Introduction

•      We are often asked whether it is worthwhile setting up a company outside the UK to act as an intermediary where a UK company is engaged in a trading transaction with a foreign company, whether involving goods or services.

•      The answer is that it depends upon the circumstances of the case

Potential tax planning opportunity

•      The planning opportunity is that, by placing a non-UK company as an intermediary in the transaction, it is possible to divert an element of the overall profit on the transaction into that intermediary company. If you have chosen your non-UK jurisdiction wisely, there will be little or no tax to pay on the intermediary’s profits.

Central management and control

•      If only it were that simple, which of course it is not.

•      The residence of a company is determined not only by where it is registered, but also by where central management and control over its affairs is exercised. This means where the key decisions on the company’s affairs are taken.

•      In order for planning to be effective, the place of central management and control has to be outside the UK. Given that the owner of the offshore company is almost certainly resident in the UK, this gives an immediate problem.

•      Many taxpayers think they can solve this problem by jumping on a plane to Jersey etc. for a couple of Board meetings each year, but again it is not that simple.

•      The problem arises not with routine matters but with emergencies. What happens if you don’t have time to jump on a plane before you take your commercial decision?

•      Thus, for such planning to be effective, you need one of two situations to exist:

o    You have a trustworthy friend or family member resident where the company is registered who you can trust to run it for you; or

o    You pay someone to run it for you.

•      In the first case, we are talking about a high level of trust. If it is going to be worthwhile putting such a structure in place, the offshore company will be holding a lot of money, which you will be entrusting to your friend or relative.

•      In the second case, it will be expensive to appoint a merchant bank to provide directors for your company, but that is likely to be what you will need to do.

•      And even then, you cannot be seen to be telling the directors what to do; they have to have autonomy to run the company.

Where will the company reside?

•      Assuming you can get over these hurdles, which jurisdiction will you opt for? The places where your trusted friends live may not have benign tax regimes, or if they do they may not have sufficiently robust financial systems for your peace of mind.

•      Thus you may be obliged to pay for director services in the interests of locating in an appropriate tax and financial regime.

What about the country you are trading with?

•      It is not possible simply to ignore the tax regime of your customer or supplier’s country either, as that country may wish to levy tax on your profits from the transaction. Typically this will only be the case if you have what is called a ‘permanent establishment’ there (typically an office etc). So can you avoid having such an establishment in practice?

What about the impact on the existing UK company?

•      You also need to be careful on this score. Your UK company will have to share its corporation tax small companies’ rate band (20% on the first £300,000 of profit) equally with the offshore company. So beware that your planning does not increase the UK tax bill of the existing company by more than it saves.

Transfer pricing

•      All of this is only worthwhile if you choose a benign tax regime.

•      But if you choose a benign tax regime, the transaction between the offshore company and your UK business is subject to UK transfer pricing legislation.

•      This basically says that the price charged between the two companies must be a true market price for the transaction.

•      This is not to say that the offshore company cannot make a fair intermediary’s profit on the transaction, but it cannot make more than that; it is not possible to attribute all of the profit to the offshore company.

•      It is possible and desirable to reach advance agreement with HMRC on a fair price for the transaction in question.

Who owns the offshore company?

•      You do, of course, but should you take the opportunity to do some further tax planning, and allocate shares to your spouse and children? This is likely to be sensible (I would use a trust to hold the children’s shares) but remember that any income from shares held by your minor children will be taxed on you.

What do we do with the money from the offshore company?

•      Ideally you would not wish to take dividends from the offshore company if you are a higher rate taxpayer, as you are taxed as a UK resident on your worldwide income.

•      You cannot take a salary from the offshore company as, of course, you are not a director.

•      If you are intending to remain in the UK in the long term, once your transactions outside the UK are complete you could move the management and control of the company to the UK for the company to undertake new, or indeed existing, business activities here. You will then have effectively funded the company’s activities at little or no tax cost.

•      On the other hand, if your long-term plans include emigration, you could wait to enjoy the funds from the offshore company until you have left the UK, provided of course you choose somewhere to live with a benign tax regime (Belgium and New Zealand have been popular choices to enjoy the funds from the company tax-free).

Summary & Conclusion

•      So all is not plain sailing in this area, and in the majority of cases the use of an offshore company will either not be worthwhile or not be practical. But in some cases offshore planning can work very successfully, so it is at least worth considering where large scale international trade transactions are undertaken.

•      So if you are about to enter into an international trading contract, and believe there may be possibilities of using a non-UK company to advantage, please contact Mark Simpson to discuss your options:

•      Telephone   0161 886 8062

•      E-mail        mark.simpson@sbnca.com

 

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