ARTICLE
20 January 1997

Financial News - Offshore Companies

FS
Financial Services Commission

Contributor

Financial Services Commission
Turks and Caicos Islands Wealth Management
By Keith Burant, B. Com, CMA

The basis of most offshore structures is the company which like its onshore counterpart is formed to provide limited liability to the principals, confidentiality, marketing potential and case of ownership transfer. In the Turks & Caicos Islands one must distinguish between Ordinary and Exempted Companies.- Ordinary Companies are used when operating a company whose business is conducted primarily from within the Turks & Caicos Islands. An Ordinary Company must declare on an annual basis that the beneficial owners of that company have not changed in the previous year. This enables the local government to ensure that all applicable land transfer taxes etc. are collected when a change of property ownership occurs.

Exempted Companies are used, when the primary business activity being conducted by the corporation occurs outside the Turks & Caicos Islands. There is a wide variety of reasons for forming an Exempted Company, the most popular structures being the following.

Holding Companies

In this situation, a taxpayer resident in a high-tax country wishing to invest funds will, instead of doing so directly, transfer those funds to a specially formed company in a zero tax jurisdiction. The investments will then be made by-this company so that the resulting income will be subject to nil or low tax rates. Care should be taken, in structuring the ownership of an offshore company to ensure that individuals resident in a taxing jurisdiction such as Canada or the UK will not be liable to taxation on these corporate profit's. Similarly, a company incorporated in a zero tax jurisdiction may be interposed between a parent company in a tax paying country and its overseas subsidiaries, so that dividends from the subsidiaries are only subject to the rates of tax (if any) applying in the Turks & Caicos Islands.

Offshore Trading Company

Offshore Trading Companies (OTCS) are one of the most popular structures utilised by individuals and corporate groups in their tax planning strategies. Typically OTCs are companies which enter into contracts for the purchase of products from a company located in one country and the subsequent resale of products to purchasers in another country. The profit or spread made by the offshore Exempted Company, if properly structured to avoid specific onshore legislation, should be free from taxation. This practice is known as transfer pricing. Transfer pricing is a mechanism where export sales of a company or multinational group may be channelled through a specially formed offshore sales or distribution company. In the simplest type of such operation, the offshore Exempted Company purchases items from affiliated companies and the mark-up is made in the zero tax jurisdiction where the profits are trapped. In order for such an arrangement to succeed and avoid specific onshore legislation designed to attack such arrangements, it is important to include a value added component to the transaction in the offshore jurisdiction. Then, the product is re-sold for a marginal mark-up from the offshore Exempted Company to the company located in a taxing jurisdiction. The key to successfully using an OTC, however, remains the location of the management of the company. Many highly developed taxing nations will attempt to establish management by reference to the residence of the purchasers or vendors with whom the Offshore Trading Company conducts its business activities. However, it may be difficult to refute such contentions if there is no central office in the company's country of residence.

For this reason, it may be preferable to establish an Offshore Trading Company which is permitted to maintain effective management locally, even though the conclusion of its business activities is effected outside its country of residence.

Licensing of Patents and Trademarks

Licensing of Patents and Trademarks offshore is another method of international tax planning. By holding patents, trademarks, and copyrights, of a fully. taxed company or multinational group, within an offshore company, royalties can be received -in the jurisdiction subject to a nil or low rate of tax.

Bulk Purchasing Company

While it may be difficult to establish manufacturing operations in most zero tax jurisdiction countries, an international group of companies involved in similar activities may find it beneficial to obtain economies of scale through central purchasing.

Rather than incorporate a company in a highly taxed country to effect this central purchasing, it may be more tax effective to use a zero tax jurisdiction. i.e.: A Canadian multinational resource group has subsidiaries in the United Kingdom, Norway, and Sweden, all of which are completely autonomous. The four companies each purchase their requirements via an agent but, if all the companies processed their orders through one company, it is considered that substantial discounts could be obtained with direct purchases from the resource exporters. The Canadian parent considers incorporating a Turks & Caicos company run by a non-resident Canadian or other non-Canadian individual who would be based there.

The non-resident Canadian would be required to visit various exporters in Asia and negotiate quantity discounts for the, different products involved. He would then return to the Turks & Caicos Islands and process all orders from the European companies, arranging letters of credit through various offshore banks. Provided the management-of these function's is carried out from the Turks & Caicos Islands, no income tax will be due on profits earned by the Turks & Caicos company.

Portfolio Holding Company

Many portfolio holding companies are formed in zero tax jurisdictions so that the income and capital gains generated on the sale of securities may be accumulated tax free. Trading Accounts may be opened in both Canada or the United States and trades may be directed by or routed through Licensed Trust Companies.

Leasing Companies

Leasing Companies can be used beneficially in the situation where an offshore Exempted Company has substantial funds which, unless invested, would have to be repatriated to the parent company and be subject to full corporate taxation. It may be useful to purchase capital assets required by a group company and act as a leasing company.

Although Turks & Caicos Islands corporations provide a variety of uses, the versatility can be greatly enhanced by settling the shares of these companies in a Trust. Licensed Trust Companies can form Trusts and act as Trustee in order to provide the following services: a) Protect assets from being attacked by possible law suits; b) Provide a means of avoiding or mitigating the effect of burdensome laws and regulations, particularly those of countries imposing heavy, taxes and death duties and exchange control regulations; c) Enable real or personal property to be held for persons who, for one reason or another, cannot or do not wish to hold and/or manage such property themselves; d) Make provision for dependants, friends and families privately; c) Own trading or investment companies; f) Make investments through skilled personnel, thus freeing time for other business; g) Minimise the incidence of income tax, capital gain tax, transfer tax, estate duty and other forms of taxation imposed in high tax countries.

Mr, Burant attended the University of Alberta graduating
with a Bachelor of Business Administration and Commerce. He obtained his CMA designation in 1987.

Mr. Burant has had extensive experience in international banking before joining Temple Trust as Managing Director. Temple Trust Company Ltd., is a licensed and insured Trust company which is audited annually by KPMG. Temple Trust, which administers over 600 Trusts and Companies, is wholly owned by the partners of McLean, McNally, prominent TCI law firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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