International Trading
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International Trading
When considering the taxation of business, generally most countries follow OECD guidelines. One of the first principles to consider is the principle that a company is resident where it is centrally managed and controlled (sometimes referred to as where the company’s “mind and management” is based). So for instance if an Isle of Man Company was set up from the UK with UK resident directors and managers it would most likely be considered tax resident in the UK under this principle. Likewise if a company was set up and run in the Isle of Man it should be considered tax resident in the Isle of Man (though matters are not quite so straightforward as that).
Indeed when a company changes jurisdiction it is important that it’s “seat” of management also moves with all (or the majority) of directors being based in the new location and all major decisions being taken from there.
If we follow this OECD Model convention principle further one need to be careful to ensure when a company relocates that no one is able to make decisions or bind the company from another jurisdiction or has powers that could mean that they would be considered to be a “shadow” director and hence threaten the tax residency of the company. In this regard even Powers of Attorney (if issued for a specific contract) need to be carefully worded, issued for specific matters and time limited.
Another issue that can affect company residency is whether a company has “permanent establishment” in a country (this is more than just a registered office) and some countries would look to see if trade was being carried out from a specific location. It is possible that a company may have a branch but if not handled correctly this could mean a company could be considered to be wholly based in a location. This prompts a new area of discussion which can be simplified by establishing whether a company is trading “in” or “with” a country.
In many ways it is preferable for an International company to be trading “with” rather than “in” a specific country. For certain types of business, such as property development, it is almost impossible to argue there isn’t a permanent establishment of some sort in a country however this is much easier for say an internet business, international royalty business, shipping or import/export business for instance. A lot depends on the nature of the specific business considered.
One of the strongest ways to defend the relocation of a business to a lower tax area is to establish from the onset a robust non-tax motive for the set up of a company in that jurisdiction. This might for example be because a client involved with the company has decided to say physically relocate to an area such as the Isle of Man (with a top rate of personal tax at 20% the Island can be an excellent location for entrepreneurs to move to and establish a business) or it could also by that some of the key business functions are carried out from here such as the website, client administration and accounting, etc. or it could be because there is a local contract or business partner that is based in the area concerned. With a sound motive it may be possible to establish to the authorities that the proposed Isle of Man Company is a truly internationally operated company that has been set up, has a presence and is managed on the Isle of Man for valid commercial reasons.
As mentioned above it is vitally important to look at the nature of the proposed trade as the OECD and numerous national laws and regulations cover this area. One area to consider is the possibility of withholding taxes that might apply to certain types of income movement for instance Royalty payments. These differ between countries and in some cases it is possible to mitigate this depending on the jurisdictions involved. Also it does make sense to build up profits in a tax neutral jurisdiction for various reasons such as cash flow benefits and success in business incubation. Such profits are generally derived from the trading arrangements between the countries involved and this has been placed under particular scrutiny with anti-avoidance legislation looking closely at “conduit trading transactions”, “Treaty shopping” and “Transfer pricing”. It is essential therefore to follow good business practice with pricing and trade being carried out on “arms length” commercial terms avoiding excessive pricing.
As you can see this is a varied and complicated area and we can assist with introducing clients to specialist tax experts and providing the relevant company, trust and accounting services that may be required.