- Tax Planning
- Efficient Tax Planning Strategies
- Strategy 1. Income Transfer
- Strategy 2. Business Transfer to the Offshore
- Strategy 3. Use of Possibilities Provided by Tax Havens
- Strategy 4. Deferred Tax Payment
- Strategy 5. Regulatory Arbitration
- Strategy 6. Use of Holding Companies
- Strategy 7. Corporate Inversion
- Strategy 8. Income Conversion
- Strategy 9. Double Taxation Avoidance
Efficient tax planning has become even more complicated in 2023 for a company that carries out international business in several countries. The strategies which help to considerably decrease tax rates and make a considerable share of profit disregarded by fiscal authorities are practically nonexistent now. Developed countries actively exchange financial information, and offshore jurisdictions where no register of beneficiaries is kept are gradually ousted from the economic space.
A global minimum tax is yet another problem. The OECD is actively promoting and lobbying for this novelty, and there will be less room for legal tax optimization if it is implemented. But it does not mean that companies should abandon legal tax optimization. You will have no problems whatsoever as long as you abide by the law.
You may be interested to discover how billionaires save on taxes.
Offshore company registration becomes a very complicated task if efficient tax optimization is set as one of the priority goals. If you make a mistake in choosing a suitable jurisdiction for particular goals and initial conditions, it will cause a lot of problems. With that in mind, we will be happy to offer an interesting anti-crisis service: a free consultation on this hard-to-handle issue that will help you receive all the answers you need!
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on which jurisdiction is best for
your business, preferred tax regime,
on which jurisdiction is best for your business, preferred tax regime, company structure.
In 2023, strategic tax planning for international business has a radically different basis than in the times of active use of offshores for any purpose. It means that taking into account the laws of a particular country is set as a top priority, and the company’s management consciously refuses to use any dubious gray schemes. If you comply with these basic conditions, taxation becomes absolutely transparent and lawful, and it is optimized by competent use of all the opportunities provided by existing laws.
Main advantages of efficient tax planning:
- 100% lawfulness
- Absolute compliance with the laws of particular countries
- Business stability
- Real tax reduction
- Scalability for practically any business
- Tax optimization to achieve particular goals and objectives
- Relatively simple implementation (if the company cooperates with a competent and experienced expert/intermediary).
Find out in what way you pay taxes on an offshore company.
Basic tax planning strategies (a company can use several or even all of them):
- Profit movement (transfer pricing)
- Business transfer (in full or in part) to a jurisdiction with milder tax conditions;
- Use of possibilities provided by tax havens (it actually means change of tax residence)
- Deferred tax payment
- Regulatory arbitration (tax optimization thanks to the difference in legal control of the company’s business in different countries)
- Use of holding structures
- Corporate inversion (transfer of the company’s identity)
- Profit conversion
- Double tax avoidance
The company’s fiscal obligations should not be ignored or forgotten. If you fail to comply with this rule, tax planning will become illegal, and any actions aimed at mandatory payments reduction will be considered administrative or criminal offense. On the other hand, the company may reduce its taxes on absolutely legal grounds.
In both cases, the tax planning goal you set will be formally achieved as the company will get a large profit while preserving its income. The difference between two approaches lies in compliance with laws. They will be violated in the first case and used to reduce taxation in the second one. Therefore, competent tax planning means compliance with the existing regulatory acts to the same degree as the interests of the company and its owner. There is no point in considering other options even if they seem more profitable at first glance.
Basic strategies that help the company reduce mandatory payments:
- Short-term tax planning. It is done every year to achieve certain aims and objectives. There are limited techniques used in this case, and they usually do not require any substantial expenses. The effect from such tax planning does not last long in most cases and it is quickly lost if the initial conditions change. It is usually performed once a year.
- Long-term tax planning. It gives no immediate benefits but provides best results in the long run. This option is easily scalable and can be adapted to the changing conditions without much hassle.
- Permissive tax planning. It uses the possibilities provided by corporate laws of a particular country. If you move your business to another jurisdiction, the method becomes much less effective.
- Target tax planning. The method is aimed at achieving a particular goal set. Other possibilities of optimizing the company business are usually disregarded if they do not help with achievement of the main goal. This is a customized tax planning format that requires precise calculations at the preliminary stage.
How to reduce taxes for a particular company? Are effective planning and optimization possible if you strictly comply with current laws? What can be done if the company receives profits internationally and it entails tax obligations in several countries? Unfortunately, there is no one-size-fits-all answer to these questions.
Read our related article on what international tax planning is.
The experts of our portal are ready to offer their help in efficient tax planning to meet the customer’s particular requirements and with regard to all individual business peculiarities. The general tips and recommendations given below will help you with your plans, but they are not meant as instructions to be followed (especially without proper modification).
Tax optimization has no sense unless it takes into consideration all the individual features of the company and its business. The same can be said about the businessman’s independent actions unless they are backed by sufficient experience and deep understanding of current taxation laws.
Efficient Tax Planning Strategies
All the options preserved below have one distinctive feature: they are absolutely legal! It means that the company’s taxation methods following a competent application of any strategy (one or several of them) will not result in the conflict with law in the majority of countries. But it does not automatically imply that tax planning in two jurisdictions will have the same efficiency. Think twice before you take any particular steps.
Strategy 1. Income Transfer
The transfer pricing on which the strategy is based relies on the transfer of income from a country with a high tax rate to the one where it is lower. This is one of the most efficient tax optimization tools. You will have no legal problems if you comply with all the tax laws.
But if you act in a straightforward way, tax planning will be considered by the majority of countries as aggressive and illegal. So you should not think that income transfer from the onshore to the offshore will make it possible to considerably reduce taxes. The method requires competent preliminary planning considering the legal peculiarities of the two countries.
Read what countries have zero income tax in 2023.
Strategy 2. Business Transfer to the Offshore
If the company was initially registered onshore, the income tax it has to pay will be quite high. However, these countries have a number of other advantages, and it would be groundless to say that onshores are a bad choice for commercial operations. But if efficient tax planning is a priority, you’d better transfer your business to another jurisdiction.
You can use midshores (countries with low taxes and express fiscal benefits) or offshores for this purpose. Don’t make a final choice until you thoroughly analyze the situation. Remember that you may have difficulties in case of practical tax planning realization as regulators struggle hard against tax base erosion and aggressive offshore optimization schemes.
Strategy 3. Use of Possibilities Provided by Tax Havens
Change of tax residence is one of the easiest ways to optimize taxation. You will need to get a residence permit, permanent residence, or citizenship of a suitable jurisdiction to implement it. There is no need to renounce your current citizenship in the majority of cases. As soon as all the formalities are complete, the company owner will no longer be taxation-bound to the onshore where the business was initially registered. It will help to considerably cut the taxes or reduce them to zero in some cases.
This is not a suitable option for US citizens as they have to pay taxes on all income, even to the part derived outside the country. One more potential difficulty is connected with a ban on second citizenship. You should take into account the laws that define a controlled foreign company and OECD tax haven lists, which is absolutely unacceptable in separate cases. But even if you consider these circumstances, tax planning by relocation to a tax haven is one of the most efficient tax optimization methods.
If you want to know everything about offshore tax benefits, here is an article for you.
Strategy 4. Deferred Tax Payment
This approach allows not so much to save on taxes but to defer their payment while waiting for a more suitable moment to come. The essence is as follows: you have an affiliated company that conducts international business, but it does not transfer or repatriate profit to the parent company in the form of dividend or interests. As a result, neither structure pays taxes, and this is done on absolutely legal grounds.
You cannot say that this tax optimization method is universal as its success will depend on corporate laws in particular jurisdictions. It should also be kept in mind that the parent company almost automatically incurs fiscal liabilities on the date of income transfer. But if the main goal of planning is one-time tax reduction (for example, before mandatory payments at the end of the year), this tax optimization format is quite acceptable.
Strategy 5. Regulatory Arbitration
Tax planning and optimization based on the use of loopholes in corporate and fiscal laws of the two countries helps to considerably reduce the company’s mandatory payments to the budget. This is quite a difficult method to implement as the difference between legal and illegal (aggressive) tax optimization is sometimes barely perceptible.
A typical tax reduction method lies in the different interpretation of the “foreign subsidiary” notion, which breeds indifference in the fiscal status and, as a result, a possibility to use this fact for tax optimization. The parent company creates a subsidiary (an affiliated company) in the country with a lower taxation level. This structure will be considered as an offshore non-incorporated subsidiary in the jurisdiction where the parent company is registered (this is an onshore country in most cases). It will have the status of an offshore legal entity in the country where this affiliated company is opened.
Read our article on Top 16 popular offshore destinations for tax planning.
One more case when tax planning becomes possible thanks to the loopholes in laws of different jurisdictions is the tax status of hybrid securities. If a company that engages in international business emits such financial instruments (with equity and debt components) and they are acquired by an affiliated company, the status of such securities may differ in another jurisdiction.
The tax service in the jurisdiction where the foreign business is registered treats these as equity instruments, while the same is considered debt instruments in the country where the affiliated person itself is the resident. Consequently, the taxation of the same securities in two different jurisdictions will differ substantially, and the real company owner will be able to select the most suitable option.
Strategy 6. Use of Holding Companies
The structures for international business that include a parent company and several dependent companies controlled via ownership/controlling stock management have become especially popular in the post-offshore era. The main advantage of holding companies is efficient tax optimization with no mandatory condition of doing so via an offshore company.
The scheme that involves holding companies to enable minimum tax payment looks as follows. The company that is a tax resident in the “right” jurisdiction (and it is not that easy to choose one) gives an asset to the affiliated structure that serves as a source of income. The latter is returned to the parent company in the form of license payments. The taxes in the jurisdiction where the affiliated company is registered are usually much better (sometimes resulting in a substantial difference), and the company that carries out international business has a unique opportunity to pay reduced taxes instead of those it would have been due to pay in the country of its registration.
The scenario we described is absolutely legal, so it is used quite often. It is important to understand that the choice of this tax planning strategy/optimization relies in many ways on a competent choice of a jurisdiction where the parent company and subordinated units are registered.
Strategy 7. Corporate Inversion
This is a tax planning option in which the parent and the affiliated company actually change their places. If the latter is registered in a country with lower taxes, this corporate reincarnation will result in considerable savings, and this will be absolutely transparent in the eyes of the law.
It actually works as follows. The company that conducts international business and strives to pay minimum taxes on a legal basis finds a suitable country with a favorable fiscal climate and a competitor that works in the same market segment. Then the company buys it out or acquires it. The status of the parent company is transferred to the offshore, and it becomes a subordinated unit.
Further actions are quite understandable and logical. As the new company is registered in the offshore or midshore, the tax rate can be considerably reduced through license deductions. The scheme has been applied for about 20 years, but the fiscal authorities still have not found any effective way of counteracting it. The efficiency of such tax planning is confirmed by the fact that the corporate inversion was used by Apple in 2014 in Ireland, and it was a successful experience.
Read our article on international tax planning and consulting to get more information on the subject.
Strategy 8. Income Conversion
Corporate taxation rates vary not only between countries but also between different kinds of income. This fact is usually disregarded even when you specially focus on tax planning in an attempt to reduce one or several particular taxes. But if you face the necessity to optimize taxation and see no simple and evident ways of doing that, income conversion will help.
The dividend tax rates in most cases differ from capital gains/interest tax rates. At the same time, the tax at the source may be transformed into dividend income (but not into income from interest). And this tax planning method really works!
There are a lot of practical ways to implement this idea. A standard option is giving a loan to the affiliated unit by the parent company (if both of them are a part of the holding company) on the condition that the subordinated structure receives interest under this loan. The formal debt is repaid by payment of dividends.
This is just one of the possible income conversion examples, and there are other options that can be just as effective.
Strategy 9. Double Taxation Avoidance
One of the few legal ways to avoid it is to conduct international business with a country that is a party to a DTT with your home country. If this is so, competent tax planning will help the company pay taxes in the country with lower tax rates on absolutely legal grounds.
However, realization of this strategy often brings about difficulties, and an attempt to solve the problem without proper studying of the tax laws and consultations with reliable tax advisors results in failure.
Offshore jurisdictions are a typical example here: they are thought to reduce taxes in the most radical way. But if the company conducts real business, it will not be able to take advantage of DTT benefits in most cases if it is an offshore legal entity.
Consequently, if the company seeks to reduce taxes, it should be especially careful in choosing a jurisdiction for business conducting and registration. A country with low taxes (a typical midshore) will often be a better choice for tax optimization than a tax-free jurisdiction.
- How to protect the company income from too high taxes? Use suitable tax optimization strategies based on taking into account all peculiarities of your business.
- Is legal and efficient tax optimization possible for a company that conducts international business? Of course, it is. However, using standard schemes without analysis of real factors would amount to nothing in the majority of cases.
- Is it possible to conceal your income by using aggressive tax optimization methods? This technical possibility does exist, but we would not advise you to take it. The company has to pay taxes, but it does not mean that the rate must be high.
- Are offshores the only optimal instruments of tax optimization? Tax-free jurisdictions cannot be called the only possible tax optimization alternative. On the whole, the “optimal” choice is not that evident. In some cases, an offshore jurisdiction will really be the best choice. But there are also situations when moving your company to the offshore will not have the desired effect or it will not be that evident.
You may be interested in reading this article: Offshore Companies and Taxation: What You Need to Know
If you are interested in tax optimization that would meet particular terms and requirements, please contact the experts of International Wealth portal and discuss all the questions at an individual session.
If you are thinking of using a holding company to reduce the tax burden, here are some articles for you:
- Holding Company: All You Need to Know.
- A Holding Company as an Instrument of Tax Burden Reduction.
- Does a Holding Company Need an EIN?.
If you are interested in company re-domiciliation, the following articles may be useful to you:
- Redomiciliation in a Nutshell.
- Redomiciliation of Offshore Company to Belize.
- On Redomiciliation.
- Redomiciliation of your company to the Marshall Islands.
If you are interested in changing the tax residency, here are some additional posts on the subject:
- Tax residency in Andorra for your company.
- Consultations on Tax Residency.
- Best Tax Havens to Incorporate Your Company.
Write to firstname.lastname@example.org to get in touch with International Wealth experts.