International import and export trading companies usually involve themselves with buying goods cheaply in one country and selling them at a profit in a more economically developed nation. Due to the cross-border nature of the activities, an offshore structure is well suited.
Trading companies generate their profits in the country in which their goods are sold, which means they can benefit from tax breaks and exemptions if they establish themselves in a tax-neutral offshore jurisdiction (either one with zero taxation or territorial tax system).
In this article, we will take a closer look at the benefits of using an offshore tax-free company for international trading, along with some practical considerations in the process of setting one up.
Table of Contents:
The primary benefit to forming an offshore international trading company in a favourable jurisdiction is that it is exempt from corporate taxation.
There are other important benefits including:
Information about beneficial owners remains confidential in many jurisdictions.
Many offshore trading companies are more affordable to form and maintain.
In most offshore tax havens, there are little to no financial reporting requirements. This includes no obligation to file accounts and no annual auditing requirements.
Offshore companies are known to provide much stronger asset and liability protection to owners. Your company assets will be far out of reach of local creditors and litigations.
Setting up an international trading company in a worldwide trading hub like, for example, Singapore, Hong Kong, or Europe, can provide access to new opportunities otherwise not available in your home country.
It will allow you to penetrate new markets, find better suppliers, and service more customers in different regions of the world.
In addition to zero corporate taxation, it is possible to obtain VAT exemption and other tax breaks. This depends on how your business is structured and where your customers and suppliers are based.
For example, if your supplier is based in one EU country and your customers are based in another, then your company may be eligible for VAT exemption based on intra-community transactions within the EU. This is subject to meeting certain criteria and conditions.
When deciding if, where, and how to best use an offshore company for international trading, the following factors should be considered:
One of the primary reasons for taking your international trading business offshore is to take advantage of more efficient tax systems. To ensure this strategy is effective, you need to fully understand the tax issues and rules in the country where you choose to incorporate.
Controlled Foreign Corporation rules (CFC rules) are a set of rules which are implemented in some nations to reduce tax avoidance by foreign corporate entities. CFC rules will be used to determine the proportion of foreign-sourced income which should actually be taxed domestically. This can have a significant bearing on taxes incurred, and so the existence of any CFC rules in the jurisdiction in question should be considered.
Transfer-pricing rules are another set of tax rules which aim to reduce tax avoidance on cross-border transactions. One of the most common type of transfer-pricing rules which exists in the UK and many other countries is the “arm’s length principle”.
This is where transactions between connected entities (such as parent companies and their subsidiaries) should be taxed as if they had occurred under comparable conditions between independent entities. Transfer-pricing rules are especially prevalent in the context of international trading companies which often have multiple subsidiaries based in different jurisdictions, so they should be understood and properly adhered to.
Offshore tax havens offer many practical advantages in terms of privacy and tax reduction. However, many of the traditional tax havens have unfortunately acquired a negative global reputation over the years as a result of people using them for dubious activities.
Therefore, even though your intentions may be completely pure and legitimate, operating a company which is based in one of these countries can have a negative impact on how your business is perceived by clients and customers alike. In many cases, it is better to choose a reputable ‘onshore’ jurisdiction with low taxes or a territorial tax system (e.g. Singapore or Hong Kong) as opposed to a traditional tax haven, as these countries have a better global image and therefore won’t cause unforeseen issues later down the road.
If you do wish to incorporate in a genuine tax haven, then British Virgin Islands are a good choice due to the fact that they maintain a good reputation around the world.
Wherever you decide to conduct business and incorporate your offshore company, you will almost certainly need to obtain the relevant business license. Each jurisdiction will have its own unique requirements in this regard, with different issuing authorities (e.g., federal authorities, state authorities and/or local authorities).
You should therefore be fully aware of the licenses you require, the process for obtaining them, the costs involved, and whether there is the possibility of having your application rejected.
The specific locations of your customers and suppliers can have implications in a number of key areas. Firstly, you might find that having your business based in a certain location will make it easier to engage with customers and suppliers in their respective areas (for example, if your customers and suppliers are all based in Europe, it makes far more sense to incorporate your offshore company inn a favourable European jurisdiction as opposed to central America).
Other factors involved include:
While there are major advantages to setting up an international trading company in an offshore jurisdiction, it also comes with its costs. In the long run, the aim should be for your costs to be reduced and profits maximised by operating in an offshore country, however, you should be prepared to incur some initial expenses.
Whether these costs are worth incurring for you will depend greatly on your business size and expected revenue. If you are planning to run a large-scale trading business, then these minor setup costs can be quickly offset and are thus not such a major consideration.
One final related issue is that your business needs to be large enough with adequate economic substance to be considered a tax resident in the country you decide to incorporate.
International trading companies who engage in cross-border import and export activities of a reasonable size can greatly benefit from using a tax-free offshore company structure. The multi-national nature of the business activities, and the fact that a large proportion of the revenue is generated from abroad, lends itself well to an offshore setup.
That being said, setting up the right offshore structure in an appropriate jurisdiction for your particular business is not as simple as you might believe. There are various factors to consider and rules and procedures to comply with. It is important to understand all these various factors before going ahead.
Consulting an expert who can give personalised advice based on your specific business requirements is always the most advisable course to take.
Without a customised legal strategy, you put yourself at risk.
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
Disclaimer: Offshore Protection strives to keep information on this website updated, however, laws and circumstances are subject to change. All information on this website is for reference purposes only and does not constitute legal or tax advice. Contact Offshore Protection for specific advice regarding your situation.
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