Tax planning is a standard and widespread practice that allows for legitimate ways to reduce the tax burden. However, in order to correctly create this scheme it is extremely important to know what subtleties and nuances exist in different jurisdictions. This is the case when we can not do without the help of a qualified specialist.
Tax optimization is one of the forms of expenses optimization that improves the financial performance of entrepreneurial activity. The essence of tax planning is to ensure the minimum possible amount of tax burden while conducting economic activities or for a specified period of time. Understanding this has long become a generally accepted axiom applied everywhere in big business.
Tax planning plays an important role in the organization of business, especially large business with an international presence, and payment of taxes at a standard rate reflects inefficient tax management. If the company lacks competent tax planning, high expenses through various types of taxes can negatively affect the efficiency and financial state of the company, and as a result, its competitiveness.
At the corporate level some well-established and widely used schemes are applied for the purpose of tax optimization. One way is to use different jurisdictions depending on tax burden relieving goals. This step is conceived through choosing the most advantageous location for the organization, branches and subsidiaries.
For example, Cyprus and the Netherlands are the most popular jurisdictions for registration of holdings. While investment companies get more preferable conditions in Ireland, Luxembourg, and, again, in Cyprus. Commodity traders are a different thing altogether and they often choose Switzerland and Singapore. Due to the peculiarities of US legislation, almost any type of business in this country uses the jurisdiction of the State of Delaware for the purposes of tax optimization. All these jurisdictions have their own characteristics that meet the particular needs of different business categories and have long been well-established.
But the task of tax optimization is not limited to choosing a jurisdiction alone. Due to the surge of international practices for combating tax evasion, just a formal registration of a legal entity in a low-tax jurisdiction no longer offers the opportunity to optimize taxation, which creates difficulties while using the established schemes.
The most important requirement is the existence of a sound economic justification for the use of companies registered in a particular jurisdiction in the business. In particular, it is necessary to highlight the requirement for the existence of a real office, the so-called “office with substance”.
Economic justification is also required for the activities of offshore companies. Such requirements are made by the tax authorities of the countries in which business is actually conducted. The absence of a real economic justification can become the reason for classifying an offshore company de facto as a tax resident of the country in which the activity is carried out. According to the law, tax optimization cannot be the only economic justification for using offshore companies in business. The absence of the “office with substance” requirement for offshore companies becomes insignificant as compared to the need to come up with additional economic grounds for their application.
The use of offshore companies in business as a ubiquitous and widespread practice is gradually becoming obsolete. These schemes slowly become displaced by other already proven ways to optimize tax burden, which received a new stimulus for development.
As a result, offshore companies are replaced by direct ownership of shares in on-shore companies by individuals, and tax optimization is achieved by choosing the jurisdiction where the actual and tax residency of such individuals moves.
This scheme is gaining popularity, and a large number of countries literally enter into a tacit competition with each other to offer the most beneficial taxation systems. Thus, the ability to attract new capable taxpayers comes to the forefront. It should be noted that the original citizenship, except for the one of the US, does not play a significant role and does not create an obstacle, which is extremely important.
A large number of countries that attract people from all over the world rely on flexible taxation systems. For example, Switzerland has long attracted wealthy citizens with its lump-sum tax regime and a similar system of taxation was introduced in 2017 in Italy. In Switzerland, the minimum annual tax payment is 400,000 francs and in Italy 100,000 euros. Despite these rates, each system has its own specifics, all aspects of which is extremely important to know in order not to get into an unpleasant situation.
Other countries, such as Great Britain, Cyprus and Malta, have a non-domicile taxation system. In particular, Malta operates a system where only the income coming to a bank account inside the country is taxable. Another jurisdiction, which has roots in the English legal system, Gibraltar, has a taxation regime that is based on the maximum tax burden.
It is also worth mentioning Monaco and Dubai where taxation of individuals is non-existent as such.
Some jurisdictions also offer special conditions for tax residency as part of investor programs. Tax residency in such countries can be part of the overall investment strategy and not just an element of tax planning.
This overview gives just a general idea of the various preferential and special taxation regimes available in different jurisdictions. There is no universal solution, and the choice of the optimal solution in each case will depend on individual circumstances. To understand all the details is sometimes very difficult and even impossible without the support of highly qualified, independent and unbiased experts who have proven themselves in the market. These are the experts from Cyprus Sotheby’s International Realty.