Tax Planning Considerations

Tax Planning Considerations

The Cardinal Rules of Tax Planning are:

  • What are my personal circumstances and future needs?
  • What are my families future needs and circumstances?
  • Do I need to separate my business wealth from my individual wealth?
  • Do I need a Tax Planning or Tax Haven Company?

Today, few individuals can view their tax planning in isolation from their personal circumstances. This is primarily due to the almost ubiquitous employment of anti-avoidance tax provisions by most western countries. Factors, which are often pivotal, include a person's domicile, residence, motive and/or required input into the proposed undertaking. In no circumstances should a client proceed with any tax mitigation scheme without first having sought professional advice. To do so could certainly result in many sleepless nights!

The normal distinction between a tax planning, as opposed to a tax haven jurisdiction is that the former normally involves the exploitation of double taxation treaty provisions and/or the use of domestic tax 'loop-holes'. The primary advantage of using such tax planning jurisdictions is that they have no 'offshore' stigma and can often withstand the application of tax anti-avoidance provisions. Notwithstanding this, tax-planning jurisdictions are often used in conjunction with tax haven companies but the latter – not normally having any tax treaty protection – are normally used only in a passive holding capacity and/or when confidentiality is required (see below):

Tax Planning Jurisdictions

Example tax planning jurisdictions would include:

The Netherlands

The Netherlands is perhaps the most established, albeit expensive, 'treaty shopping' jurisdiction having a very advantageous and extensive double taxation treaty network. In brief, the modus operandi behind its use is to employ local companies as catalysts to receive dividends, royalties and interest, often with no or little withholding tax implications from the payor country. When payments derived from such sources are received in Holland, the full local tax of 35% will be charged in respect of the 'turn' amount - This normally being a small percentage of the actual sum received. The tax tree balance is then often forwarded to a zero or low tax jurisdiction, such as Luxembourg or the Netherlands Antilles

Rating 5 Stars

Malta

Malta has at the time of writing successfully managed to avoid a 'bailout' with this in no small part due to its more conservative approach to banking and financial services than its Cypriot neighbour – In particular, the Maltese model has concentrated on Western rather than Russian and East European tax planning and banking services. In addition, its ostensible 35% corporate tax rate has protected it from being deemed 'aggressive' despite the fact that the effective corporate tax rate can come down to as little as 5.5% after the distribution of dividends. In précis, Malta is a far more sophisticated tax planning jurisdiction than its size would indicate

Rating 4 Stars

Labuan (Malaysia)

Labuan is a strategically placed Malaysian island, which can justly claim to be Asia's premier international offshore financial centre. Labuan is located within 3 to 4 hours by air from many of the region's leading capital cities such as Jakarta, Hong Kong, Singapore, Manila, Brunei, Bangkok and of course the Malay capital of Kuala Lumpur. Most impressively, this jurisdiction has fully coordinated legislation and a 'one stop' regulatory body, the Labuan Offshore Financial Services Authority (LOFSA), ensuring an efficiency level comparable to the best that the United States, Britain or Ireland can offer. From a tax planning perspective Labuan allows investors to select either an annual exempt duty or a minimal taxation liability depending upon the needs of the individual.

Further, Labuan companies operating within South-East Asia can enjoy the full benefits of the Malaysian double taxation treaty network. In fact, Labuan is an ideal conduit for those wishing to invest in China where direct financial repatriations could expose a company to high taxation. Uniquely in Europe, the Hibernian/SCF Group has its own fully licensed management company, namely SCF TRUST (MALAYSIA) SDN BHD

Rating 4 Stars

The Republic of Ireland

The Republic of Ireland is not generally thought of as a 'tax planning' jurisdiction, but nevertheless has one of the most sophisticated tax treaty networks in the world combined with very favourable domestic tax legislation for both companies and individuals. For example, since 2003 all Irish companies have been subject to a universal corporate tax rate of only 12.5%. For non-domiciled but resident individuals, Ireland can also be an ideal place of residence. Not only are such individuals taxed on a remittance basis only, but also they have tax treaty protection against the anti avoidance provisions of their former jurisdiction of residence. For resident individuals, domiciled or not, actually employed by an Irish company it is often possible to significantly reduce domestic tax levels using various Finance Act provisions. For writers and "artists" there are no individual taxes.

Finally, Ireland can also offer non resident companies that are externally managed and controlled, provided there is either a domestic director or management occurs in a country with which Ireland has concluded a tax treaty or is part of the EU [see Finance Act (No. 2) 1999]. It should also be noted that notwithstanding the fact that Ireland was the second EU country (after Greece) to require a 'bailout' it has successfully navigated its way out of its financial quagmire without losing its 12.5% corporate tax rate or bailing in deposit or bond holders and indeed will be leaving the Troika (ECB, EU & the World Bank) programme by the end of 2013. Ireland has also improved its competiveness and is one of the few countries in Europe to enjoy a current account trade surplus and is expected to be back to full health within the next five years. Ireland is in particular favoured by larger business especially where there is a US or high tech connection

Rating 4.5 Stars

Hong Kong

Since Reunification with Mainland China on the 1st itself as a world class tax planning jurisdiction enjoying many of the benefits of being part of China but a part of China having recourse to the business friendly ex-British common law system, favourable tax treaties with many external countries but most importantly a unique and very favourable 'territorial' tax system, which basically means that companies' need only pay Hong Kong corporate tax (itself only 16%) on those sums derived from either business or management carried out in Hong Kong - In effect, this means that the effective tax rate for many Hong Kong based companies can be as little as 4% or lower. In the case of the SCF Group, we can provide full local management and control facilities, banking, chartered accountant stewardship and accountancy maintenance to trial balance ready for future auditing

Rating 4.5 Stars

Cyprus

The 2013 Cypriot bailout was undoubtedly the most dramatic of the 'peripheral' country bailouts with depositors being bailed in and the financial sector left in absolute pandemonium. At the time of writing, the long-term consequences of the German led moves are not known but this firm is strongly of the belief that in effect sequestrating depositor's money from the banks, has set an awful precedent and one that may eventually lead to the collapse of the Euro but only time will tell. For now, the SCF Group does not recommend using Cypriot banks for liquid sums larger than €100,000.00 but would say that notwithstanding the recent calamitous events it still retains the benefit of EU Directives and Regulations, a common law system, an English speaking business community and a still competitive 12.5% corporate tax rate together with its historically advantageous tax treaties with the former COMECON countries in Eastern Europe.

Rating 3.5 Stars

Tax Haven Jurisdictions

Tax Haven jurisdictions do not normally enjoy tax treaty benefits and are often 'black listed'. In most cases, companies located in these jurisdictions are not subject to variable taxes, but pay an annual duty and/or franchise tax. In some cases, they can have bearer shares and provide a higher degree of confidentiality than is possible in a tax-planning jurisdiction but save for holding they are coming under increasing disclosure pressure from cash starved countries around the world.

Their Uses

Offshore or Tax Haven companies are not normally suitable for dividends, royalties or interest (because they are generally subject to full withholding taxes) receipts or especially for trading purposes (for anti-avoidance legislation reasons). Tax havens are nevertheless very cost effective and generally operate free of local corporate tax exposure and are still regularly employed in tax planning structures or in the Developing World where anti-avoidance provisions are not as sophisticated as in the West. There are also very popular when registering vessels around the World with some of the leading Tax Havens including:

(a) The British Virgin Islands,
(b) The Bahamas,
(c) Belize,
(d) The Isle of Man,
(e) Jersey
(f) Guernsey and
(g) Gibraltar but see also Tax Haven Jurisdictions