CONCEPTS OF CORPORATE TAXATION

Resident for tax purposes | Tax exempt company | Non resident company | Territorial tax No tax company | Conculsion

Resident for Tax Purposes

Depending on the territory a company may be resident for tax purposes in the country of its incorporation regardless of where the directors reside unless this is over ridden by provisions in a double taxation treaty. These can move the basis of taxation from that of incorporation to the place of management and control.

Other offshore jurisdictions tax a company not on the basis of incorporation but solely on the basis of where the management and control is exercised.

Other complications occur because tax can arise in one country, for example, directly on the source of income from the originating country such as rents from property and also fall to charge within the country where a company is either incorporated or managed and controlled. This fortunately is normally overcome by provisions of a double taxation treaty which lays down rules as to which country retains the tax and prevents the company paying twice.

The concept of management and control is almost universally understood and even in countries where the basis of taxation is incorporation the Revenue will still charge to tax foreign companies managed and controlled within their borders.

It is therefore important for a company not to be resident in a jurisdiction where it wishes to avoid local tax.

Tax Exempt Company

Gibraltar was the first offshore jurisdiction to introduce the Tax Exempt Company and has been followed by others since. However the principle of the tax exempt company in each jurisdiction is much the same. A tax exempt company starts life as being resident through either the incorporation test or because management and control is in its jurisdiction. However, where the beneficial owner of the company is not resident in the territory and the company does not trade with residents of the territory or has income derived from the territory apart from bank interest and certain other financial income then, notwithstanding that it is resident for tax purposes it may apply to be exempt from taxation. For this privilege the company must pay an annual fee to the government of the territory.

Non Resident Company

Where a jurisdiction only brings company profits into charge of tax when that company's management and control is located within its borders then as long as no income is derived from that territory, tax can be avoided by arranging for the company to be managed and controlled by directors situated in a territory without tax. Traditionally directors based in the Channel Islands of Sark were used. The traditional offshore non resident company is now unpopular and has very much been replaced by the exempt company described above.

However the concept of the non resident company is still important when looking for a jurisdiction which is not "tainted" as offshore but based onshore and structured so as not to be taxed in that territory.

Territorial Tax

Some jurisdictions such as Hong Kong only tax income generated in their territory. In such a case foreign source income will escape tax. These jurisdictions have an important place in tax planning.

No Tax Company

Typically the Caribbean international business companies are incorporated as tax free companies. They maintain their goodstanding as long as they pay their annual registration tax to each of the island's governments.

Conclusion

It is important to understand the taxing regime in each jurisdiction to avoid unnecessary exposure to tax. Fiduciary can assist you on such matters.