30 November 2020
How to legally reduce your tax liability through offshore corporations
Citizens of countries who implement the territorial tax system can create an offshore strategy to significantly reduce their global tax liabilities and move their taxable income from a high-tax country to a low-tax country, and in some cases even a tax-exempt jurisdiction. Many businesses will resort to other measures to reduce their taxes by increasing their tax deductions, donations and selling off assets at a loss- but in the world of the offshore market, this is simply not necessary (though making donations to worthy causes is always advisable).
Understanding offshore strategies
Establishing an offshore strategy for your business is not just for high net worth individuals or large international companies, offshore entities can be easily set up. In many jurisdictions, offshore corporations can be incorporated remotely and most within 2 weeks. After the leak of millions of financial documents in 2016, referred to as the Panama Papers, the offshore market took a hit and became largely associated with illegal activities such as fraud, tax evasion and money laundering. However, an offshore company is simply a company set up in a different jurisdiction. If a Canadian citizen set up a company in the USA that would be considered an offshore company. Offshore business entities are legal and are legitimate tools for a variety of uses including tax optimization, asset protection, and financial privacy.
Deciding on where to set up an offshore entity is a crucial step in the process. This will be determined based on the business activities and financial needs. Each jurisdiction, whilst sharing many similar benefits, will be better suited according to the business enterprise. Another important point of consideration, is the implication associated with income repatriation into your country of tax residency and/or country of citizenship.
For example, a French client can incorporate an IBC (International Business Corporation) in Panama with offshore operations, thus benefiting from Panama´s tax-free policies on foreign sourced income. However, the personal income derived in the form of dividends will be subject to different tax implications. If the client has established tax residency in Panama and along with the double tax treaty between Panama and France, the client will be legally required to pay taxes in Panama. They will pay a rate of 5% on foreign earned income tax for dividends. While the client may have to report their income in France, they will not be liable to pay for any taxes there. On the other hand, if the client remains a tax resident of France, they are legally liable to pay both the 5% tax rate in Panama as well as the tax rates in France.
With this newfound financial freedom, you can eliminate your dependency on a single government, diversify your assets, protect your wealth and benefit from some of the best offshore jurisdictions’ renowned and sophisticated financial and banking services.
Written by Michelle Hammond
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