Dec 2010:
There are many challenges to contemplate if structuring your company’s overseas activities by using offshore companies. The overriding basis for setting up an overseas entity really should be influenced by commercial reasons as an alternative to tax mitigation. There may also be legal, regulatory and language problems to take into account. Even so, members of UK partnerships and LLPs will have to put up with rates of tax of as much as 52% (including national insurance policies contributions) on their share of profits from August 2011. As a consequence, such firms might consider benefiting from lower taxed regimes offshore if substantial work is concluded outside the UK.
After proper planning, a company might be established in a non-UK jurisdiction for you to conduct overseas activities. The organization would be subject to local tax on their profits. Provided that the middle management and control from the company is located in that offshore jurisdiction, the profits of the company should not be susceptible to UK tax. The likelihood is that certain operations completed for the new offshore company will be provided from Britain.
A sensible transfer pricing policy will have to be introduced to guarantee that such UK costs are recharged into the non-UK company at arm's length rates. The partnership deed or members agreement must be reviewed to ensure you can find no conflicts with an overseas entity doing any business actions. In the same manner, partnership profit-sharing arrangements could be affected by such a set up, both in terms from the overseas profits foregone with the UK partnership, and the ownership belonging to the offshore company. There are many competitive offshore jurisdictions with low tax regimes. The strength of your double tax treaty network as well as the imposition of withholding taxations on dividends and service fees for technical services will have to be considered, so getting local tax expertise is highly advised. The allocation of post-tax profits on the overseas company among principals is usually the key issue for consideration here.
The simple allocation of shares to members belonging to the partnership would present difficulties in the future when new partners are recruited or existing associates retire or leave the actual firm. Care should also be taken to ensure no employment income taxes issues arise under the job related securities legislation where, for instance, members become officers or employees in the company. Profits generated by the offshore company could possibly be enjoyed by the shareholders in several different ways. Dividends paid in order to, and sales of shares by, UK resident taxpayers would produce a further layer associated with tax. However, there might be a number of tax advantages for non-UK domiciliary to put together an offshore structure that will shelter future offshore profits.
There is a large amount of UK anti avoidance legislation into position to examine any structures that happen to be not adequately sturdy. These difficulties will be different from business to business, so it will have to be outlined at the first planning stage. The establishment and running of the offshore company will mean substantial costs. Financial benefits can only be guaranteed when the company has sufficient substance inside the offshore territory. Any services provided from the UK will have to be charged on the arm's length basis.
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