UK companies are looking for legitimate solutions that enable them to remain profitable by reducing their costs and increasing profitability.  Reviewing the way a business is structured can deliver big benefits.  Even businesses with moderate taxable profits can reap rewards.

The outcome of such a review may demonstrate that a business can legitimately and significantly reduce its tax burden by re-organising its structure.  A corporate re-structure may include the addition of offshore or international business companies, that take advantage of the UK’s Double Taxation Treaties and low rates of tax in treaty partner countries.

In the following case study a UK company (‘UK Co’) that buys goods from China (‘China Co’) and sells to consumers in the UK.

• China Co sends goods worth £100 per unit, with invoice directly to UK Co.
• At the end of the financial year, UK Co makes a taxable profit of £1,500,000.  The corporation tax at 28% = £420,000 so the profit after tax was £1,080,000.

Upon review the owners of UK Co decide to make changes to their corporate structure.  They transfer their shares in UK Co and form two new companies:

• Belize company (’Belize Co’) with a Swiss bank account
• Cyprus company (‘Cyprus Co’) with a Cyprus bank account
• The shares in UK Co are transferred to Cyprus Co.  Cyprus Co is owned 100% by Belize Co.  Belize Co is owned 100% by the owners.

The new corporate structure took only a few days to establish and was ready for operations by the beginning of the next financial year.  The business now operated like this:

• China Co sends the invoice for £100 each unit to Cyprus Co but the goods are sent directly to UK Co.
• Cyprus Co issues an invoice to UK Co for each unit at £150.
• UK Co continues to sell the goods at the same retail price as before.

Therefore at the end of the first financial year using the new corporate structure, UK Co made a smaller taxable profit but this was offset by increased profits of Cyprus Co. The detail looked like this:

• UK Co had made a smaller taxable profit of £750,000.  The reduced UK Co profits qualify for tax relief reducing the tax payable to £196,875.  Therefore UK Co makes an after tax profit of £553,125
• UK Co pays the £553,125 to Cyprus Co as a dividend. Because of the double taxation treaty between UK and Cyprus the dividend payment to Cyprus Co incurred no tax.
• Cyprus Co made £750,000 profit from the ‘sales’ it made to UK Co and received £553,125 dividends from UK Co.
  • £750,000 was subject to Cyprus corporation tax at 10% (£75,000), therefore Cyprus Co profits after tax were £1,228,125.
• Cyprus Co paid the £1,228,125. to Belize Co as a dividend into the Swiss bank account.  Under Cyprus tax rules the dividend is tax free.
• By making changes to their corporate structure, in the first year after the changes the owners reduced their corporate tax burden by from £420,000 to £271,875 – a saving of £148,125.

The above example structure cost £2,000 to set up, and £2,500 annually for government fees, accounting/audit and corporate services. YourBooks Ltd in Cyprus offers a wide range of bespoke solutions and special ‘packages’ at cost-effective rates.

Choice of countries and cost of services vary widely and advice from a competent service provider should be sought.  In addition to costs there are other important considerations to take into account when planning a new corporate structure.

• Country/Jurisdiction:  the choice of which country or jurisdiction to choose when forming a company or choosing a bank account may be influenced by such factors as; tax regime; confidentiality rules; reputation and stability; an extensive network of double taxation treaties; high standard of professional service providers.
• Owner’s vision: Whether an exit plan, divestment plan; or public listing; a corporate structure should support and promote the vision and goals of the owners.
• Flexibility: Things happen; businesses grow, tax regimes shift, an owner’s vision changes; so a corporate structure should be able to be adapted to accordingly.
• Cost-effectiveness.  The cost of setting up and administering new companies and banking arrangements.

Example:

Jurisdiction                   Belize

Operations country       UK

Bank account              Switzerland

Choosing the right jurisdictions

The right jurisdiction might be influenced by the type and where in the world business will be conducted; and the tax issues for the shareholders, including the existence of double taxation treaties between the shareholder’s tax residency and the juristic diction of the company.

Many jurisdictions have an exceptional reputation and are well regarded by the finance industry and regulators, whilst some jurisdictions are regarded less favorably.  Recent and planned changes to OECD rules and not least US law, mean that most jurisdictions have changed and are continuing to change their regulatory frameworks.

Legitimate uses of IBCs companies

• International trading
• Reducing tax liability
• Asset protection
• Protection of intellectual property
• Succession planning
• Confidentiality
• Yacht registration

Benefits

IBCs companies have the following features which may be beneficial:

• Taxation:  In some jurisdictions IBCs are not taxed however they may have to pay flat rate annual government fees (Belize $100)

• Simplicity and Reporting:  Nil or minimal reporting is often required

• Legal and asset protection:  Some jurisdictions have strict restrictions on allowing a court to obtain or divulge company information.  In some jurisdictions local law takes precedence over that of the country there the company is sued. For example under Swiss law it is illegal to disclose banking information about a Swiss Company.

• Fees:  Some jurisdictions impose much higher fees to incorporate than other jurisdictions.
• “Maintenance fees” for a company’s annual renewal vary greatly from service provider to service provider but will reflect the cost of local government fees and other disbursements.

• Anonymity:  The Company is a separate legal entity, so name of the Beneficial Owner will necessarily appear in documentation.  However anti-money laundering regulations require banks to have an understanding of the ownership of the company.
• Financial assistance:  IBCs companies are usually not prohibited from providing assistance for the acquisition of their own shares.

Disadvantages

• IBCs companies are sometimes prohibited from conducting business or hiring staff employees in their jurisdiction of incorporation.
• Certain countries have anti-tax haven legislation which makes it difficult to conduct business in those countries using an IBC.
• Where a Shareholder of an IBC dies, it can be necessary that the will is admitted to probate in the offshore jurisdiction.  This will add cost and delay in executing the will.

Illegitimate uses include; Financing of terrorism; Money laundering; Tax evasion; Fraud; Confidentiality (for criminal activities); Evasion of creditors

1:- In the following case study a UK based company ‘UK Importer Co’ (an electrical goods imported and re-seller) is buying 1,000 TVs at £100 each, directly from China and selling to consumers in the UK at £200 each, thus making a profit of £100,000.  The corporation tax on this would be 28% = £28,000

However the incorporation of an offshore company in Cyprus can reduce the corporation tax liability for the UK importer & re-seller.

2:-  The China supplier sends the invoice for £100,000 to the Cyprus Company.

3:-  The Cyprus company ‘re-sells’ the goods to UK Importer Co by issuing a sales invoice for £150,000 (£150 per item) and the goods are shipped direct from the China supplier to the UK importer.

4:-   The UK importer buys the 1,000 electrical goods at £150 each but sells them  at the original price of £200 so the profit for the UK Importer Co is reduced to £50,000.  The UK corporation tax = £14,000.  Cyprus Corporation tax is 10%, so the Cyprus corporation tax = £50,000 x 10%) = £5,000.

In this single transaction the tax burden was reduced from £28,000 to £21,000 creating a saving of £7,000

Contact YourBooks today to order a Cyprus Company from just €700