Isle of Man: Uses of Offshore Companies

Last Updated: 4 January 2000

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue."

Law Lord Clyde, (Ayrshire Pullman Motor Services v Inland Revenue Comrs [1929] 14 Tax Cas 754, at 763,764).

"There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; all do right. Nobody owes any public duty to pay more than the law demands; taxes are enforced exactions not voluntary contributions!"

US Judge Learned Hand

OCRA World Wide acts for a wide range of clients from large multinational companies to family businesses to private individuals. Our clients are engaged in their own country or internationally in many areas of activity such as:

The Arts, Agriculture, Banking, Brokerage, Chemicals, Constructions, Distribution, Electronics, Exporting, Energy, Engineering, Fund Management, Film Production, Hotels, Importing, Insurance, Investment Advice, Manufacturing, Natural Resources, Oil and Gas, The Professions, Property, Project Financing, Retailing, Shipping, Show Business, Textiles, Trading and Unit Trusts.

Some examples of the areas in which OCRA World Wide helps its clients follow. Apply the principles to yourself or your company and you will appreciate how we can help you.

INTERNATIONAL TRADING AND PURCHASING COMPANIES

One of the most popular uses of a company incorporated in a low tax area is for international trading. Significant tax saving opportunities can arise by interposing an offshore company in to an international trading transaction. If an offshore company were to obtain products from one country, and then sell them on to another country the profits arising out of the transaction may be accumulated in the offshore company, free from taxation in the offshore centre.

For European Union transactions, the Isle of Man and Madeira have become very popular locations for conducting cross border trading activities. Both the Isle of Man and Madeira are able to obtain VAT registration, which is imperative for transactions within the European Union. As an example, if an Isle of Man company wished to source products from France for sale to Germany, the Isle of Man company would inform the French company of its VAT number so that it could zero rate its sales invoice. The French company would not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the German company's VAT number so that it could zero rate its sales invoice.

This type of transaction would not normally be possible through other jurisdictions without the requirement of either establishing a branch office or appointing a tax agent within the European Union which can be a complicated exercise and may give rise to taxation implications.

Factoring trading debts of a company resident in a high tax jurisdiction through a company established in low tax jurisdiction may assist in transferring funds to the low tax jurisdiction.

Another common use of an offshore entity is for bulk purchasing. Such a structure is typically established by a group of associated or un-associated companies to benefit from economies of scale and reduced administrative costs. Moreover, such a structure may be more tax efficient than an onshore arrangement.

INTERNATIONAL INVESTMENT

Both corporations and individuals regularly make use of offshore companies as vehicles to hold investment portfolios. Such portfolios may consist of stock, bonds, cash and a broad range of other investment products. Cash assets held by offshore companies may earn deposit interest gross or be placed in collective cash funds.

Many of our clients instruct us to arrange for offshore life insurance and pension contracts to be established by their offshore companies.

High net worth individuals often use offshore companies as personal holding companies to hold investments made in a number of different markets and countries. Personal holding companies can provide privacy and may save the professional and other fees associated with setting up and maintaining entities in a number of different structures. In this connection, offshore companies are regularly used for inheritance planning and to reduce the costs and time delays associated with probate.

The selection of a politically and economically stable corporate domicile may reduce risks that both corporations and individuals may face in either their home or third party countries.

PERSONAL SERVICE COMPANIES

Many individuals engaged in the provision of professional services in the professions and in the construction, engineering, aviation, finance, computer, film and entertainment industries can achieve considerable tax saving benefits through the establishment of a personal service company, based offshore.

The offshore company can contract to supply the services of the individual outside the country in which he/she is normally resident and the fees earned can accumulate offshore, free from taxation in the offshore centre. Payments to the individual can then be structured in such a way to minimise income tax.

HOLDING COMPANIES

Offshore corporations and trusts are often used to hold investments in subsidiary and/or associated companies, publicly quoted and private companies and joint venture projects. In many cases, capital gains, arising from the disposal of particular investments, can be made without the encumbrance of taxation. In the case of dividend payments, reduced levels of withholding taxes can be achieved by the utilisation of a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state. An example of this is a Mauritian Offshore Company, which can invest in to Indian companies and benefit from the double tax treaty that exists between the two countries. Moreover, there is no capital gains tax upon the disposal of the investment in India.

INTERMEDIARY HOLDING COMPANIES

Many large corporations and companies wishing to invest in to countries where a double tax agreement does not exist between the investor's country and the country where the investment is to be made will establish an intermediary company in a jurisdiction where there is a suitable treaty. The Madeira SGPS Company, for example, has been used extensively for inward investment in to European Union since corporate entities incorporated there are generally able to avail themselves of the EU Parent/Subsidiary Directive.

Cyprus has an extensive double tax treaty network with many Eastern European and CIS countries, and the use of Cypriot companies for inward investment in to these countries provides a tax efficient conduit.

EMPLOYMENT COMPANIES

Many companies utilise offshore companies for the employment of staff working on overseas assignments. This helps to reduce the costs associated with payroll and travel expense administration, and may provide a tax and social security saving benefit for the employees.

PROPERTY AND LAND OWNERSHIP

The ownership of real property and land by an offshore company can often create tax advantages, including the legal avoidance of capital gains, inheritance and property transfer taxes.

If, for example, an offshore company, beneficially owned by a UK non-resident, purchased a property in the United Kingdom for investment purposes and the property was then later sold on to a third party the capital gain arising from the transaction would not be subject to United Kingdom capital gains taxation. In addition, by structuring the financing correctly through a back-to-back loan facility, the offshore company can reduce the effective level of any withholding taxes on rental income that may apply.

INTELLECTUAL PROPERTY, LICENSING AND FRANCHISING

Intellectual property, including computer software, technical knowledge, patents, trademarks and copyrights can be owned by or assigned to an offshore company. Upon the acquisition of the rights, the offshore company can then enter in to licence or franchise agreements with companies interested in the exploitation of such rights around the world. The income arising from such arrangements can be accumulated offshore and by the careful selection of an appropriate jurisdiction; withholding taxes on royalty payments can be reduced by the commercial application of double tax treaties. The UK, Netherlands, Madeira, Cyprus and Mauritius are good examples of jurisdictions used for holding intellectual property.

STOCK MARKET LISTINGS AND CAPITAL RAISING EXERCISES

With political and economic uncertainty in some countries, many large corporations have sought to mitigate risk by moving ownership of assets and bases of operations offshore. Luxembourg and Bermuda have been host to many companies wishing to re-domicile their operations.

Offshore companies are regularly employed to raise money through loan or bond issues. Such a structure may reduce withholding tax on interest payments as, for example, countries such as the UK raise a withholding tax on interest paid on non-quoted bonds to non-residents. Double taxation avoidance planning is vital in cases such as these.

FINANCE

Offshore finance companies can be established to fulfil an inter-group treasury management function. Interest payments from group companies may be subject to withholding taxes, but often these taxes are different to the normal rates of corporation taxes that are levied. The interest paid would be a deductible charge, for taxation purposes, and so consolidating interest payments in an offshore finance company may provide a tax saving benefit.

Many large companies establish their own offshore mixing companies to mix dividends from their subsidiaries and to take maximum advantage of tax credits.

In certain countries, foreign exchange losses are not deductible for tax purposes. If an offshore finance subsidiary was formed, then made a foreign exchange loss, and was then liquidated, the investment could be a tax-deductible item for the parent company.

Offshore companies are often utilised as part of mechanisms and structures for acquiring foreign entities; international restructuring of corporations, real estate and other investments and other corporate finance related projects.

Another application of offshore structures is leasing, and such mechanisms are particularly favoured when an offshore structure is rich in funds which, unless invested, would have to be repatriated and face high levels of corporate taxation.

PRE-EMIGRATION TAX PLANNING

OCRA World Wide respects the fact that the anti-avoidance legislation of most high tax jurisdictions is primarily aimed at long term residents of that jurisdiction or alternatively at countering action taken while a resident of that jurisdiction. This leaves an enormous amount of scope for planning when an individual is physically moving between high tax countries.

SHIPPING AND AVIATION COMPANIES

Since the early part of the 20th Century, the use of offshore companies to own merchant ships and pleasure craft has been an important function of certain offshore jurisdictions, such as Panama and Liberia.

Many other important offshore jurisdictions have modern ship and pleasure craft registration facilities that provide low cost registration fees and tax exemption on income derived from shipping and chartering activities. These jurisdictions include the Isle of Man, Madeira, Jersey, Gibraltar, Cyprus, Bahamas, Belize and Mauritius.

It should be noted that owners of pleasure vessels being operated within European Union waters for extended periods require specialised advice in relation to Value Added Tax.

OCRA World Wide has particular expertise in aircraft registration and finance and is able to assist clients wishing to register aircraft in the UK, Isle of Man, Aruba, Mauritius, Seychelles, Bermuda, Cayman Islands and elsewhere.

FREEPORTS

The Group established a Mauritian offshore company for a client who sources and exports precious woods from the African continent to the European Union. The Mauritian company rents space in the Mauritius Freeport and treats the product further. This degree of processing qualifies the wood for a Mauritian Certificate of Origin, without the necessity of setting up an onshore processing unit which would be liable to tax at the full corporate rate. The Mauritian Certificate of Origin ensures that the wood enters the European Market on a concessionary duty and benefits from the Mauritian quota.

OCRA World Wide processes all the documentation relating to the Letters of Credit and liases with the banks involved to ensure that payment for the products to the supplier is made, and payment from the customer is received.

If you are interested in our international professional corporate services please contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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