The modern Offshore Company, which began its all-conquering journey in the islands which once formed the British Empire, in the 1970s and 80s, can justifiably be described as an ENGLISH invention. At that time, it was also possible to incorporate so-called "non-residenté" companies in England, which, if managed from outside the United Kingdom, were not subject to taxation in England, although even then London could never have been described as a classic offshore zone.
This possibility ended in the early 90s, but, England, and in particular London remained an extremely popular place for the incorporation of companies, for both ENGLISH and foreign businesses alike. Numerous businessmen chose to incorporate in London, Companies House now boasts a register with over three million companies, ranging from small businesses to multinational companies. So what makes people want to incorporate in London?
1. The legislation, regulation and infrastructure regarding company incorporation are very efficient and well-developed. The incorporation process is still based on traditional procedures dating back several hundred years - a joint stock company can still be established with capital of just 2 GBP - and the background legislation is so well-developed that contradictory changes do not occur from year to year. Many companies offer services in the field of Company formation, though there are considerable differences in both the services they offer and their prices, and when examining such companies, it is also necessary to understand the background dependability which supports them. The authorities overseeing company incorporation - Companies House - work quickly and efficiently, offering great assistance to incorporates.
2. The regulations regarding taxation are stable, clear and comparatively liberal, and as with those referring to incorporation, are not liable to annual changes. This make long-term (3-5 year) tax planning possible, unlike in many other, more changeable European countries. In fact, recent changes have made the tax laws even more attractive to foreigners; Advance Corporate Tax has been abolished, and, as of April 1st 1999 the Corporate Tax for companies with an annual turnover under 350 000 GBP has been reduced from 21 to 20%, which is certainly attractive by international standards, especially considering that dividends paid abroad are not subject to dividend tax (withholding tax).
3. Book-keeping requirements are stable and easy to fulfill. Companies which do not operate in the UK, or rather in the EU, only need to prepare books, and file a tax return, once a year. As of July 26th 2000, companies with an annual turnover under one million GBP are no longer required to attach an audited balance to the tax return (the previous limit was 350 000 GBP). The company owners or directors can even prepare the simplified tax return forms themselves, though in practice we recommend a specialist accountant as this can considerably speed up the process.
4. UK companies are extremely prestigious. London is one of the bastions of international financial and business life. A company incorporated here will undoubtedly be held in high prestige anywhere in the world.
5. UK companies are not discriminated against. A number of countries now operate so-called "blacklistsé". If a local company deals with a company from a blacklisted country, then the local tax authorities may not recognize invoices from the blacklisted country as valid expenses in the local companyé's books.
6. England is currently party to the largest number of treaties for the avoidance of double taxation (DDTs) in the world. International tax planners can use these DDTs advantageously, particularly in the establishment of international holding structures.
The tax advantages related to ENGLISH companies
The above shows quite clearly that ENGLISH companies cannot be categorized as traditional tax-free companies, and in fact they are quite the opposite. How, therefore, can ENGLISH companies be used advantageously in international business transactions? The following section shows one of the possible use.
Trading company for nominee purposes
Blacklists have meant problems for a large number of offshore companies, particularly those providing services. One very efficient way of overcoming this problem is by using an ENGLISH company, which concludes a special contract with the Offshore Company, which may be incorporated in a traditional offshore zone such as The Bahamas, BVI or Belize. According to the terms of the contract, the ENGLISH company concludes contracts with foreign partners on behalf of the Offshore Company, prepares invoices for the total amount of the services provided, and receives full payment into its bank account, although the Offshore Company actually provides the services. Periodically (as defined in the contract between the ENGLISH and offshore companies), the ENGLISH company is entitled to an agency fee of between 5 and 10% of the value of the contracts concluded. The ENGLISH company must declare this income and pay tax accordingly, whereas, the remaining 90-95%, is transferred to the account of the Offshore Company, as set down in the contract. An Offshore Company is subject to tax in England on income with an ENGLISH source. Although the Offshore Company operates through an ENGLISH resident company, the actual source of the income is not England, but the foreign partner. At the same time, it is an important condition that the Offshore Company should be managed from outside England, and that the directors, shareholders and bank account signatories of the offshore and ENGLISH companies should not be the same people.
This information is not intended and should not be construed as concrete tax advice. Should you wish to make use of one or any of the structures mentioned, we recommend that you consult your personal tax adviser, as well as experts on the legal systems of all countries involved.