In classic offshore companies, there is no taxation of profits and capital gains of companies registered in the names of non-residents. Of course, in order to be eligible for this, the company must conduct its activities outside the country. Let’s see if offshore companies pay VAT.
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The value added tax (VAT) has a couple of different names in various countries:
- Value Added Tax (VAT);
- Goods and Services Tax (GST).
In any case, the tax is charged on the sales. VAT is an indirect tax. It is paid by the consumer, and the accounting is carried out by sellers.
Is an offshore company obliged to pay VAT?
Each country establishes a regulation that VAT on domestic and import trade transactions is paid by all business entities (resident and non-resident ones) when a certain limit of value of the supplied goods and services is exceeded.
Hence, there are some cases when an offshore company must register as ф VAT payer in the country where it operates. For example, this is true in the UK or countries of the EU.
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Situations in which an offshore company does not have to pay VAT abroad
There are some conditions under which an offshore company operating in a foreign country does not pay VAT:
- if it exclusively supplies goods and services for which VAT is 0%;
- if it performs only export operations that are exempt from Value Added Tax.
Using an offshore to reduce VAT
In export operations involving offshore companies, re-invoicing is often arranged. This can be done by significantly undercutting the prices of goods or services. An offshore company buys a batch from an affiliated company at the lowest price, and then sells it to a counterparty at a market price. Thus, it is possible to concentrate the funds in an offshore zone, where they will be eligible for taxation.
In some countries, payment of a company’s authorized capital with goods is not subject to customs duties and VAT. In this case, an offshore company states that the goods it imports are a contribution towards the capital of a local enterprise; in this case the foreign company becomes the founder of the local one.
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