The prospect will find numerous agencies specialized in foreign
company formations in the internet. As a rule, however, these
companies do not employ Tax Accountants specialized in international
tax law. Frequently,
such formation agencies are not – or only insufficiently - versed in
international tax law, or are not permitted to provide advice on
legal or tax matters in countries as a consequence of the Legal
Advice Act. Formation agencies - or even Tax Accountants – located
in the forming countries (for example: Cyprus, Belize etc…) often
are only knowledgeable in domestic tax law. If one takes a look at
the relevant internet offers, it quickly becomes apparent, that a
great deal of the providers publish incorrect or insufficient
information, working according to the strategy “The cheaper the
The following factors, among others, are to be observed within the
scope of international tax planning / company formation in a foreign
-Most countries have laws for the prevention of tax evasion and/or
have laws that formulate the right to impose taxes domestically.
It is not in the interest of these countries, that companies
and individuals have their income taxed in foreign countries, even
though “in truth” the managerial supervision is located domestically
and / or the activities are transacted / performed domestically and
/ or “in truth” the taxpayer resides in country and/or a production
site is not installed in the foreign country. In many countries,
(for example: USA and Germany) “tax evasion” is, in fact, a criminal
offense. For this
reason, it is somewhat naive to believe, that the right to impose
taxes can be relocated to a foreign country, by simply investing a
few hundred Euro for the formation of a company in a foreign
country. It is true, that almost everything can be done, however
domestic tax laws must be observed and – to the extent a production
site is not installed in a foreign country, or no site for the
exploitation of mineral resources or construction works, whose
duration is greater than 9-12 months exist (in the event a Double
Taxation Agreement exists this will always constitute a permanent
establishment), the impression must be avoided that the foreign
company is just a „bogus company”.
- The permanent establishment in a foreign country:
1. Managerial supervision
A production site, a site for the exploitation of mineral resources
or construction works, whose duration is greater than 9-12 months,
always constitutes the establishment of a place of business in the
formation country - at least in the event of a DBA-situation (Double
Otherwise the definition of a permanent establishment is based,
among other things, on the “place of managerial supervision”. As a
rule, this means that a resident of the formation country (ordinary
residence) acts as the Company Director. Either the client relocates
his ordinary residence to the formation country and acts as the
Director of the company himself OR a citizen of the formation
country is hired to take the position of Director OR the client
himself acts as the Director, and provides proof that he is present
in the formation country to perform customary managerial supervision
OR our Law Firm in the foreign country provides a Nominee Director.
In the event, a Nominee Director is provided the following factors
must be observed:
-The responsibilities of the Nominee Director should be performed by
an Attorney or Tax Consultant in the formation country of the
company (in the case of a legal entity as a Trustee Director of a
Law Firm). This ensures, that the trustee relationship is not
disclosed for "incidental" grounds. Only attorneys can effectively
protect the trustee relationship from third party access.
It goes without saying, that attorneys will demand the
corresponding fees and will not just demand a few Euros for their
services as a Trustee Director.
Under certain conditions, it can even be required or useful, that a
person in the formation country is employed as the Director of the
company, i.e. with an employment contract between the company and
the Director, payment of payroll taxes and social security
contributions; to the extent they are collected. We are also able to
provide such an “employed Director”.
The so-called "Formation Directors” are
“absolute nonsense”, who
resign after the company has been registered and transfer the
company and position to the actual beneficiary.
In this situation, the "actual Director” can quickly be
identified. A Trustee Director must of course be registered and
reachable during the entire agreement term.
One “can” deviate from such an arrangement, if the foreign company
is formed in a country, which has not entered into a Double Taxation
Agreement and / or a Mutual Legal Assistance (MLA) Agreement.
An “Offshore Director is also
“absolute nonsense”, an
example of this is that a legal entity acts as the Director of an
English Limited in Belize. Such a constellation is “asking for it”
i.e. asking to be accused of “Avoidance Abuse” and of course, such a
company will not be able to open an account or be issued a Value
Added Tax ID Number.
2. The place of business in
a foreign company
A “Post Office Box” or an "Answering Machine" does not constitute an
ordinary place of business. Accordingly, "Registered Office
Addresses” do not meet the prerequisites for a proper place of
The minimum requirements of a proper place of business are:
-Serviceable postal address, also for registered mail
-Reachable by telephone during normal office hours, personal call
reception with the name of the company.
It does not always have to be “large offices”, but it must not be a
post office box. The configuration / structure of the place of
business is to a high degree dependent upon the company activities.
If one assumes that a company can only perform its business
activities, if it has 3 offices and 4 employees on-site, then a pure
virtual office would indeed appear rather odd. In this situation a
“sense of proportion” is required, everything must be plausible.
3. The company account in a foreign country
Many formation agencies offer "help in opening an account”. This
means, in plain English, that an account is not opened, for example
an English bank will not open an account, if the Director resides on
Belize (unless he is present at the opening of the account, which is
not probable). Also
many banks will not open a company account, in the event only bearer
shares are issued (with the exception that the owners are present at
the opening of the account or in certain countries such as
Switzerland or Belize.
However, in these countries the owners must at least be disclosed to
the bank and often must be present at the opening of an account.)
“Just fill out a few forms” and the opening of an account is done,
is, in most cases, nothing but a fairytale and has nothing to do
with real-world business practices.
-Taxes must not be paid in tax-haven countries?
Also in this case, a great deal of nonsense is published in the
internet. In reality,
there are only very few "zero-tax havens”, like for example the
Cayman Islands. In fact, many countries (Belize, BVI, Nevis etc…)
offer the formation of so-called offshore companies (as a rule
International Business Companies, IBCs), i.e. companies who only
transact business and generate revenues outside the country, however
onshore companies (companies, who transact business domestically)
are indeed taxed. Offshore companies must of course provide proof,
that they only transact business outside of the country, and they
must of course keep their books in order. In addition, there are a
series of other taxes (withholding tax, capital gains tax,
inheritance tax, property tax, income tax etc…) that may be of
interest to our clients and may under certain circumstances be
levied in “tax-haven countries”.
- Are tax-haven countries always the most suitable countries for the
formation of a company?
Certainly NOT. Tax-haven countries are defined as countries that
have not entered into Double Taxation Agreements, Mutual Legal
Assistance (MLA) Agreements, or extradition treaties for fiscal
offences with other countries that at a minimum do not tax revenues
that have been generated outside of the country.
The “screening effect" is not in effect against double taxation,
specifically due to the lack of a Double Taxation Agreement.
If a company, located in a tax-haven country is, for example,
a stockholder of a company in Germany or the USA, in that event
dividends distributed to such company in a tax-haven country are
subject to the full withholding tax in Germany or the USA; while
Double Taxation Agreements, as a rule, limit the withholding tax
rate to 5%. Double Taxation Agreements also define under which
circumstances the prerequisites for the existence of a permanent
establishment are met and that a stock of goods or merchandise
(warehouse), a permanent agent or a representation in another
contracting state as a rule do not constitute a permanent
for example, a company in Belize maintain a stock of goods or
merchandise (warehouse) in another country, this warehouse as a rule
does constitute a permanent establishment in the other country, i.e.
taxation of the proceeds generated there.
Also the EU Parent Subsidiary Directive does not apply to tax-haven
countries. This can have substantial disadvantages for associated
companies; because in the case of the application of the EU Parent
Subsidiary Directive the dividends distributed between the companies
are tax-free (this fact of course is only advantageous to clients
from EU states).
Companies in tax-haven countries do not receive Value Added Tax IDs.
This could result in substantial disadvantages, if these companies
want, for example, to transact business with European companies.
In addition, if one considers the fact that for example Cyprus (EU
Member, Double Taxation Agreement with almost all countries) has an
income tax of only 10% or the Canton of Zug in Switzerland has a
total tax burden of 15.5% for companies or that the EU special
economic zones (Maderia, Canary special economic zone) entice with
income tax rates below 5%, one should ask oneself the question, if
the formation of a company in a tax-haven country is really the
Factors, such as "economic and political stability”, play also a
major role. Example Belize: As long as the British military protects
Belize against territorial claims of its neighbor Guatemala,
investments can reasonably be made. If the protectors withdraw, one
can assume the worst will happen. Should one decide to make an
investment, one should take out an insurance policy against imminent
Of course, good reasons may exist with regard to forming a company
in a tax-haven country. Specifically the fact that Mutual Legal
Assistance (MLA) Agreements, and extradition treaties for fiscal
offences do not exist and that many tax-haven countries do not
maintain a commercial register, can be very helpful in certain
And of course there are also clients, who setup an “actual company”
in tax-haven countries, with offices, employees and an employed
Managing Director who maintains his ordinary residence in the
foreign country. In such cases, of course, the situation is to be
- Tax Planning within the scope of “associated companies”
Within the scope of associated companies, it is of extraordinary
importance, if the EU Parent Subsidiary Directive is applicable and
/ or if a Double Taxation Agreement has been entered into and / or
if the respective country levies withholding tax on outgoing
This - and other details - must be considered in international tax
-Tax Planning within the scope of Holding companies
Numerous details must also be observed in the formation of a foreign
Location of the subsidiaries (DBA-Situation, EU, Non-DBA
Advantages and disadvantages of individual holding locations,
with regard to the high priority objectives
How are non-holding-activities taxed in the seat
country of the Holding?
Does a holding privilege even exist (for example Cyprus,
Switzerland, Spain), i.e. no taxation on the distribution of
incoming dividends (for example, Cyprus, Switzerland, Spain, the
Netherlands) or low taxation?
outflows /dividend distributions of
the Holding taxed, if they are distributed out-of-country or
distributed in-country (withholding tax)?
How are interest and license payments
of the Holding taxed?
How are deductions due to losses from sale and write-downs to
the lower going concern value addressed?
deductions of expenditures for interests /
stockholder debt financing addressed?
International tax planning is a very complex subject and belongs in
the hands of trained specialists. “Just forming a company on the fly
for a few hundred Euros" can have fatal consequences for the client.
Good advice costs good money. And a waterproof company
constellation, which would standup to subsequent verification - is
simply not feasible for a small amount of money.