Offshore company formation in tax haven

[Elemia]

Looking to open an offshore entity in a low/0 tax jurisdiction with simple/no annual reporting requirements.
I operate an operating business in Canada and I'm looking to establish an offshore in a tax haven. Entity will be used for wealth transfer/investment as well as used to adjust my operating company's income.

 

[Sols]

Send me a post card from prison.

What you're proposing is not only illegal, it's trivial for the CRA to find you.

Looking to open an offshore entity in a low/0 tax jurisdiction with simple/no annual reporting requirements.

Many options. Most of the well known tax havens fit this. Nevis, Samoa, Seychelles, Belize, Saint Lucia, and so on.

I operate an operating business in Canada

Focus on doing that, especially if it's a growing/profitable business.

and I'm looking to establish an offshore in a tax haven. Entity will be used for wealth transfer/investment as well as used to adjust my operating company's income.

Sounds an awful lot like you want a convenient place to book costs and park profits to avoid paying tax in Canada. The kind of stuff they train CRA officers on day 1.

Look into things like corporate tax residence and BEPS (Base Erosion and Profit Shifting). Any company you form while still controlling from Canada is considered Canadian for tax purposes.

 

[Elemia]

Send me a post card from prison.

What you're proposing is not only illegal, it's trivial for the CRA to find you.


Many options. Most of the well known tax havens fit this. Nevis, Samoa, Seychelles, Belize, Saint Lucia, and so on.


Focus on doing that, especially if it's a growing/profitable business.


Sounds an awful lot like you want a convenient place to book costs and park profits to avoid paying tax in Canada. The kind of stuff they train CRA officers on day 1.

Look into things like corporate tax residence and BEPS (Base Erosion and Profit Shifting). Any company you form while still controlling from Canada is considered Canadian for tax purposes.

Thank you for the tip, I'll let my acquaintances who got audited by the incredibly competent CRA agents know about this. They may have done this for 15+ years but they might send me a postcard from prison next week.
That being said, thank you for the jurisdiction suggestions, I'll look into them.

 

[Tradepass]

Looking to open an offshore entity in a low/0 tax jurisdiction with simple/no annual reporting requirements.
I operate an operating business in Canada and I'm looking to establish an offshore in a tax haven. Entity will be used for wealth transfer/investment as well as used to adjust my operating company's income.

Sure you have to structure your offshore entity in a proper way to obtain some kind of tax benefits. For instance, you need to ensure that your offshore company has some economic substance, because, otherwise, if it is deemed to be "shell company", your company will be reported to the Canadian Revenue. There is no best offshore jurisdiction out there. If you want to use your offshore company just to make investments, it is better to go for Cayman Islands, Bermuda, or The Bahamas. These are the offshore financial centers closer to you and that have a robust financial industry and banking system.

 

[aniglo22]

Sure you have to structure your offshore entity in a proper way to obtain some kind of tax benefits. For instance, you need to ensure that your offshore company has some economic substance, because, otherwise, if it is deemed to be "shell company", your company will be reported to the Canadian Revenue. There is no best offshore jurisdiction out there. If you want to use your offshore company just to make investments, it is better to go for Cayman Islands, Bermuda, or The Bahamas. These are the offshore financial centers closer to you and that have a robust financial industry and banking system.

He won’t gain much, as his offshore company will be a CFA, and he plans to use it for investment purposes.
Investment purposes mean much stricter requirements to be exempt from FAPI (which is basically impossible in his case).
He would need to employ more than five full-time employees actively conducting the business.
Income tax act 95(1):

(c) the operator employs

• (i) more than five employees full time in the active conduct of the business, or
• (ii) the equivalent of more than five employees full time in the active conduct of the business taking into consideration only
  • (A) the services provided by employees of the operator, and
  • (B) the services provided outside Canada to the operator by any one or more persons each of whom is, during the time at which the services were performed by the person, an employee of
    • (I) a corporation related to the affiliate (otherwise than because of a right referred to in paragraph 251(5)(b)),
    • (II) in the case where the operator is the affiliate,
      
      1 a corporation (referred to in this subparagraph as a “providing shareholder”) that is a qualifying shareholder of the affiliate,
      
      2 a designated corporation in respect of the affiliate, or
      
      3 a designated partnership in respect of the affiliate, and
    • (III) in the case where the operator is the partnership described in subparagraph (b)(ii),
      
      1 any person (referred to in this subparagraph as a “providing member”) who is a qualifying member of that partnership,
      
      2 a designated corporation in respect of the affiliate, or
      
      3 a designated partnership in respect of the affiliate,

That means all the income earned by the offshore company will be considered FAPI, and he will be taxed on it in Canada at his regular rate.

 

[Tradepass]

He won’t gain much, as his offshore company will be a CFA, and he plans to use it for investment purposes.
Investment purposes mean much stricter requirements to be exempt from FAPI (which is basically impossible in his case).
He would need to employ more than five full-time employees actively conducting the business.
Income tax act 95(1):


That means all the income earned by the offshore company will be considered FAPI, and he will be taxed on it in Canada at
his regular rate.

He also said that he's planning to use the offshore company for intercompany transactions, so I guess the structuring becomes easier. If he's outsourcing to a third jurisdiction some services (interCo), he's still able to obtain some tax benefits, provided that there is a transfer pricing analysis.

 

[Sols]

Maybe I presume too much based on previous threads and questions of this nature. But when someone is asking a question like this, things like economic substance and transfer pricing analysis don't come to mind.

Perhaps @Elemia's friends did all that and that's how they passed an audit with the CRA. Or maybe those friends don't exist. If they do, why not just ask them how they set things up? More likely, if they do exist, there is much more to the story than we and/or Elemia know.

It just reeks of BEPS and tax residence issues to me.

 

[Tradepass]

Maybe I presume too much based on previous threads and questions of this nature. But when someone is asking a question like this, things like economic substance and transfer pricing analysis don't come to mind.

Perhaps @Elemia's friends did all that and that's how they passed an audit with the CRA. Or maybe those friends don't exist. If they do, why not just ask them how they set things up? More likely, if they do exist, there is much more to the story than we and/or Elemia know.

It just reeks of BEPS and tax residence issues to me.

Tax residence should not be an issue here. Again, it all depends on proper structuring. Having a shell company is no good for anyone. Having a real economic substance makes the difference. If your entity must be a tax resident of a third jurisdiction, you should have, at the very least, an independent resident director for your company (usually, a class B director, since the class A director is usually the owner). This is something I worked on for years, while I was in Luxembourg (or do you really think that all Luxembourg holdings have 5 or 10 employees). Please note that a nominee director is not an independent director.

This is why I always emphasize on having a company in a reputable jurisdiction. If you incorporate a company in Cayman, you can find all the professional services you need to ensure to comply with international tax laws. If you incorporate in Anjouan or other third world countries, do not expect Revenue authorities to believe that you have a genuine business purposes for that...

 

[aniglo22]

He also said that he's planning to use the offshore company for intercompany transactions, so I guess the structuring becomes easier. If he's outsourcing to a third jurisdiction some services (interCo), he's still able to obtain some tax benefits, provided that there is a transfer pricing analysis.

Even with proper transfer pricing, service income earned by a CFA from intercompany transactions is often classified as FAPI under Canadian tax law (ITA § 95(2)(b)),
as such income is recharacterized as income from a non-active business and therefore falls under FAPI.

It's not that simple .

 

[Tradepass]

Even with proper transfer pricing, service income earned by a CFA from intercompany transactions is often classified as FAPI under Canadian tax law (ITA § 95(2)(b)),
as such income is recharacterized as income from a non-active business and therefore falls under FAPI.

It's not that simple .

Sure, it is not something simple. If you want to take some tax benefits, in today's world, you always need to have some real presence (or better, economic substance). Just the fact of having a company in a Caribbean island doesn't mean anything.

That's why structuring is essential. And that's why you always need to have reliable professional services. Beware of people who claim that by buying a $1k offshore company formation package, you can save taxes LEGALLY... it is just not true. You need to have real presence, local directors and possibly employees (depending on the activity that you outsource to your offshore company). In other words, the question should not be "where do I incorporate an offshore company", but "where do I want to carry on part of my business activities"...

 

[aniglo22]

Sure, it is not something simple. If you want to take some tax benefits, in today's world, you always need to have some real presence (or better, economic substance). Just the fact of having a company in a Caribbean island doesn't mean anything.

That's why structuring is essential. And that's why you always need to have reliable professional services. Beware of people who claim that by buying a $1k offshore company formation package, you can save taxes LEGALLY... it is just not true. You need to have real presence, local directors and possibly employees (depending on the activity that you outsource to your offshore company). In other words, the question should not be "where do I incorporate an offshore company", but "where do I want to carry on part of my business activities"...

But the costs associated with it are often higher than the tax savings, especially for small entrepreneurs like most people here

 

[Tradepass]

But the costs associated with it are often higher than the tax savings, especially for small entrepreneurs like most people here

That's exactly why the OECD has implemented BEPS and all the related-regulations... that are totally ineffective with big multi-national corporations and devastating for the middle-man...

There are just a few situations where it is possible to legally obtain tax benefits with an offshore company... but they have to be carefully evaluated... for instance, you can set up a family office or a private investment fund in Cayman or Luxembourg... but still you need to spend some money in legal fees to have proper authorizations from regulatory bodies (CSSF or CIMA), etc.... the life for unregulated entities is just becoming awful tax-wise...

 

[Sols]

Tax residence should not be an issue here. Again, it all depends on proper structuring. Having a shell company is no good for anyone. Having a real economic substance makes the difference. If your entity must be a tax resident of a third jurisdiction, you should have, at the very least, an independent resident director for your company (usually, a class B director, since the class A director is usually the owner). This is something I worked on for years, while I was in Luxembourg (or do you really think that all Luxembourg holdings have 5 or 10 employees). Please note that a nominee director is not an independent director.

IMO, what you're describing is corporate tax residence being an issue. It is an issue that must be solved, as otherwise any offshore company just ends up being Canadian for tax purposes.

The solution depends on the magnitude and severity of the risk/threat being faced. A genuine director goes a long way. However, nine times out of ten, when a question like this thread is posed, hiring a genuine director isn't in scope. They just want a cheap Seychelles IBC to book some costs through to lower their tax basis, like it's 1995 again.

 

[aniglo22]

IMO, what you're describing is corporate tax residence being an issue. It is an issue that must be solved, as otherwise any offshore company just ends up being Canadian for tax purposes.

The solution depends on the magnitude and severity of the risk/threat being faced. A genuine director goes a long way. However, nine times out of ten, when a question like this thread is posed, hiring a genuine director isn't in scope. They just want a cheap Seychelles IBC to book some costs through to lower their tax basis, like it's 1995 again.

I fully agree, especially with the second part.
They’ve probably watched some documentary or YouTube video about offshore companies and think that incorporating one would magically let them pay legally no tax.

 

[Elemia]

I assure you my acquaintance is real and his company deals in import and wholesale like I do. His offshore should be in Hongkong and potentially established before his Canadian operating company, but I don't know anymore than that.

He might of obfuscated it by rerouting his import through this company or simply billed his Canadian company with invoices for products and services. Although I would like to know exactly how he did it, he retired back in 2022 and left the hellhole that is Canada. Unfortunately, we weren't close enough to discuss things like this further due to the nature of these questions. I am also not interested in establishing any entity in Hongkong or China, although that might have been a part of his obfuscating process.

I'm not requiring for one account or entity to be able to both handle investing and profit shifting, though of course that would be preferred.

 

[Tradepass]

I assure you my acquaintance is real and his company deals in import and wholesale like I do. His offshore should be in Hongkong and potentially established before his Canadian operating company, but I don't know anymore than that.

He might of obfuscated it by rerouting his import through this company or simply billed his Canadian company with invoices for products and services. Although I would like to know exactly how he did it, he retired back in 2022 and left the hellhole that is Canada. Unfortunately, we weren't close enough to discuss things like this further due to the nature of these questions. I am also not interested in establishing any entity in Hongkong or China, although that might have been a part of his obfuscating process.

I'm not requiring for one account or entity to be able to both handle investing and profit shifting, though of course that would be preferred.

Especially when it comes to import/export transactions, there are plenty of business operations that you can move to an offshore jurisdiction, depending on personal circumstances. Especially in complicated distubutorship/agency arrangements, Incoterms management (for risks related to tariffs and freight), trade insurance & finance... I am sure you have plenty of tax opportunities (through well-designed transfer pricing analysis). But, as mentioned by others, professional expenses are not going to be negligible, so you have to conduct some cost / benefit analysis... my suggestion is to consult a Canadian CPA or tax attorney... they can surely work something out for taxes (LEGALLY).