Tax residency status / Economic Substance

[wmorgan]

Hi there.

I'm a Canadian software developer, living in Canada, and I had an opportunity come up.

A client from Switzerland is willing to pay me a monthly amount to maintain and develop an open source project.

I'd like to:
- Open a SVG LLC with nominees, and then hire global contractors to perform the daily operations and customer support functions, as well as a developer to help with things.
- The SVG LLC would sub-contract the development work to me as an independent contractor

With this setup, SVG LLC's management, customer support, and development are all outsourced and abroad. Some (although probably the majority) of the development is outsourced to my corporation in Canada. The customers of the SVG LLC are also abroad.

Would this SVG LLC have tax residency in Canada? I don't think it would have any economic substance in Canada, correct?

Thanks!

 

[Sols]

As a general rule, nominees do not affect tax residence. No tax authority is going to look at your company, look at you being the UBO, look the company being engaged in activities that are aligned with what you used to do, and somehow accept that it's SVG tax resident because it happens to have directors located there. Directors which are probably engaged in hundreds of other companies.

Because effective management and control is in Canada, your SVG LLC is most likely a Canadian corporation for tax purposes and has to comply with Canadian tax law.

Canada doesn't recognize US LLC as passthrough entities, so chances are it won't recognize SVG LLC any differently. So in that case, you might as well just form a Canadian company and keep things simple for yourself. If you don't like Canadian tax, don't live in Canada.

Maybe if you were talking about a Swiss company (where your client is based) or a company located where the developers or customer service agents are, there could be a stronger case against tax residence in Canada.

 

[JohnLocke]

Maybe if you were talking about a Swiss company (where your client is based) or a company located where the developers or customer service agents are, there could be a stronger case against tax residence in Canada.

I would agree with that. You may rent a real office and employ someone or take a trip 5 - 10 times a year to that office.

 

[Mike Forman]

Hi there.

I'm a Canadian software developer, living in Canada, and I had an opportunity come up.

A client from Switzerland is willing to pay me a monthly amount to maintain and develop an open source project.

I'd like to:
- Open a SVG LLC with nominees, and then hire global contractors to perform the daily operations and customer support functions, as well as a developer to help with things.
- The SVG LLC would sub-contract the development work to me as an independent contractor

With this setup, SVG LLC's management, customer support, and development are all outsourced and abroad. Some (although probably the majority) of the development is outsourced to my corporation in Canada. The customers of the SVG LLC are also abroad.

Would this SVG LLC have tax residency in Canada? I don't think it would have any economic substance in Canada, correct?

Thanks!

UBO, management and most work is done from Canada so this is considered a corporation liable to Canadian taxes.

How will the SVG LLC pay you out? When you do business with a related company, especially in a tax haven you have to declare that. Receiving income from a tax haven will also trigger a red flag. Will you be able to provide proof of communication with staff from Saint Vincent? Where is the office?

These questions will be asked and they will already assume this is an empty shell. The nominee director will not protect you much then.

If no income is transferred to Canada it should be less of a risk.

 

[wmorgan]

> As a general rule, nominees do not affect tax residence. No tax authority is going to look at your company, look at you being the UBO, look the company being engaged in activities that are aligned with what you used to do, and somehow accept that it's SVG tax resident because it happens to have directors located there. Directors which are probably engaged in hundreds of other companies.

How about this instead:
1) I have a Canadian corporation. All clients/customers engage with the Canadian corporation alone.
2) I'm the sole director/shareholder of the Canadian corporation.
3) The Canadian corporation pays me a salary for doing development work.
4) The Canadian corporation sub-contracts development work to the offshore company.

The offshore company is setup in such that it provides software development services to anyone:
1) Aside from myself, there are 2 other full-time staff abroad. Both are directors/shareholders. We each share the same number of votes/shares.
2) All funds are managed by blockchain smart contract, and the operator of that contract is a multi-sig wallet with each director having a key. Any change to the logic of the smart contract requires us all to digitally sign the transaction as part of the multi-sig wallet.
3) Have a virtual office.
4) Signed agreements with the directors that they would be prohibited to engage with clients directly.
5) Skip the nominee directors.

I'd pay tax on the profit of the Canadian corporation. I'd pay personal tax from my salary. I'd pay no tax at the offshore level.

> How will the SVG LLC pay you out?

The offshore wouldn't have a bank account. All transactions would be facilitated via cryptocurrency and all funds would be distributed by the smart contract.

With the above structure, would the foreign company's tax residency be outside of Canada? Would the directors need to be in SVG, or can they also work abroad (not Canadian)?

Thanks!

 

[Sols]

> As a general rule, nominees do not affect tax residence. No tax authority is going to look at your company, look at you being the UBO, look the company being engaged in activities that are aligned with what you used to do, and somehow accept that it's SVG tax resident because it happens to have directors located there. Directors which are probably engaged in hundreds of other companies.

How about this instead:
1) I have a Canadian corporation. All clients/customers engage with the Canadian corporation alone.
2) I'm the sole director/shareholder of the Canadian corporation.
3) The Canadian corporation pays me a salary for doing development work.
4) The Canadian corporation sub-contracts development work to the offshore company.


The offshore company is setup in such that it provides software development services to anyone:
1) Aside from myself, there are 2 other full-time staff abroad. Both are directors/shareholders. We each share the same number of votes/shares.
2) All funds are managed by blockchain smart contract, and the operator of that contract is a multi-sig wallet with each director having a key. Any change to the logic of the smart contract requires us all to digitally sign the transaction as part of the multi-sig wallet.
3) Have a virtual office.
4) Signed agreements with the directors that they would be prohibited to engage with clients directly.
5) Skip the nominee directors.

I'd pay tax on the profit of the Canadian corporation. I'd pay personal tax from my salary. I'd pay no tax at the offshore level.

Discuss this with a Canadian tax adviser.

I'd say there is a non-zero risk that the SVG is considered partially tax resident or having a permanent establishment in Canada and be subject to Canadian corporate tax on your portion of the work done for the company. I'd also be worried about the crypto stuff being viewed as aggravating circumstance if you're caught. If I'm a tax authority auditing you (for some reason) and I see offshore and crypto, it's not exactly going to make me think you had pure intentions.

Chances may be small that you're caught, though, so while the structure might not be sound, it might work. Until it doesn't.

If you don't want to pay Canadian tax, the solution is simple: don't live in Canada. There are a lot of places in the world you can relocate to. If you have family or other ties to Canada that prevent you from moving, Canadian tax is simply a reality of life that you're risking fines, back taxes, and prison time for evading.

With the above structure, would the foreign company's tax residency be outside of Canada? Would the directors need to be in SVG, or can they also work abroad (not Canadian)?

Tax residence is only part of the headache now. You also have to consider permanent establishments.

 

[wmorgan]

OK, thanks all! I want to be 100% legal and thus, I think I'll just keep things in Canada - not worth the risk/hassle.

 

[Sols]

You're probably not entirely without options to optimize things but your case is now very specific to Canadian law and specific to details about your situation and business that you probably aren't comfortable sharing publicly. That's why I recommend speaking with a Canadian tax adviser. There might be ways to place part of the activities in other countries where the other members of the management team are based, for example. Some of your income can perhaps be made passive and taxes as capital gains or dividends rather than personal income, for example.

But SVG LLC Is almost certainly not going to be in any sensible, viable structure.

However, the more complicated and nuanced your structure is, the more it costs. There is a cost—benefit analysis to be done. Are you saving enough on taxes to justify the extra costs and admin time? It's a lot easier to just stick to a domestic company and use that extra time and energy on growing the business.

 

[AlbanyJames]

You may want to look into Barbados if you are Canadian.

 

[Mike Forman]

Discuss this with a Canadian tax adviser.

I'd say there is a non-zero risk that the SVG is considered partially tax resident or having a permanent establishment in Canada and be subject to Canadian corporate tax on your portion of the work done for the company. I'd also be worried about the crypto stuff being viewed as aggravating circumstance if you're caught. If I'm a tax authority auditing you (for some reason) and I see offshore and crypto, it's not exactly going to make me think you had pure intentions.

Chances may be small that you're caught, though, so while the structure might not be sound, it might work. Until it doesn't.

If you don't want to pay Canadian tax, the solution is simple: don't live in Canada. There are a lot of places in the world you can relocate to. If you have family or other ties to Canada that prevent you from moving, Canadian tax is simply a reality of life that you're risking fines, back taxes, and prison time for evading.


Tax residence is only part of the headache now. You also have to consider permanent establishments.

I completely agree with the above. All you do is just creating more red flags and 2023 is not anymore as 10 years ago where you could easily get undetected.

Now they have all resources of information and legal obligations that require you to declare anything that could be a red flag. Their mining tools are smarter and will raise the flag as soon as crypto, svg etc is involved.

You can take a risk just as its possible to take the risk to steel a car and get away with it. But since there are everywhere digital prints they can still figure out and go after you in 2030.

Besg solution is to live in a country where they leave you alone and don't pay tax on foreign income, then you can set all this up without any problem.

 

[icecold]

Besg solution is to live in a country where they leave you alone and don't pay tax on foreign income, then you can set all this up without any problem.

That is true, but not always possible for all!

 

[wellington]

Move.

 

[JimBeam]

@wmorgan what's the monthly amount we're speaking about?

Also forget about offshore companies and nominee directors and all that.
These don't work anymore and could get you in trouble or the costs will be greater than the savings.