In this article we analyze three established and proven strategies of international tax structuring and divide them into different risk classes.
In the following presentation we focus on three examples from the practice of international tax structuring instead of reporting on tens of possible domicile states and solutions. The insights gained from these three strategies can then be applied to other tax planning scenarios.
The strategies listed here are examples that we have implemented in exactly the same way for some of our clients. On the basis of these examples, we explain the principles of international tax structuring and deal with both the relocation of domicile and the establishment of companies abroad.
This article is part of the TaxFree Matrix series on “international tax planning”.
International Taxation Strategy 1 (Low Risk) – Transfer of Residence to Malta, Malta Limited Company (LTD) in combination with a Holding Company in Scotland
This design guarantees you maximum flexibility and a total tax burden of 5%.
Click here for the article >>Strategy 1
International tax planning Strategy 2 (Medium Risk) – No transfer of residence, Limited Company (LTD) in Ireland or Malta with substance
There are always situations that make a change of residence impossible. With this arrangement you pay between 5% and 12.5% tax on the company’s profits. When a profit distribution is made, a further tax is added (in Germany e.g. 25% final withholding tax).
Click here for the article >>Strategy 2
International tax structuring Strategy 3 (High Risk) – No change of domicile, US C-Corporation (Inc.) in combination with a Limited Partnership (LP) in Scotland and Malta Limited Company (Ltd.) as holding company with substance
In this strategy, a US C-Corporation (Inc.) is founded with a tax permanent establishment in the USA. By means of a profit transfer agreement, 90% of the profits of the US company without US reference are paid tax-free to the Scottish Limited Partnership (LP). The shares of the Scottish LP in turn are held with substance by the Malta Holding Company. The Malta company can thus receive the profits of the LP tax-free.
Click here for the article >>Strategy 3
Our comments on the three strategies presented
For many outsiders, international tax structuring consists of a confusing mix of complex corporate networks in the Caribbean, foreign accounts at unknown banks in Asia and Liechtenstein, and exotic terms. But the reality is different and far less complicated.
Basically and in simple terms, there are two measures that can be applied in the context of international tax structuring and this is best done in combination:
- Transfer of residence and center of life to a tax-efficient foreign country. This measure leads to a significant minimization of personal taxation (income tax, capital gains tax, wealth tax).
- Foundation and establishment of a company in a tax-advantaged foreign country. The aim of this measure is to optimize the taxation of companies.
There are only various possibilities in the choice of the optimal country of residence and location for the foreign company.
Only limited options
Most people will probably ask themselves now: Is that all? Is it only about the transfer of domicile and/or founding of a foreign company? Are there no “tricks” or ingenious strategies to save taxes?
It is indeed true that there are only limited options available if you as an entrepreneur want to optimize your taxes. It always boils down to these two sets of solutions. Of course, these are not the only ways that can be used for tax optimization. But from our point of view they are the only ones that are safe and can be implemented with manageable effort.
For these three strategies we assume that you and your company meet the following conditions:
- Foreign company with a short-term profit potential of at least EUR 250,000 per year.
- The foreign company must be clearly verifiable – place of service provision abroad, the majority of customers are located abroad or you are planning to move abroad. A combination of these factors would be optimal.
- Clear economic reasons for founding a foreign company. The tax reason should only be a positive deadweight effect, but not the actual reason.
If one of the points should not apply to your project, these solutions are most likely not suitable for your business.
We have classified all three strategies into three risk levels – low, medium and high. A higher risk rating does not mean that the strategy is “more illegal” or that you run a higher risk of being “caught” by the tax authorities. In all our consultations and solutions we always assume that all details of the strategy – where legally required – will be reported to the tax offices.
The higher risk rating means that there is a greater likelihood that the tax authorities will take a closer look. It must also be expected that the whole design is interpreted as an abuse of design and that one is obliged to prove the opposite, which in turn can be lengthy and unpleasant.
With a higher risk rating, you must pay all the more attention to the correct behavior that is intended in the context of the design and, if possible, you must not make any mistakes.
Basis of risk classification
The basis of the risk classification is based on our assumption that you live in a country like Germany, Austria or Switzerland and are taxable there. If you live in another country, there are other ways and solutions.
Transferability and adjustments
These strategies are case studies that never apply 100% to your personal situation. A little creativity and flexibility is required here. No two solutions can be absolutely identical.
You have to “adopt” these described models. In English there is a term for this: “make it your own”. This way of thinking is also needed here. Our consulting services aim to adapt and customize functioning designs to your requirements.