Onshore or offshore?
In contrast, the territorial tax principle establishes that a state will only tax the income resulting from activities that take place within its territory. In other words, any transaction performed and executed outside the country's borders (offshore) is not taxable. In this context, it is important to mention that the territorial tax principle is commonly applied by developing countries, whereas the international tax principal is mostly followed by developed countries. Very often the territorial tax principle is connected with countries commonly referred to as 'tax havens.'
Among tax haven jurisdictions, it is necessary to distinguish between the no-tax jurisdictions and the low-tax jurisdictions. Current no tax-jurisdictions include the Bahamas, Antigua and the Cayman Islands. No-tax jurisdictions are jurisdictions which have no individual income tax, no corporate income tax, no capital gains tax, no withholding tax, no gift tax, no estate tax and no value added tax. These jurisdictions impose no taxes either on residents or on non-residents.
Low-tax haven jurisdictions include countries that do have taxation regimes. Notwithstanding the latter, these countries often base their tax systems on local-source income. For these types of systems, it is not relevant whether the person is a resident or non-resident. The (resident or non-resident) taxpayer's income will only be taxable with respect to earnings obtained onshore. Examples of these jurisdictions include inter alia: Panama, Costa Rica, and Hong Kong.
Both low and no-tax jurisdictions are used for a wide variety of purposes. Some of them are explained below.
Estate planning. Brings the advantage of eliminating succession. Estate planning is commonly accomplished through the use of vehicles such as private interest foundations or trusts. Testamentary arrangements organized by means of trusts or private interest foundations are unknown under Polish law. These legal vehicles allow the transfer of the inherited assets faster, cheaper, and confidentially. In most cases there are no inheritance or transfer taxes to be paid, due to the fact that the real estate or other assets subject to transfer are not located in the territory of the country where the trust or private interest foundation has been organized. Notwithstanding, depending on the specific circumstances of a case, it may be possible that other taxes will have to be paid in the country of residence of the founder or settler (person that constitutes the private interest foundation or trust respectively). In the case of the private interest foundation, a very important feature is that the existence of compulsory inheritance laws in the domicile of the founder or the beneficiaries does not affect the entity or its validity. The objectives of the foundation (established by the founder) will still be fulfilled in accordance to the provisions of the foundation charter and its regulations.
Tax planning. Tax havens may be used to structure legal schemes in order to decrease tax liability. This does not mean that the obligation of paying taxes will be evaded, but it can certainly be minimized. By using offshore entities, companies are able to deal with their suppliers and customers directly. Moreover, the profits arising from the difference between the purchase and sales price will stay in the offshore jurisdiction without being taxed.
A large number of offshore jurisdicitions have concluded double taxation agreements with high tax countries. Double taxation agreements offer an additional incentive to those seeking to incorporate an offshore vehicle as part of their corporate structure or to expand their commercial activities through, inter alia, a permanent establishment in an offshore jurisdiction. In addition, these double taxation agreements add transparency and credibility to business transactions executed through these jurisdictions.
Asset protection. Offshore companies are instrumental in limiting the liability of the primary corporation in the event of an unforeseen or malicious legal action, locally or overseas. Under a simple one-tier structure, the main corporation limits its financial and legal exposure by becoming a stockholder in the offshore corporation making the investment. To make the example more clear, let's imagine that Company A, a Canadian company, decides to enter the Polish market by investing $1 million.
If Company A invests directly in Poland, its exposure is not only the $1 million invested, but it may reach the assets of the Canadian corporation (Figure 1). A more suitable structuring would be to incorporate a wholly-owned offshore company, Company B, capitalize it, and then have Company B invest in Poland (Figure 2). This structure presents the advantage that profits gained in the Polish territory can be expatriated and kept in a low or no-tax country. Taking this example a bit further, it would be even possible to have Company B incorporate a third company in Poland (Company C). In the latter case, Company B would not invest directly in the Polish market and its position would be limited to that of the shareholder of Company C (Figure 3). Using this structure can be advantageous in the event, i.e. of bankruptcy because it can shield Company A from further financial losses, thus limiting its liability.
The purpose of International Offshore Financial Centers (IOFC) is to facilitate trading and investment and to fill a gap in the international commercial market by creating a comfortable environment for business transactions. IOFCs operate with a lot of discretion and flexibility due to the diversity of legal instruments available (trusts, joint-stock companies - Corp.'s, Inc's, SA's, international business companies - IBC's, limited liability companies - LLC's, 'captive' insurance companies, shipping registries, private interest foundations, etc.) to satisfy the demands of each individual client.
During the last few years, governments and professionals of offshore jurisdictions have made individual and collective efforts to clear the name of the offshore industry. More than seeking to maintain very strict secrecy rules, governments are trying to draw the line between confidentiality and its abuse. Nowadays, the tendency amongst offshore professionals is the application of the know-your-client (KYC) policy. This allows offshore professionals to ensure that only honest and reputable individuals and companies enjoy the legitimate benefits of going offshore.
Finally, it is necessary to mention that developments in the offshore industry are blurring the line between offshore and onshore (refers to countries traditionally considered as high-tax). Interestingly, it is now very common to find onshore vehicles as part of estate or tax planning structures. Onshore vehicles used accordingly together with offshore vehicles are now becoming a trend in the offshore industry. This 'mixture' is what has led some practitioners to claim that offshore is becoming onshore and onshore is becoming offshore.
The author is an advocate in Panama and partner at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
Among tax haven jurisdictions, it is necessary to distinguish between the no-tax jurisdictions and the low-tax jurisdictions. Current no tax-jurisdictions include the Bahamas, Antigua and the Cayman Islands. No-tax jurisdictions are jurisdictions which have no individual income tax, no corporate income tax, no capital gains tax, no withholding tax, no gift tax, no estate tax and no value added tax. These jurisdictions impose no taxes either on residents or on non-residents.
Low-tax haven jurisdictions include countries that do have taxation regimes. Notwithstanding the latter, these countries often base their tax systems on local-source income. For these types of systems, it is not relevant whether the person is a resident or non-resident. The (resident or non-resident) taxpayer's income will only be taxable with respect to earnings obtained onshore. Examples of these jurisdictions include inter alia: Panama, Costa Rica, and Hong Kong.
Both low and no-tax jurisdictions are used for a wide variety of purposes. Some of them are explained below.
Estate planning. Brings the advantage of eliminating succession. Estate planning is commonly accomplished through the use of vehicles such as private interest foundations or trusts. Testamentary arrangements organized by means of trusts or private interest foundations are unknown under Polish law. These legal vehicles allow the transfer of the inherited assets faster, cheaper, and confidentially. In most cases there are no inheritance or transfer taxes to be paid, due to the fact that the real estate or other assets subject to transfer are not located in the territory of the country where the trust or private interest foundation has been organized. Notwithstanding, depending on the specific circumstances of a case, it may be possible that other taxes will have to be paid in the country of residence of the founder or settler (person that constitutes the private interest foundation or trust respectively). In the case of the private interest foundation, a very important feature is that the existence of compulsory inheritance laws in the domicile of the founder or the beneficiaries does not affect the entity or its validity. The objectives of the foundation (established by the founder) will still be fulfilled in accordance to the provisions of the foundation charter and its regulations.
Tax planning. Tax havens may be used to structure legal schemes in order to decrease tax liability. This does not mean that the obligation of paying taxes will be evaded, but it can certainly be minimized. By using offshore entities, companies are able to deal with their suppliers and customers directly. Moreover, the profits arising from the difference between the purchase and sales price will stay in the offshore jurisdiction without being taxed.
A large number of offshore jurisdicitions have concluded double taxation agreements with high tax countries. Double taxation agreements offer an additional incentive to those seeking to incorporate an offshore vehicle as part of their corporate structure or to expand their commercial activities through, inter alia, a permanent establishment in an offshore jurisdiction. In addition, these double taxation agreements add transparency and credibility to business transactions executed through these jurisdictions.
Asset protection. Offshore companies are instrumental in limiting the liability of the primary corporation in the event of an unforeseen or malicious legal action, locally or overseas. Under a simple one-tier structure, the main corporation limits its financial and legal exposure by becoming a stockholder in the offshore corporation making the investment. To make the example more clear, let's imagine that Company A, a Canadian company, decides to enter the Polish market by investing $1 million.
If Company A invests directly in Poland, its exposure is not only the $1 million invested, but it may reach the assets of the Canadian corporation (Figure 1). A more suitable structuring would be to incorporate a wholly-owned offshore company, Company B, capitalize it, and then have Company B invest in Poland (Figure 2). This structure presents the advantage that profits gained in the Polish territory can be expatriated and kept in a low or no-tax country. Taking this example a bit further, it would be even possible to have Company B incorporate a third company in Poland (Company C). In the latter case, Company B would not invest directly in the Polish market and its position would be limited to that of the shareholder of Company C (Figure 3). Using this structure can be advantageous in the event, i.e. of bankruptcy because it can shield Company A from further financial losses, thus limiting its liability.
The purpose of International Offshore Financial Centers (IOFC) is to facilitate trading and investment and to fill a gap in the international commercial market by creating a comfortable environment for business transactions. IOFCs operate with a lot of discretion and flexibility due to the diversity of legal instruments available (trusts, joint-stock companies - Corp.'s, Inc's, SA's, international business companies - IBC's, limited liability companies - LLC's, 'captive' insurance companies, shipping registries, private interest foundations, etc.) to satisfy the demands of each individual client.
During the last few years, governments and professionals of offshore jurisdictions have made individual and collective efforts to clear the name of the offshore industry. More than seeking to maintain very strict secrecy rules, governments are trying to draw the line between confidentiality and its abuse. Nowadays, the tendency amongst offshore professionals is the application of the know-your-client (KYC) policy. This allows offshore professionals to ensure that only honest and reputable individuals and companies enjoy the legitimate benefits of going offshore.
Finally, it is necessary to mention that developments in the offshore industry are blurring the line between offshore and onshore (refers to countries traditionally considered as high-tax). Interestingly, it is now very common to find onshore vehicles as part of estate or tax planning structures. Onshore vehicles used accordingly together with offshore vehicles are now becoming a trend in the offshore industry. This 'mixture' is what has led some practitioners to claim that offshore is becoming onshore and onshore is becoming offshore.
The author is an advocate in Panama and partner at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
