used?
Trading Operations
This type of arrangement is most relevant to a trading operation and effectively separates the transactions, with the invoicing being done by the agency company and delivery and transfer of title in the goods resting with the offshore IBC.
Note that it's important to distinguish between the invoicing and the generation of profit. Whereas there is no problem with the nominee company invoicing for the services or products provided, any profit actually made should be generated by the tax haven 'principal' company. Therefore the offshore IBC should actually purchase and dispose of the goods (for example, transfer title) to ensure that any profit is made by the IBC. Provided you've chosen the location of the offshore IBC carefully, no tax should be payable by the IBC. You should also bear in mind that most IBCs aren't allowed to trade in the country where they are incorporated.
Property
You could also use this structure for owning property. In this case the offshore IBC would own the property and the agency company would act as a property management agent.
Rental income is invoiced by the nominee company and received by it on behalf of the offshore IBC. As above, the agency company would charge a commercially acceptable fee to the IBC (calculated on an arm's length basis) which would usually be taxable (less expenses).
The benefits here are that:
• The tenants don't know they are dealing with an offshore IBC.
• Any gain on disposal would arise in the offshore IBC (for example, in the case of the UK, any gain would be exempt if the offshore company is non-UK resident).
• The rental income would be taxed in the hands of the IBC.
Service Companies
The agency structure could also be used where you are supplying services via an offshore company but didn't want these invoices shown in your accounts. This may be the case where for example you move offshore and invoice your trading company for services you provide.
Your Customers
If you are based offshore and provide services to client companies possibly in a high tax jurisdiction, your customers may not like having invoices from a tax haven in their accounts on the basis that the taxman may look into their affairs in a bit more detail.
You could therefore form an agency company in a respectable 'onshore' jurisdiction (for example, the UK) to invoice the client.
Where to Incorporate
This will clearly depend on the use of the agency arrangement and the countries of any trading/property holding.
However, the UK is known as a good choice for the nominee company, given its sound trading reputation and tough anti-money-laundering rules.
In terms of the offshore company -- take your pick! The Bahamas, British Virgin Islands and Panama are all favourites.
As you'll see, closely linked with the nominee idea, is the use of a company as a tool for re-invoicing.
Re-invoicing is just the establishment of an offshore IBC to act as an intermediary between a trader and the clients.
It allows profits to be split between onshore and offshore jurisdictions, with the aim obviously being to redirect some of the trading profits to tax haven jurisdictions. Profits could then be accumulated offshore, with hopefully (if structured correctly) the onshore company receiving a tax deduction for the amounts paid to the offshore company.
Example
An international trading company sells €1,000,000 of goods to European customers and earns a gross profit €400,000. It pays tax at 30%, so its tax bill will be €120,000 reducing its net profits to €280,000.
One option the company may consider is establishing a tax haven IBC to act as intermediary. The trader sells its products to the tax haven IBC on paper for, say, €800,000. The tax haven IBC would then sell the goods to the eventual customers for €1,000,000. The tax haven IBC would therefore show a profit of €200,000 but assuming it's a 0% tax haven there should be no tax charge.
The trading company would realize a profit of €200,000 as it sold the goods for €800,000 and incurred costs of €600,000.
The use of a re-invoicing strategy would save the trading company being taxed on €200,000, which could equate to a tax saving of €60,000.
Where is the Re-invoicing Company Incorporated?
The re-invoicing company is usually formed in one of the Caribbean tax haven jurisdictions (often combined with a nominee company incorporated in a less high-profile environment). So you'd be looking at the British Virgin Islands, the Bahamas, St Kitts Nevis etc, given that they provide a sound tax environment for import/export companies.
The main problem with this type of scheme is transfer pricing. The disposal by a trading company to the re-invoicing company is traditionally at a discount to allow a profit to be made overseas. In countries with strong transfer pricing requirements, this would need to be justified (for example because of additional services still to be provided by the re-invoicing company). Given that transfer pricing is a specialist area, it is essential that specific advice from a suitable specialist is obtained.
This is not the only problem with this re-invoicing strategy -- remember the anti-avoidance rules that we looked at earlier? Well in this case the tax haven IBC could easily be classed as a controlled foreign company if it falls foul of the CFC conditions (for example, for US tax purposes if its shares are owned by US residents).
This would result in the profits of the tax haven IBC being subject to tax along with the international trading company. For this reason, re-invoicing is a difficult strategy to get passed the tax authorities, although you'll need to take detailed advice on the implications for your particular country of residence.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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