Offshore trading:
Keep it low profile

Low profile & low tax:
Strategy example

Learn to keep your offshore company out of sight if you want to see those tax-free profits coming in.

OFFSHORE-FOX.COM
with Peter Widder

(Part 2 of 2)

Even though the image of an offshore company has taken such a battering over the years, this does not mean that an offshore company is all but useless for the international entrepreneur. Far from it.

Near-zero tax trading is still possible through an offshore company, but keeping a low profile is essential. In other words, the offshore company itself is best obscured in such a way that to an outsider it appears as if no offshore company is involved at all.

Sounds complex? Not at all. Whilst the minute legal details call for specialist knowledge, the underlying idea is usually simplicity itself: it involves the use of a respectable onshore company to "front" transactions on behalf of an offshore company in return for a commission.

Basic structure explained

Let us look at a typical example of a cross-border trading structure that benefits from low-profile, "respectable" appearance yet operates under a near-zero tax regime:

Two separate companies are formed -- one in an offshore zero-tax haven, the other onshore, in a "respectable", low-profile but high-tax country.

For example:

Offshore tax-haven company
Company name:		Tax-Free Offshore Company Ltd.
Incorporated in:		British Virgin Islands, Reg. No. 12345
Reg. Office:		Wickhams Cay 1, Road Town, Tortola, British Virgin Islands
Bankers:		Antigua Overseas Bank Ltd., St. John's, Antigua
Tax rate:		0%

Onshore company
Company name:		Respectable European Company Ltd.
Incorporated in:		England, Reg. No. 56789
Reg. Office:		123 Regent Place, London, England
Bankers:		Lloyds Bank plc, London, United Kingdom
Tax rate:		up to 30%

After incorporation, Respectable European Company Ltd. agrees to act as an agent for Tax-Free Offshore Company Ltd. A contract between the two entities is drawn up under which Respectable European Company Ltd. agrees to conduct business in its name but on behalf of Tax-Free Offshore Company Ltd.

In effect, Respectable European Company Ltd. serves as a "front-end", or a clearing centre, for the worldwide operations of Tax-Free Offshore Company Ltd.

Respectable European Company Ltd. receives commissions from Tax-Free Offshore Company Ltd. as its fee for providing the clearing centre services.

Respectability regained

As agreed, Respectable European Company Ltd. handles all trading operations in its name, from its British-based offices.

Respectable European Company Ltd. will:

• Receive all purchase orders in the UK.
• Issue invoices in its name and dispatch these from its London offices;
• Take receipt of payments in its British bank account;
• Issue receipts, delivery notes and all other trading documentation.

Although Respectable European Company Ltd. acts under the direction of the principals of Tax-Free Offshore Company Ltd., no invoices or other documentation ever mention the BVI-based offshore company. End customers and trading partners only "see" and do business with the "front-end" UK company. The agreement between the "front-end" company and the offshore company is a private matter between the two.

Taxation

The matters of respectable appearance dealt with, let us turn our attention to taxation of such a structure.

Respectable European Company Ltd. -- being a mere agent for Tax-Free Offshore Company Ltd. -- keeps only small transaction commissions in its British account. The majority of funds received are immediately forwarded offshore, to the account of Tax-Free Offshore Company Ltd. where they remain free of any taxation.

Naturally, profits of our Respectable European Company Ltd. -- that is commissions earned for its efforts on behalf of Tax-Free Offshore Company Ltd. -- are taxable in the UK.

It is important that a realistic level of commission is chosen if the "fronting" arrangement is to stand up to the scrutiny of the UK tax authorities. A commission of 3 to 5 per cent seems to satisfy this requirement. Of course, any expenses reasonably incurred in the course of the UK company's business -- such as office rental, secretarial expenses and so on -- are deductible from the tax bill. Consequently, the final taxation level can be as little as 1 per cent of turnover.

Staying within the law

Any tax mitigation structure must ensure compliance with the law. If mistakes are made, not only can any tax-saving benefits be lost, but heavy penalties can be incurred.

The structure described above depends for its success on several factors:

• Appropriately worded contract must be entered into between Tax-Free Offshore Company Ltd. and Respectable European Company Ltd., regulating the respective duties of the two companies.
• Tax-Free Offshore Company Ltd. must be UK non-resident for tax purposes. In practical terms this means that its central management and control must reside outside of the UK.
• Respectable European Company Ltd. must be controlled by UK non-resident directors.
• Respectable European Company Ltd. must not conduct any trading within the UK or with any UK entities.

Conclusion

Respectable European Company Ltd. is clearly a worthwhile investment for the principals of Tax-Free Offshore Company Ltd.; the desired onshore profile is attained without sacrificing the attractions of an offshore tax regime.

It is worth mentioning that Respectable European Company Ltd. can also register for VAT in the United Kingdom; this appeals to entrepreneurs wishing to operate within the European Union.

Although we have used the United Kingdom and the British Virgin Islands to "incorporate" our example companies, there are many other jurisdictions to choose from when arranging a trading structure such as this.

Our Tax-Free Offshore Company Ltd. could be formed in a number of offshore tax havens, and its corporate agent -- Respectable European Company Ltd. -- could well be registered in a non-European country. The intended business activity and geographical markets in question will be the deciding factor here.