Sunday, December 11, 2011

London, the citadel of the offshore world

Why bother with black lists and immobilization of bearer bonds in BVI and other countries? You can get bearer shares from United Kingdom Limited Liability entities and be welcome by tax authorities and banks in most countries which have black lists copied verbatim from the France-based OECD.

The final irony is that Panama and the United Kingdom will start negotiations for a double-taxation agreement


The modern offshore company, which began its all-conquering journey in the islands which once formed the British Empire in the 1970s and 80s, can justifiably be described as an English invention. At that time, it was also possible to incorporate so-called "non-resident" companies in England, which, if managed from outside of the United Kingdom, were not subject to taxation in England, although even then London could never have been described as a classic offshore zone.

This possibility ended in the early 90s, but, England, and in particular, London remained an extremely popular place for the incorporation of companies, for both English and foreign businesses alike. Numerous businessmen chose to incorporate in London; Companies House now boasts a register with over three million companies, ranging from small business to multinational companies. So what makes people want to incorporate in London?

The tax advantages related to English companies

The above shows quite clearly that English companies cannot be categorized as traditional tax-free companies, and in fact they are quite the opposite. How, therefore, can English companies be used advantageously in international business transactions? The following section shows just two of the possible uses.

Trading company for nominee purposes.

Blacklists have meant problems for a large number of offshore companies, particularly those providing services. One very efficient way of overcoming this problem is by using an English company, which concludes a special contract with the offshore company, which may be incorporated in a traditional offshore zone such as The Bahamas, BVI or Belize. According to the terms of the contract, the English company concludes contracts with foreign partners on behalf of the offshore company, prepares invoices for the total amount of the services provided, and receives full payment into its bank account, although the offshore company actually provides the services. Periodically (as defined in the contract between the English and offshore companies), the English company is entitled to an agency fee of between 5 & 10 % of the value of the contracts concluded. The English company must declare this income and pay tax accordingly, whereas, the remaining 90-95 %, is transferred to the account of the offshore company, as set down in the contract. An offshore company is subject to tax in England on income with an English source. Although the offshore company operates through an English resident company, the actual source of the income is not England, but the foreign partner. At the same time, it is an important condition that the offshore company should be managed from outside England, and that the directors, shareholders and bank account signatories of the offshore and English companies should not be the same people.

Dual resident companies

An English company must be classified as resident in England if it was incorporated in England and/or the majority of the directors are resident in England and manage the company from England. However, according to the agreements made by England for the avoidance of double taxation (DDTs) it is possible for a company to be resident in two or more places, if, for example, it is managed from a different company. Such companies are known as "dual resident companies". As long as the company is managed from a country which is protected by a DDT, then the company can apply to the English tax authorities to be taxed in that country rather than in England. And if that country has more favorable rates of taxation, then it is worth operating the company as a dual resident company. Currently, the most attractive jurisdiction with which England has signed a DDT is Cyprus. According to Cypriot law, if a company, or a branch of that company, operates outside Cyprus, then that branch is subject to the 4.25% profit tax of the worldwide income. The English company becomes resident in Cyprus by establishing an offshore branch there. The majority of the directors of the English company must be Cypriots and all the decisions relating to the running of the company must also be managed from outside England, preferably from Cyprus. Similarly, the company must not receive income from English sources. This is all the more problematic as activities carried out in England are subject to VAT. Dual resident companies must file annual returns in both Cyprus and England, but can also take advantage of the DDTs signed by Cyprus.

This information is not intended and should not be construed as concrete tax advice. Should you wish to make use of one or any of the structures mentioned, we recommend that you consult your personal tax adviser, as well as experts on the legal systems of all the countries involved.

Source: LAVECO brochure. Extract posted with thanks to N. Remé (Humboldt-Universität zu Berlin, EJP).
Photo: UK Inland Revenue offices

1 comment:

Anonymous said...

Do you do much with offshore services in Panama? Where can I get some more informations?