Use of a UK company as the link between Onshore and Offshore
The problem experienced
A person is trading in Europe, with a European company, but wants most of the profit to go in the books of an offshore company. This would normally be done through a management charge, where the onshore company pays a charge to the offshore company for various services.
However
Many continental countries penalise payments to a company incorporated in a low tax jurisdiction. They do this by levying a withholding tax on these transactions. Both France and Spain define a low tax jurisdiction in legislation. A company incorporated in a low tax jurisdiction is not necessarily not taxed; as, if it is trading in a high tax jurisdiction, it could be liable for tax in that territory. However, many legal codes assume that all offshore companies are thereto avoid tax.
The solution
The British tax authorities do not penalise payments to any individual or any company. Therefore it is common for companies to trade in, say France and Spain, have a management company in Britain and a further management company in a low tax jurisdiction.
| Trading company | Intermediate management company | Top-level management company |
|---|---|---|
| France, Spain, other countries which penalise transactions with low-tax jurisdictions | UK, (also to be considered: Switzerland, Dominican Republic, Québec, Costa Rica) | Delaware, Saint Vincent, Panamá |
| Makes profit on operations, but the managing of the global operation should be done elsewhere | This company is an agent on behalf of the administration company, which coordinates its activities from an "offshore" base. A small profit is made in this company | This company is the principal and key manager of the global group |
Matters to watch out for:
- As the UK company is an agent for a principal and not a subsidiary, there often needs to be no visible link between the intermediate and the top level management company. Therefore, the UK company and/or the offshore company, will often have to be nominee companies.
- As the UK company is giving services to the trading company, there should be a clear split of responsibilities and personnel between the Management and the Trading companies.
- The services carried out by the management companies have to be properly documented and invoiced in detail to the trading company.