Article image: Offshore schemes - an effective instrument for taxation optimization

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The UAE second export category after crude oil is aluminum. Full version

Businessmen say: "Paying taxes is an obligation while paying little taxes is an art."

Business owners’ drive to reduce the amount of tax payments after all is quite logical, since tax rates in our country are extremely high. However, not all businessmen are aware of such legal tools for optimization of taxation as offshore schemes. It should be noted that such schemes have nothing to do with tax evasion, which is deemed gross violation of the laws. Offshore business scheme constitute absolutely lawful and valid instrument designated to reduce tax payments. It operates under the laws of countries with friendly taxation regimes.

Currently, offshore schemes are deemed to be one of the most effective instruments for tax optimization. An offshore is characterized by the following:

  • low tax rate or tax free status: both personal and corporate;
  • confidentiality relating to ownership and management – there are no public registers of directors and shareholders;
  • uncomplicated management and administration – it is required to pay only fixed amount annually;
  • no financial reporting requirement;
  • broad opportunities for business – possibility of doing any business provided that the business is not subject to licensing requirements;
  • Fast incorporation process and startup of the company.

Main offshore business schemes

There are many advanced offshore schemes which depend on the type of the company, its profitability, and other factors.

The simplest offshore scheme is related to trade activity. Foreign company sells goods at minimum price to offshore company, which, in turn, sells them at market price. Accordingly, the substantial share of profit is retained by offshore company. In case of import, foreign vendor delivers goods to an offshore company at market price, whereas it sell them to foreign companies at low price. The aforesaid allows to reduce customs duties and VAT.

Enterprises may enjoy the production offshore scheme. It stipulates that producer sells to its offshore company services or products at the lowest price. Offshore company in such case acts in the capacity of an agent and sells products to end consumers at market prices. Generated profit (agency fee) is accumulated on offshore bank accounts.

100% prepayment - a foreign national and an offshore firm enter into an agreement. The prepayment is made in full, whereas thereafter the transaction is cancelled, and foreign company files an action with the court for recovery of prepaid amount. The court issues an order for recovery of prepayment, however the authorities are not authorized to enforce the order. As a result the debt is formed, which reduces taxable income.

Agency scheme - offshore company hires a company - agent and pays minimum taxes against agency fee.

Credit - a foreign company takes a loan from the bank to make prepayment for services of an offshore company. The loan amount is transferred to an offshore account, and since foreign company did not intend to perform terms and conditions of the contract, the amount is transferred back to the bank upon six months. Within this period, the offshore company disposes the money for its own purposes, and generated profit is accumulated outside of the offshore zone.

Services provision scheme - foreign firm makes payment to an offshore company for provision of agreed services. This amount is included into cost of goods, thereby reducing income tax. The fact of provision of services shall be documented, but in reality the provision of such services may be withheld.

The aforesaid offshore schemes constitute an effective tool for optimization of taxation. Important – any implementation of offshore optimization requires advice with tax advisor as regulations of each country noticeably differ.

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