Transtax

MISCONCEPTIONS

• Tax residency is the same as physical residency
• This is not always the case. Most countries will assess tax residency after a stay in the country of a certain period, sometimes averaged over a number of years. As a consequence one can be tax resident in a number of countries which may result in paying multiple taxes over earnings

• Offshore companies do not pay tax or pay very little tax.
• Anti avoidance legislation in certain countries may very well eliminate the effectiveness of certain offshore structures. In such a case the resident of that country is being taxed as if the money earned in the offshore was earned by him or her personally, regardless whether dividends have been paid, or certain transactions and expenses are not being recognized by the authorities. Expert planning is required to avoid these unpleasant surprises.

• If one uses a trust one looses control over the assets in the trust.
• Even though the Trustee must be independent and have full control over the assets, there are ways to structure the trust in such a way that the beneficial owner can exercise full control over the management of the assets.

• Trusts are expensive.
• Certain trust companies and banks do indeed charge a lot of money for a trust. However, there is no reason for such charges and a trust can be structures at a very reasonable cost, while the annual expenses can be kept at a minimum. It is advisable though to use a smaller specialized trust company in the jurisdiction of choice.

• It is cheaper to have a will.
• Wills are cheap to make. However the execution of a will can be quite expensive and the tax consequences of a will can me very significant, at times dramatically reducing the assets to be inherited. Considering these factors, a sensibly constructed trust is always more advantageous than a will.

• A trust can not be revoked.
• This is not correct. A trust can be revoked, but there may be considerable tax consequences. It is therefore advisable to evaluate possible consequences when structuring the trust.

FAQ

• What is the difference between legal and beneficial ownership?
• The legal owner is the owner who has title to a certain asset. However, he can hold this on a trust or nominee basis, for somebody else. This other person is the beneficial owner.

• What is a company secretary?
• A company secretary is responsible to make sure that a company remains in good standing by filing the necessary returns and by complying with all other legal requirements of a country.

• Why do I need a registered office. in the country of incorporation?
• A registered office is a requirement in most countries. It enables to authorities to deliver legal documents to the company.

• What is the difference between authorized, issued and paid-up share capital?
• Authorized share capital is the amount of shares the company can issue. If more shares are to be issued, the shareholders will have to decide to increase the authorized share capital. Issued share capital is that share capital the shareholders have subscribed to, that means the amount they are responsible for towards creditors etc. of the company. Paid-up capital is the amount of the issued share capital actually paid into the company.

• What is the difference between the Articles of Association and the Memorandum of Association?
• The Memorandum declares the object of the company, i.e. what activities the company can undertake. The Articles regulates the relationship between the shareholders and the company.

• Does confidentiality still exist?
• Banks are now obliged to know the beneficial ownership of bank accounts. How safe this information is with the banks depends on the bank secrecy laws of the country. Most countries have now abandoned the existence of bearer shares, or if they exist they must be deposited with approved fiduciaries in the country who are obliged to know the beneficial owners of the shares and may be audited by the local authorities. The EU and the US have signed Tax Information Exchange Agreements with most offshore countries and will have access to certain information if so requested. Within the EU there is already an extensive exchange of tax information (MAD's). And in the UK consultants have the obligation to inform the authorities of certain facts without notifying the client. It is clear that confidentiality is at any time questionable and that good tax planning solutions should not depend on confidentiality in order to be effective. It is also important to be aware of the risks when using consultants and banks of certain jurisdictions.

• Is the EU savings directive a threat?
• Depending on the final draft it may have more consequences than mere withholding tax on interest income. We refer to what is written above and this directive requires additional disclosure and therefore increases risk in certain cases.

• What is offshore?
• Offshore refers traditionally to islands off the shores of the US and Europe that provided lower tax rates and lower compliance requirements. The term is now generally applied to all jurisdictions that provide these kind of facilitations (OFC's).

• What is CFC legislation?
• Controlled Foreign Companies are companies that provide tax benefits, but are controlled by residents of other higher tax countries. They are therefore considered "convenient", and anti avoidance legislation will allow countries to tax their residents (corporate or non) on profits of those companies, even when not distributed.

• What is Transfer Pricing?
• Transfer Pricing refers to the pricing used by two related companies resident in different countries when transferring goods from one company to the other. Certain rules and guidelines exist which are aimed at avoiding that all profits will be declared in the lower tax country. Expert advise is needed and it often useful to clear pricing with the authorities prior to application.