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Global Business For Discussion Purposes Only by: Harry Holmquist, CPA Certain countries are preferred business locations for persons who set up holding companies or facilities offshore. This writing will attempt to address some tax planning coordinating point involving for example, Ireland, Switzerland, Netherlands, Cyprus, and others. An Irish offshore ("nonresident") company needs two stockholders and two directors, who cannot be Irish or UK residents. The Memorandum of Association can be very broad with regard to potential activities. Such a company can establish bank accounts anywhere. Approximately the same can be said for all the above mentioned states.You may need only one European back office, but be careful what activities occur in that office. No contract signings should happen there - only solicitation, marketing and accounting, paying invoices, etc. Having a back office in cities such as Dublin, London and Prague could be a potential tax problem if considered a permanent establishment with high-margin revenue source income – that is, if contract signings, management billable time, etc. are involved. On the other hand a Swiss office, has probably no exposure to taxation on such activities as they are considered "nonresident" unless tied to Swiss business. US multinationals and others, working together with related or non-related-but-dependent third-country vendors, are able to take advantage of Swiss holding corporations to support operations in Europe or other locations which involve high-value-added activities (i.e, ABB, Oracle, the pharmaceutical houses, etc.) Lower-margin product distributors are probably less interested in Switzerland.The Russia/Swiss treaty includes a 12-month exception/exclusion on contract supervision activities. So, the Swiss company pays back hard currency bonuses to the Russian company principals with no withholding at source. For Russian purposes, the two companies will generally avoid using the same names and other "red flags".Evidently, there is no requirement for the Swiss (or other offshore) company to file with Russia as having income that is treaty protected (unless the entity is deemed a permanent establishment in Russia), but the Swiss company must receive an "Appendix 5" that the Russian affiliate will use to justify "not withholding" to banks on the Russian side when sending funds to the offshore company. If an Irish company is set up as a "nonresident", it pays no Irish tax but cannot take advantage of tax treaties with other countries. Other tax favored treatments available for Irish "resident" companies require that they employ Irish nationals, etc. For example, can dividends paid by such nonresident companies be exempt from withholding? Apparently not by way of the US-Irish treaty: a "nonresident" Irish company would not receive US treaty benefits. To contrast with Switzerland, such dividends paid by a Swiss tax-advantaged affiliate to a non-Swiss "parent" (as defined by Swiss law) are not subject to withholding and have a lower rate of tax (with certain exceptions involving use of tax havens, in which case a Netherlands-Netherlands Antilles intermediary link could be utilized). Absent treaty overrides, withholding at 35% is being applied on dividends in the case of normal, i.e., "non-parent, non-controlling" shareholders. However, interest payments on notes payable, whether or not the affiliate is a "parent", are not subject to withholding or "income stripping" rules. Thus, in some cases equity can be structured as debt. Such matters would need further clarification and confirmation with local advisors. "Nonresident" status of source of income notwithstanding, in the absence of treaty protections withholding tax on outward payments of dividends, royalties, etc. could be an issue in some jurisdictions. Tax treaties should always be considered for long-term planning purposes. The Netherlands has advantageous tax treaties with many countries, including, for example, Barbados - thus often avoiding imposition of withholding tax. Switzerland, for contrast, does not have a treaty with Barbados; Ireland does not have a treaty with Russia. Because of favorable treaties, the Netherlands as a base of residency would merit careful consideration. A Dutch "participation privilege" exempts a Netherlands company from tax on incoming dividends or gains arising from operation of subsidiaries and joint ventures outside the Netherlands. This is similar to the Irish or Swiss treatment of a "nonresident" company’s income source. If Dutchco has profits from contracts, it will have normally a 33 percent tax. It can seek a Dutch tax ruling allocating 90 percent of income attributed to Dutchco to a Swiss branch or office of Dutchco. Under correct circumstances Switzerland will then issue a ruling imposing the Swiss reduced rate on the income. Even if Dutchco does not qualify, combined Dutch/Swiss rates would still be only 15-25 percent and would permit contract fulfillment activities in the EU. Furthermore, Dividends paid by Dutchco to an “offshore” company would normally be subject to 25 percent tax, absent treaty protection. However, a Netherlands Antilles company can be used to minimize the dividend withholding rate with low or no tax on the income from the side of recipient's domicile country, Netherlands Antilles; or in lieu of equity funding, Dutchco can be funded with debt, with repayments of interest not subject to withholding. But, the cost of Dutchco setup is $30-35k (high). All the above may provide some insight as to why bank loans from Switzerland are often directed to - for example - accounts in Gibraltar or Barbados, then to Netherlands Antilles, then to the Netherlands, then back to Switzerland, then to Czech Republic or wherever the funds are to be applied. Routing funds from the Netherlands Antilles direct to the US often allows capital to be "redomiciled" to the US if there is a “business purpose” for doing it. The Swiss, under pressure from the US, are said to be doing their homework on the owners, so a “business purpose” test is needed on all sides The tax advantages of Cyprus are a bit different case. The Cyprus-Russia treaty totally exempts dividends, interest and royalties from source state withholding tax - the same being true for most Cyprus treaties with Eastern European countries. By contrast, the Russia-Netherlands treaty imposes 15% tax on dividends. To avoid this “problem”, Cypriot and Dutch companies can be affiliated, together sometimes with a Swiss, US or Canadian intermediary. There is significant abuse present, but also significant public awareness of the abuse. Example: Cyprco enters into VAR/distributor agreements and employs Rusco as agent or principal (depending on legal or tendering requirements in Russia). If as agent, Rusco negotiates contracts for Cyprco but does not have the authority to approve. If as principal, it enters into contracts under its own name. Separate, new agreements are negotiated for each circumstance. For longer-term contracts, there could be further bifurcation such that, for example, Cyprco procures and Russco fulfills. This can address several legal and tax issues.
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