Using an IBC as a nominee or for re-invoicing purposes are two common uses for offshore companies, so it’s worthwhile looking into them in a little more detail.
A nominee arrangement is not really in itself a tax-saving option, although the privacy benefits would mean it could be used in conjunction with other tax-planning structures.
The basic premise is that one of the disadvantages of using an offshore IBC is that the tax authorities in some of the high-tax developed countries may pay close attention to your Cayman Islands or Panamanian IBC.
However, by using a company in an ‘onshore’ jurisdiction you are less likely to raise suspicion. Of course, there should be nothing to hide in the first place but often it’s a case of avoiding long protracted tax enquiries.
This arrangement is really only suitable for a trader.
How Does it work?
Well, taking the UK as an example, a UK company is incorporated to be used as the nominee company. The UK company acts on behalf of an offshore IBC which is itself based in a tax haven.
This is basically an agency arrangement with the UK company being the ‘agent’ and the offshore IBC being the ‘principal’. Therefore any business that the UK company conducts is on behalf of the tax haven IBC.
The type of activities the UK company could get involved in would include negotiating deals, marketing, administration and so on. The UK company could invoice UK clients for services performed and then pay the cash received to the tax haven company, less a small charge for the services provided.
The tax haven company is effectively kept out of the trading operations and for all intents and purposes the clients deal directly with the UK company. This may also reassure any client companies that may otherwise not want to deal with a tax haven company.
Note that in order for this to be a proper commercial arrangement, the agency company should charge a fee to the tax haven IBC for the provision of its services, and in its accounts the amount of trading income handled on behalf of the offshore IBC would not normally have to be shown.
Given the strict transfer pricing laws in many countries the amount of the fee would need to be carefully considered and based on a market rate – as a rough guide 5% to 15% of the gross turnover. Any expenses of the agency company are set against this and tax will be paid in the UK on the taxable profits. The cash could then be extracted by any non-resident
shareholders free of UK income taxes.
The benefit of this arrangement is that a resident company is less likely to be subject to scrutiny than an offshore company based in a tax haven. Clearly if any enquiries are made by the tax authorities the arrangement should be fully disclosed and provided an arm’s length basis is used and adequate documentary evidence is retained to back up the nominee structure, this should alleviate any concerns.
When can the agency structure Be used?
Trading Operations
This type of arrangement is most relevant to a trading operation and effectively separates the transactions, with the invoicing being done by the agency company and delivery and transfer of title in the goods resting with the offshore IBC.
Note that it’s important to distinguish between the invoicing and the generation of profit. Whereas there is no problem with the nominee company invoicing for the services or products provided, any profit actually made should be generated by the tax haven ‘principal’ company.
Therefore the offshore IBC should actually purchase and dispose of the goods (for example, transfer title) to ensure that any profit is made by the IBC. Provided you’ve chosen the location of the offshore IBC carefully, no tax should be payable by the IBC. You should also bear in mind that most IBCs aren’t allowed to trade in the country where they are incorporated.
A nominee arrangement is not really in itself a tax-saving option, although the privacy benefits would mean it could be used in conjunction with other tax-planning structures.
The basic premise is that one of the disadvantages of using an offshore IBC is that the tax authorities in some of the high-tax developed countries may pay close attention to your Cayman Islands or Panamanian IBC.
However, by using a company in an ‘onshore’ jurisdiction you are less likely to raise suspicion. Of course, there should be nothing to hide in the first place but often it’s a case of avoiding long protracted tax enquiries.
This arrangement is really only suitable for a trader.
How Does it work?
Well, taking the UK as an example, a UK company is incorporated to be used as the nominee company. The UK company acts on behalf of an offshore IBC which is itself based in a tax haven.
This is basically an agency arrangement with the UK company being the ‘agent’ and the offshore IBC being the ‘principal’. Therefore any business that the UK company conducts is on behalf of the tax haven IBC.
The type of activities the UK company could get involved in would include negotiating deals, marketing, administration and so on. The UK company could invoice UK clients for services performed and then pay the cash received to the tax haven company, less a small charge for the services provided.
The tax haven company is effectively kept out of the trading operations and for all intents and purposes the clients deal directly with the UK company. This may also reassure any client companies that may otherwise not want to deal with a tax haven company.
Note that in order for this to be a proper commercial arrangement, the agency company should charge a fee to the tax haven IBC for the provision of its services, and in its accounts the amount of trading income handled on behalf of the offshore IBC would not normally have to be shown.
Given the strict transfer pricing laws in many countries the amount of the fee would need to be carefully considered and based on a market rate – as a rough guide 5% to 15% of the gross turnover. Any expenses of the agency company are set against this and tax will be paid in the UK on the taxable profits. The cash could then be extracted by any non-resident
shareholders free of UK income taxes.
The benefit of this arrangement is that a resident company is less likely to be subject to scrutiny than an offshore company based in a tax haven. Clearly if any enquiries are made by the tax authorities the arrangement should be fully disclosed and provided an arm’s length basis is used and adequate documentary evidence is retained to back up the nominee structure, this should alleviate any concerns.
When can the agency structure Be used?
Trading Operations
This type of arrangement is most relevant to a trading operation and effectively separates the transactions, with the invoicing being done by the agency company and delivery and transfer of title in the goods resting with the offshore IBC.
Note that it’s important to distinguish between the invoicing and the generation of profit. Whereas there is no problem with the nominee company invoicing for the services or products provided, any profit actually made should be generated by the tax haven ‘principal’ company.
Therefore the offshore IBC should actually purchase and dispose of the goods (for example, transfer title) to ensure that any profit is made by the IBC. Provided you’ve chosen the location of the offshore IBC carefully, no tax should be payable by the IBC. You should also bear in mind that most IBCs aren’t allowed to trade in the country where they are incorporated.
