Nominee Director Substance thought process.

[wellington]

Just something i've never really thought about, surely a nominee director (hired as a nominee) - paid a salary (amount they confirm for the directorship nominee position) is technically 'substance'.

Wonder if that's been testing in law?

 

[Don]

Just something i've never really thought about, surely a nominee director (hired as a nominee) - paid a salary (amount they confirm for the directorship nominee position) is technically 'substance'.

Wonder if that's been testing in law?

The expression “Substance” does not normally appear in the actual text of Double Tax Treaties or any local legislation; thus, the concept of Substance in a particular location can be open for interpretation based on competent authority procedures.

Hiring a nominee director at least helps to pass the initial sniff test, as opposed to being a director yourself and a tax resident in another country which commonly leaves the company 100% exposed to tax risk arising from a place of effective management and permanent establishment.

 

[Sols]

It has been and sometime it is and sometimes it isn't enough to establish substance or tax residence. It depends on who's asking, how angry they are, and what the other circumstances are.

I remember at least case where very word "nominee" (which had been used in relevant marketing materials and in signed agreements) was used by the prosecution to successfully convince the court that the director wasn't a bonafide director. Of course, in addition to additional evidence. I think that case was in Europe somewhere.

I've also seen tax authorities argue that a bonafide director is not director of dozens or hundreds of companies. If the number of appointments is so high that a person could not reasonably fulfil the expected ordinary obligations of a director, the tax authority can claim it's not a bonafide appointment and just a sham.

 

[Don]

It has been and sometime it is and sometimes it isn't enough to establish substance or tax residence. It depends on who's asking, how angry they are, and what the other circumstances are.

So I wonder in which case it is reasonable to appoint a Cyprus nominee director for 300 EUR/year who is simultaneously a director in 500+ companies?

 

[Sols]

So I wonder in which case it is reasonable to appoint a Cyprus nominee director for 300 EUR/year who is simultaneously a director in 500+ companies?

None for tax purposes, if you are trying to avoid creating tax residence in a country which is aggressive against you and/or against nominee directors in general.

 

[European]

None for tax purposes, if you are trying to avoid creating tax residence in a country which is aggressive against you and/or against nominee directors in general.

Would a "real" director be enough to create substance though?
I am talking about a friend or acquaintance that is not a director anywhere else, or maybe in one other company. You might pay them something for their trouble but you would be running the business. I am talking mostly of a single-owned US LLC (or perhaps with two members, both foreign, one with a very small share in the business.

By the way, how does a tax authority know whether the director is a director of many companies??

Thanks

 

[Sols]

Would a "real" director be enough to create substance though?

As I said, it depends on who's asking, how angry they are, and what the other circumstances are.

There's no check list where if you tick a certain number of criteria, you're automatically off the hook.

By the way, how does a tax authority know whether the director is a director of many companies??

By having data about other companies. Public registers are of course the easiest source but leaks such Panama Papers are also a great resource.

They only need enough data to make a reasonable guess or estimate. If their assessment that your director is a nominee isn't correct, it's up to you to prove them wrong.

 

[European]

As I said, it depends on who's asking, how angry they are, and what the other circumstances are.

There's no check list where if you tick a certain number of criteria, you're automatically off the hook.


By having data about other companies. Public registers are of course the easiest source but leaks such Panama Papers are also a great resource.

They only need enough data to make a reasonable guess or estimate. If their assessment that your director is a nominee isn't correct, it's up to you to prove them wrong.

Is the burden of proof not on them? I can imagine how you potentially could prove somebody is a director in 100s of companies but how do you prove they are not?

 

[Don]

Would a "real" director be enough to create substance though?
I am talking about a friend or acquaintance that is not a director anywhere else, or maybe in one other company. You might pay them something for their trouble but you would be running the business. I am talking mostly of a single-owned US LLC (or perhaps with two members, both foreign, one with a very small share in the business.

By the way, how does a tax authority know whether the director is a director of many companies??

Thanks

Is the burden of proof not on them? I can imagine how you potentially could prove somebody is a director in 100s of companies but how do you prove they are not?

You should be able to prove that they key management decisions were in fact made by the "nominee" director.
This is in the cases were you are hit with a tax bill.

 

[European]

Would a "real" director be enough to create substance though?
I am talking about a friend or acquaintance that is not a director anywhere else, or maybe in one other company. You might pay them something for their trouble but you would be running the business. I am talking mostly of a single-owned US LLC (or perhaps with two members, both foreign, one with a very small share in the business.

By the way, how does a tax authority know whether the director is a director of many companies??

Thanks

I was talking mostly about having a "real" director in the US but that could potentially make the US LLC taxable in the US?
Something else, what if you have a US LLC owned by two non-US persons, each based in a different county (say EU), each with 50% of the LLC. Where would that LLC be considered resident upon inspection?

Is that not quite easy to prove, if there are no public records of what is going on within the LLC? Something like just let the director sign the contracts with clients on behalf of the company, or sign the invoices? Would that be enough or are they looking for other type of proof?

 

[Don]

I was talking mostly about having a "real" director in the US but that could potentially make the US LLC taxable in the US?
Something else, what if you have a US LLC owned by two non-US persons, each based in a different county (say EU), each with 50% of the LLC. Where would that LLC be considered resident upon inspection?

Even if residency remains in the US, there might still be 2 permanent establishments that will be taxed separately by each jurisdiction. At least in theory.

 

[Sols]

Is the burden of proof not on them? I can imagine how you potentially could prove somebody is a director in 100s of companies but how do you prove they are not?

Check your local laws. Tax crimes often have a reverse burden of proof, at least once certain criteria have been met by the tax authority or prosecutor. They can't just claim your director is on the board of hundreds of companies with no evidence. But once they have enough evidence, the burden of proof might shift.

I have seen cases where the burden of proof has shifted and then shifted again upon appeal. A lower court agreed with the tax authority but a higher court did not. Tax authorities have almost nothing to lose by being overly aggressive, and a lot of appeals are successful as a result.

The smartest thing you can do, though, is to not ever put yourself in a position where your tax matters are questioned, especially not in a hostile situation.

 

[European]

You should be able to prove that they key management decisions were in fact made by the "nominee" director.
This is in the cases were you are hit with a tax bill.

Is that not quite easy to prove, if there are no public records of what is going on within the LLC? Something like just let the director sign the contracts with clients on behalf of the company, or sign the invoices? Would that be enough or are they looking for other type of proof?

 

[Don]

Is that not quite easy to prove, if there are no public records of what is going on within the LLC? Something like just let the director sign the contracts with clients on behalf of the company, or sign the invoices? Would that be enough or are they looking for other type of proof?

If you must take your affairs to court against the tax office, you want something to back your statements.

 

[CyprusLawyer101]

There are options to appoint unique directors however the fees differ. Also if a director is actually handling some work, like accounting or banking for example or advising on legal and tax matters or even commercial, his position is strengthen as a managing director and offer greater validity than putting a desk and a chair and thinking that you have created substance.
Economic Substance is a relative concept and should be applied according to each companys operations.

 

[spartan78]

Hello all, You can establish a company in Romania(which is an European(and subject to European laws) country, which has another company(a local one) as a nominee director. No problem, it is better to have a local nominee director because in this way you can avoid the problems you would have with the authorities about the fiscal optimization. If the company has no local nominee director, the tax authorities can always interpret that you made the company for tax optimization and everything cost you more in the end. If you have a local nominee director(company or person), you can avoid all this.

 

[Mike Forman]

Is the burden of proof not on them? I can imagine how you potentially could prove somebody is a director in 100s of companies but how do you prove they are not?

As mentioned earlier it depends on the situation and as a first layer a nominee director will diffuse risks of transfer pricing, taxation etc.

If tax authorities suspect something and start to look further into it they will dig deeper and will ask quite some information, such as :

- who controls the company and who can make decisions on his/her own
- rental contract, is the office shared and proof of this office
- payroll list with names and location, salaries and taxes paid
- general ledger, profit loss and taxes paid.
- All invoices and money transfers to related companies
- ubo
- business registrations, shareholder and director record,..
- list of top 5 customers and their revenue (if your other corporation is the only customer or key customer they are related)
-...

If that person you mention is willing to state he acts as a director and that he is the decision maker you might be ok, but no hired nominee will do that. Receiving a letter from the tax authorities means something is going on, and a director is always responsible for mistakes, fraud, tax evasion and any liabilities as a result of this fraud/tax evasion. Nominees will not take that risk and as soon as it gets hot will state they are just a nominee and you are actually in control.

So all depends if your transactions would raise red flags in their data mining or not (e.g. transfer to low tax jurisdictions, high consulting fees,..)