Why Pay Corporation Tax If You Can Set Up Offshore?

In the offshore jurisdictions of Guernsey and Jersey in the Channel Islands, no tax is payable on any income generated outside of the Islands. In other words there is no income tax payable on non Jersey or non Guernsey income. In addition, there is no corporation tax, no capital gains tax, no vat, no inheritance tax or gift tax.

Corporation tax is payable by UK companies on its profits in the UK. It is payable on all their income sources for income tax and capital gains purposes. It's also payable on their worldwide profits regardless of where they arise.

Non UK resident companies pays corporation tax only on their UK source income but only if the company both trade through a UK branch or permanent establishment and derive its UK source profits through that branch or permanent establishment. UK and international Companies can be restructured offshore in such a way to benefit from this.

The current corporation tax rate in the UK is 28%. For small companies with profits up to £300 000, the rate is 21%. Setting up or restructuring offshore would enable a saving on these taxes. The benefit of no vat would in addition allow your business to compete with competitors at a better price as no vat would be chargeable on products or services to clients. In the UK this would mean a discount to clients of 20% on products or services which is the current rate of vat payable in the UK.

If you are a UK company conducting business locally or internationally you should look at ways of restructuring your business or part of it offshore to benefit from non corporation tax and vat.

New businesses or companies who intend to do business in the UK and or globally should also consider such an option to benefit from the saving.

Structuring offshore also allows for other tax benefits like no capital gains tax, inheritance tax or gift tax.

Many well known large, recognised and reputable UK and international companies are incorporated in the Channel Islands or have a Channel Islands element/presence and make use of offshore tax benefits.

The question you have to ask yourself is, if large companies and organizations make use of the tax advantages offshore, why shouldn't your business also benefit from that. Every one is entitled to structure their affairs in such a way to pay less tax. There is a huge difference between evading tax and structuring for tax efficiency.

A number of companies listed on the London Stock Exchange, the Alternative Investment Market or other recognised stock exchanges have their incorporation in either Guernsey or Jersey.

Everyone's needs and tax consequences are different and should always take professional advice. The information provided in this article is for information purposes only and advice should be taken on each and every proposed transaction or structure.

Tax Benefits of Buying UK Properties Through an Offshore Structure

There are many advantages to creating an offshore structure and protecting your property in it. Tax advantages are only one of these - let's look at this in a little bit more detail:

In offshore jurisdictions like Guernsey and Jersey, no tax is payable on any income generated outside Guernsey and Jersey. There are no capital gains tax, no inheritance taxes and no exchange control regulations which allows for free and easy transfers of funds.

Both islands are widely recognised as two of the worlds premier international finance centres. The islands offer a first class infrastructure, stable economy, a transparent, comprehensive, sophisticated, modern and pragmatic law system, and easy access to courts, efficient company registries with cutting edge technology and established relationships with the United Kingdom which goes back a number of years. English is the main language.

Using property as an example let me illustrate an simple but dramatic advantage of buying property in an offshore company:

In the UK, stamp duty land tax ("SDLT") is payable on contracts for sale and purchase of UK property. The SDLT is payable by the purchaser. Just to highlight one of the most obvious and simplistic taxes payable.

When a UK property is purchased and transferred to an offshore company, the UK stamp duty land tax SDLT is payable by the offshore company as purchaser on the transaction. BUT when the shares of the offshore company, which owns the property, is eventually sold on, then SDLT is NOT payable in the UK by the new purchaser as there is no physical transfer of the property but only the transfer of the shares to the new purchaser. The shareholders of offshore company will also not pay capital gains tax on the sale price of the shares as no capital gains tax is payable in the Channel Islands.

The benefit that derives from the saving of SDLT for the purchaser is that it allows the seller to negotiate a better sale price for the sale of the shares of the offshore company.

Many UK properties are owned by international and listed companies, investment firms and funds through an offshore structure.

Typical offshore structures take the form of a trust with a Guernsey or a Jersey company. The Guernsey or Jersey company can conduct business anywhere in the world and this would have tax benefits and provide protection of investments and assets.

The costs for setting up a trust and a company structure in the Channel Islands starts from as little as £1,500 and could SAVE you more than that merely on the SDLT!

All regulatory requirements are met by the "offshore management team"which gives you PIECE OF MIND that all is in order with the structure's affairs. The annual management fees for each of a trust and a company ranges between £1,500 and £10,000. But make sure you deal with a reputable management firm that will deliver excellent service AND value for your money! Also check on HIDDEN COSTS by asking the management firm directly!

Management fees of the offshore company include the provision of company directors, the company secretary, the company treasurer, safe custody and the preparation of the accounts. Fees are charged in addition for time spent necessarily on the trust or company. The additional charges for time spent would depend on the nature of the structure, the activities of the structure and what needs done in addition to the scope of the work included under the annual management fees. Some structures only hold assets and wouldn't involve extra work so there could be no or minimal charges for additional time spent.

Many well known, recognised and reputable international companies are incorporated in the Channel Islands or have a Channel Islands element or presence. A number of companies listed on the London Stock Exchange, the Alternative Investment Market or other Recognised Stock Exchanges over the world have their incorporation in either Guernsey or Jersey.

Everyone's needs and tax consequences are different and should always take professional advice. The information in this article is for information purposes only and specialist advice should be taken on each and every transaction.

Investing In The UK Through An Offshore Company To Avoid UK Tax

Capital Gains Tax Holding UK investment via an offshore company would look at first glance to be a good way of avoiding UK capital gains tax. As the company is non UK resident,and provided the assets aren't used for the purpose of a UK trade they will be exempt from UK capital gains tax (or more correctly corporation tax on the capital gain).

Note though that this tax exemption only applies if the company retains the cash until the shareholder is non UK resident or if the cash is retained overseas. Any extraction of the proceeds would be taxed to the extent that they were remitted to the UK. So whether a simple dividend is paid or if the company is liquidated and a capital distribution is paid the cash would need to be retained offshore. If you wanted to enjoy the proceeds in the UK you'd need to think about methods of remitting the proceeds with minimal UK tax implications.

A big problem with using an offshore company is in ensuring it's controlled from overseas. If it was controlled from the UK it would be UK resident and as such taxed in full on any capital gains realised. If the company owns UK assets it makes it more difficult to avoid the company being classed as UK resident.

Inheritance taxUsing an offshore company is a big advantage for inheritance tax purposes, as it converts a UK asset into an overseas asset. As non UK domiciliaries are not subject to Inheritance tax on overseas assets they can then avoid tax on the UK property owned by the offshore company. One point to note here is that it's important that the company shares pass on registration. They will then be classed as located where the share register is - which if this is outside the UK will ensure that the shares are excluded property.

Income taxA directly owned foreign holding company can at the most only achieve only a a partial avoidance of UK tax. Income tax, unlike capital gains tax is still taxed on UK source income. Therefore even if an offshore company is used, UK tax will still be charged on UK income.

However there are benefits to be obtained from using an offshore company. For example there can be a saving of higher rate tax as non resident companies are subject to the lower or basic rate of tax in respect of UK source income. Note though that you can obtain some income (eg UK bank interest) free of UK tax. This is because tax on this income is restricted to tax deducted at source if the recipient is a non resident.

SummaryAn offshore company investing in the UK can look to achieve the following tax benefits:

Avoidance of capital gains tax
Avoidance of inheritance tax
Partial avoidance of income tax
Anti avoidance rulesAside from the company residence position - which is always an issue where you have an offshore company with UK shareholders there are also the anti avoidance provisions to consider.

Note that there is also the related issue that if an individual exercises control over the company and makes it UK resident there is a risk that he may be a shadow director and any benefits provided to him (or his family) from the company would be charged to income tax.

The main anti avoidance provision that applies to income is S739. Although there is an exemption for non UK domiciliaries this does not apply to the company's UK income.

Therefore if the offshore company had UK investment income this provision would deem the income of the company to be that of the person establishing/transferring to the company originally.

Another useful point to note is that S739 applies to any foreign registered company.

When can the anti avoidance rules be avoidedOne is where the UK individual buys a company that already has the UK investments in it. Provided he doesn't inject any further assets to the company he shouldn't be within the scope of the legislation (as he's not made a transfer of assets resulting in income accruing to the company).

Secondly there is the motive defence which applies where the transfer was not for the purposes of avoiding UK tax, and was for a wholly commercial purpose. One case where this is more easily satisfied is where a non domiciliary established the company before coming to the UK.

When can the offshore non resident company be used as a tax shelter for UK investments?It can be used to avoid UK Inheritance tax It can be used to avoid UK tax on any capital gain It can be used as a partial shelter for UK income if S739 is avoided in one of the above ways.

However any extraction of the income or proceeds from the company to the UK would be subject to UK tax. Therefore ideally income/proceeds should be retained overseas.