Taxation and formation of a company
When dealing with the world of international business, taxation and formation of companies, things can seem more than a little confusing. Often many companies and the consultants that you talk to forget that this is probably not your area of expertise, hence you are coming to them for assistance, they will start to babble on with all these big fancy words which on a good day will confuse you a little on a bad day will just sound like some exotic language that you have never heard in your life, and none of this helps you get to where you want to be, but just hinders the real facts that you want to know, and in some cases this is done deliberately in order to buy the not so experienced consultant time. Our philosophy at OLIESERVE is to keep it simple, we are here to help you and make things easy for you, not to trip you up and make you look stupid, we understand what would appear to somebody in the industry as a simple word may come across as a foreign word to someone who is not.
Common used words in company formation
Here I will give some examples of commonly used words within the industry of international tax planning and company formation:
- Incorporation – This is the process of legally declaring a corporate entity as separate from its owners. Incorporation has many advantages for a business and its owners, including:
- Protects the owner’s assets against the company’s liabilities
- Allows for easy transfer of ownership to another party
- Achieves a lower tax rate than on personal income
- Receives more lenient tax restrictions on loss carry forwards
- Can raise capital through the sale of stock
Incorporation involves drafting an “Articles of Incorporation”, which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued, if any.
- Jurisdiction – the territory or area of activity over which the legal authority of a court or other institution extends. In our case it is referring to an area or region under which certain taxation legislation is applied.
- Legal entity – is an association, corporation, partnership, proprietorship, trust, or individual that has legal standing in the eyes of law. A legal entity has legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in its own right, and to be held responsible for its actions.
- Structure of the company – if you are asked about the structure of the company they are referring to how the company is formed in regards to who is the owner, director, shareholder/s .
- Beneficial owner – sometimes abbreviated to BO or sometimes UBO the U standing for ultimate. Is a person or an entity that enjoys the possession and/or benefits of ownership (such as receipt of income) even though its ownership (title) may be in the name of another person or entity (called a ‘nominee’ or ‘registered owner’). Use of a nominee (who may be an agent, custodian, or a trustee) does not change the position regarding tax reporting and tax liability, and the beneficial-owner remains responsible.
- Nominee – is a person/s or entity named or appointed by another (the nominator) to act on its behalf in a limited capacity or in a specific matter.
- Company Secretary – this is not an old lady sitting at a computer and answering the phone, it is an officer appointed by the directors of a firm as responsible for ensuring that firm’s legal obligations under the corporate legislation are complied with. His or her formal duties include (1) calling meetings, (2) recording minutes of the meetings, (3) keeping statutory record books, (4) proper payment of dividend and interest payments, and (5) proper drafting and execution of agreements, contracts, and resolutions.
Moving forward with incorporation
Once you have decided to commence with the “INCORPORATION” of a company we should start thinking where this company will be incorporated i.e. its “JURISDICTION”, there are many things to think about when dealing with this question, one would be what kind of entity is best suited as different jurisdictions may have different types of entities, another question is what is the nature of the business? Does the business have a connection to any areas? For example do you have suppliers in Asia and buyers in America? But one big question and in today’s world an important one is what type of tax jurisdiction and obligations do you expect? We can break tax jurisdictions down into 3 main areas; zero tax jurisdiction(tax haven), low tax jurisdiction and high tax jurisdiction, now I can hear you saying ”zero tax of course” but like most things in life it’s not that simple as they all come with both positive and negative connotations.
- Zero tax jurisdictions
Often called tax havens are places where in some cases mainly offshore (meaning not a local company) the tax obligation is zero and depending on the jurisdiction bookkeeping and audits are required to much lower or even no level at all, great for saving you some hard earned pennies however not so great if you are trying to build a very positive strong image for your company, also many financial institutions do not like to deal with companies in so called tax havens, they also tend to be some small island that in some cases or not so politically stable. Some examples of zero tax jurisdictions are Belize, British Virgin Islands (BVI), Seychelles and a newer option in some cases is Dubai.
- Low tax jurisdictions
Are places where the taxation system is relatively low and normally more favorable than that of the BO’s home nation. These are the most popular jurisdictions as while yes you do have some bookkeeping and audit obligations and yes you do pay some amount in tax it is normally low and the country is normally much more stable in terms of politics. Some examples of low tax jurisdictions are Cyprus at 12.5%, Hong Kong 16.5% and Singapore at 17%.
- High tax jurisdictions
Are as their name suggests relatively high tax burden jurisdiction, I can hear you asking yourself why would anyone want to set up a business in a place where the taxes are high, and there are a few reasons for this, some maybe solely the privilege and prestige of it, and we should not look at these jurisdictions as simply black and white, as many will be well established strong economies with complex tax systems which may have benefits in other areas. Some examples of high tax jurisdictions are the Austria 29%, Germany 29.8%, and France at 33%.
Structuring your new company
Now we must look at the structure of the company, in an ideal world we want the structure of the company to be as simple and straight forward as possible, and in all cases we strive to achieve this. The two main positions we are looking at are that of the director and the shareholder/s which in some cases can be the same, however we do not live in an ideal world so sometimes it is not always possible to keep things simple, in which case we can use nominees and or holding companies. Some jurisdictions may require that a director of a company formed in their jurisdiction must be a local resident in that jurisdiction; it is worth noting that the term nominee is not recognized in corporate law. Another advantage of keeping things simple and straight forward is when it comes to opening bank accounts it becomes much easier and a lot less paper work if things are simple, for example if you choose to use another company as a shareholder then when you provide documents to the bank they will want all the documents for both companies, whilst there is nothing wrong with that you should be aware that it will involve more work, time and possibly money.
How we can help
If you are looking for assistance to form a company or should you want advice on how or where to form a company look no further. OLIESERVE and its team of dedicated experienced professionals will help to guide you through the entire process from start to finish keeping to informed and up to date along the way. To see how we can help and some of the other services we provide click here to be redirected to our home page, or give our friendly team a call +357 25316119. We are here to help.