International business structuring becomes nowadays one of the most popular way of legitimate business reorganization using economic, legal and other benefits of various jurisdictions.
This issue becomes a reality, in particular, for those businesses which plan to build clear corporate structure for the attraction of foreign investments, execution of foreign law governed transactions, etc. One of the key elements of the international business structuring is foreign companies, either acquired or newly established.
Choice of jurisdiction; on-shore and off-shore companies
Until recently it was very popular to create structures with the use of companies in off-shore jurisdictions (1) for purposes of tax optimization. As of the current date, a tendency moves to the use of off-shore companies (2) as holdings in business structures if they are not directly connected to the beneficial owner, but with the use of subsidiaries in companies in on-shore jurisdictions (3) (such as Cyprus, Malta, etc.), in order to avoid untaxed profits. Besides, well-thought selection of jurisdiction for the company establishment it is important to take notice of the OECD`s (Organisation for Economic Co-operation and Development) determined 3 (three) categories of jurisdictions: “white listed”, “grey listed” and “blacklisted”, as well as FATF (4) black list of countries. Various jurisdictions are suitable for various purposes. For instance, Cyprus is well fitted for the work with counterparts from EU and possesses a large number of double tax treaties; Singapore provides the possibility of carrying out either off-shore or on-shore activity at the same time, etc. All these issues, as well as the level of taxation in various jurisdictions should be considered and taken into account during international business structuring.
Types of foreign companies by the sphere of activity
Business can be considered internationally structured when such structure includes various foreign companies used for various purposes. These can include holding companies created for purposes of assets protection and repatriation of dividends to foreign jurisdictions, as well as for legal and financial consolidation, centralized management and exploitation of assets; investment companies and trusts; trading companies; financial companies aimed at intra-group financing; companies designated for holding and managing real estate, etc. For instance, off-shore trading companies are used in export-import operations under the scheme when such company receives orders from clients and supplies goods directly form the producer, which provides the possibility to plan the payment of respective custom duties and excises, by accumulating profit from realization without taxation.
Shareholders and charter capital of foreign companies
Shareholders of the foreign company can mostly always be either individuals or legal entities. Minimum amount of shareholders of companies in different jurisdictions may vary, depending on the organizational form of the company. Charter capital can be registered, issued and paid. Many foreign jurisdictions do not establish the term of charter capital payment, which in fact means that there is no obligation to pay the charter capital.
Confidentiality in off-shores and beneficial ownership
Confidentiality in off-shores is ensured by means of the absence of open data with the state registers, and moreover, through nominee and trustee services. In particular, it is widely used practice of the appointment of nominee shareholders – individuals or legal entities acting on the basis of the trust deed or the declaration of trust on behalf of the beneficiary, such persons being indicated in respective shareholders registers, however not being the real owners of the company. Nominee shareholding does not change the tax liability and reporting requirements of the beneficial owner. Another nominee used in foreign companies is the nominee director, who is formally indicated as the company manager in the directors` register. One of the documents signed by the nominee director with the beneficial owner is the Indemnity letter – a document specifying that director has no financial interest in the company, acts only upon the beneficiary`s instructions, and that the beneficiary indemnifies the director of any liability for the company`s management and decisions approved, even if they lead to the company bankruptcy.
Beneficial owner of a foreign company is its actual owner, always an individual, who actually manages the company and may represent it in many matters, sign contracts, open and manage bank accounts, even though it is highly advisable to avoid general Power of Attorneys on the names of beneficial owners which may have an adverse impact on the local tax residency of the country.
Maintenance of the foreign company
Maintenance of the foreign company as a rule includes the payment of the relevant registration and other state fees; nominee services; registered offices; secretarial services; accounting, audit and annual reporting, if required; payment of taxes and other payments, if applicable.
While the worldwide business and tax developments by world leading countries and organisations, has grown to attempt to limit the use of offshore companies and control the use of onshore companies with beneficial tax regime, the practice of such business structuring will not and cannot be extinguished. At the end of the day, businesses will try to tax optimize, simply by tax and legal accepted business structuring.
(1) Profit of offshore companies, i.e. companies which are not subject to the national tax legislation, such as in Belize, BVI, Cayman Islands, Seychelles.
(2) Off-shore company does not carry out the entrepreneurial activities in the country of its registration; the submission of annual tax and financial reporting is not required, or such requirements are simplified.
(3) “On-shore” companies are companies registered in jurisdictions where such company is subject to local tax legislation.
(4) The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the ministers of its member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.