Many offshore companies put into practice a series of strategic plans for minimizing the amount of taxes that they must pay. Choosing the appropriate strategy depends on what your company hopes to achieve.
Transfer pricing is often used as an intermediate step between sellers and buyer in offshore trading strategies.
Prices on exported merchandise or services from offshore countries are generally listed at the lowest possible cost; the merchandise is then sold at a more practical price, and the offshore company reserves all profits for itself. The value of the merchandise is usually reduced in order to lower the amount of customs duties and VAT; customs values should also be considered, since a listed value that is too low could result in a higher tax evaluation, just as a higher customs value will result in higher customs fees. In both scenarios a price can be fixed where you will need to pay as little as possible in government taxes. Another noteworthy fact is that the amount of income tax to be paid can be lowered on the use of services from companies which pay a set tax or have switched to a less complicated tax system. Buying merchandise in Russia intended for export, you will have to pay VAT, which will then be paid to the state in time. Paying VAT is not required when buying on behalf of a foreign offshore company.
Any offshore company must hire an agent who operates according to instructions given by the employer. This way, the company will pay taxes only on its profits.
With the use of this strategy, the offshore company itself acts as a contractor. All payments are made by the customer to the offshore company for construction services. The offshore company would then contract with a subcontractor, which would then perform all construction work. As a result, most of the profits remain with the offshore company.
Here, the offshore company pays all manufacturing expenses, which are generally kept to a minimum. An agent provided by the manufacturer will sell the merchandize; after discounting his commission, the agent will then remit the balance to the offshore company.
Transport companies with international contracts usually take advantage of this strategy. Offshore companies act as carriers. The agreement includes a clause regarding the avoidance of double taxation, which can be legally implemented by using a company-agent resident in the offshore country. Offshore tax expenses can be reduced to a minimum by using the company’s agent.
The Service Scheme
Resident companies receive services from an offshore company. In the most common form of this business strategy payment is sent directly to the account of the offshore company. The payment is considered an expense and is therefore tax deductible. Knowledge of legislation is a prerequisite for the use of this strategy. There is no need to provide proof that this service was used. Use of a low-tax Swiss company for this service can help increase respectability.
Residents are accorded credit by a bank in the country of residence, which is then transferred into an account in an offshore bank, according to the contract. The funds are then restored to the bank, after a six-month period, because of a presumed inability or failure to complete the required conditions. During the six-month period the funds may be used in the offshore company; the profits will not, however, need to be returned.
An offshore company creates a trademark that is then registered by a resident of the offshore country. Following the registration the trademark rights are then transferred to the offshore company, which then turns it and all rights and royalties over to the resident. Because of this, the company pays royalties in the offshore country, avoiding double taxation because no taxes are paid in the residential country. The agent’s commission and royalty payments are listed as being the highest part of the offshore company’s expenses, and thus deductions that help to lower income tax.
Registration of New Businesses
This scheme is a favorite for foreign investors for creating a resident company with foreign funds. The principal offshore company creates a branch office in the investor’s country of residence. Dividends from the company are subject offshore taxation, which results much lower than that of the investor’s residential country.