Income tax for Individuals and Companies

How to reduce income tax through the use of Offshore Companies and Tax Havens

This income tax will tax your income from business activities or trade. This is the income generated from your active business line, and taxes your net income, not your gross income. Income tax treatment and rates will be differentiated on income tax earned by an individual or by a company.

Business Income Tax - Type of entity

It is worth mentioning that depending on the type of business entity, the company will be subject or not subject to income tax.

Corporations

In general, corporations or companies held by shares, are subject to Corporate Tax, and when this corporation pays dividends to the shareholders, the shareholder will pay taxes on this dividend on its personal income tax return, or might be subject to withholding tax in case the shareholder is a non-resident in the jurisdictions where the corporation is incorporated, and given that the corporation levies taxes on dividends paid to non-residents.

LLCs, Partnerships

These entities are what is called a pass-through or tax transparent entities, meaning that the LLCs do not submit an income tax return, but the income is passed to the owner(s) and the owner(s) would pay taxes in the jurisdiction of formation only if the income earned by the company is sourced from the formation jurisdiction, or if the owner is a tax resident in that jurisdiction.

The payment made from the LLC or Partnership is called Distribution, not Dividends, hence this payment will not be classified as Dividend, what will also help you avoid the withholding tax on Dividends.

Some ways to reduce your income tax

As explained above, there are several things to take into consideration in order to reduce your income tax, and each scenario will be different, like the jurisdiction where the company is formed and its tax code, type of entity, your tax residency, and if the jurisdiction where the corporation is formed has a double taxation avoidance Agreement with the jurisdiction you are a tax resident in (in case your company is formed in a jurisdiction different from where you reside).

If you are subject to income tax as an individual or company, either because you or your company is a tax resident in a jurisdiction that levies income tax on its residents, or because the source of payments levies withholding tax on the specific type of income you are receiving, the following are some basic ways you can explore to reduce your tax base.

Increase your costs and expenses

By increasing your costs and expenses, your net income will be reduced, and your income will be subject to a lower rate in case the jurisdiction taxes corporate income tax at a progressive tax rate (meaning the higher the income, higher the tax rate), and also your tax rate will be applied to a lower amount of income.

Earning this income through an offshore company.

One option is to earn your income through an offshore company, this way the company will be located in a more tax-friendly jurisdiction, where most, if not all, income will be exempt from income tax.

This allows you to manage your company business and tax affairs in a more tax-friendly jurisdiction, with fewer regulations, and less costs and expenses control or scrutiny compared as if this company was in your country of tax residency.

What to be aware of: withholding tax, as if this offshore company has income that is deemed to be sourced from a certain jurisdiction, it will be taxed at the general withholding tax rate, unless there is a tax treaty with the jurisdiction where the offshore company is formed, and the jurisdiction where the income generated is sourced.

If the income is subject to withholding tax in its source jurisdiction, to reduce this withholding tax it is necessary to form an offshore company in a jurisdiction that has a tax treaty with this tax withholding jurisdiction.

What to be aware of when it comes to profit shifting / base erosion

Withholding tax: in the event the money is sent abroad to an offshore company, or earned by an offshore company but sourced from a jurisdiction that has withholding tax for that type of income.

Transfer Pricing Rules: in case the offshore company where the money is sent to is owned, directly or indirectly by the same Payor.

Tax Havens Grey and Black List:
- There is something colloquially referred to as the tax havens black and gray list. This list refers to those jurisdictions listed by specific jurisdictions or multilateral organizations as uncooperative for tax evasion and anti-money laundering purposes.
- The effects of forming a company in a black or gray jurisdiction is not just “bad fame”, but some (not all) jurisdictions do not allow tax resident companies to deduct expenses when paid to companies formed in black labeled jurisdictions.