Are Offshore Companies Still A Viable Solution?/long-live Offshore!

By Author: Edward Leigh Edward Leigh
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By Edward Leigh, Managing Director
OCRA Aerospace (Isle of Man) Limited

Perhaps one of the most common misconceptions of offshore companies today is the belief that their uses and application are limited. However, through careful planning, tax efficient structures can be created and used to either mitigate or avoid tax altogether.


The following case studies provide valuable insight into how offshore companies can be used to structure your affairs so as to maximise your assets.


Licensing Company

Zoomcopter Ltd, a company established in Taiwan, has developed a new widget which is used as a spare part in the assembly of helicopters. By using this widget when producing the helicopters, the operational costs of the helicopters can be substantially reduced.

Zoomcopter holds the worldwide patent on this invention and it wonders how the exploitation of the patent can be arranged in a tax-effective manner.


Suggested solution:

The patent should be transferred to a company in a low tax country ...
... from which the patents are licensed to one or more licensing companies in countries with a dense tax treaty network and which does not levy a withholding tax on royalties paid abroad.

The set-up of a licensing company in Mauritius could meet these objectives. Mauritius has an expanding network of double taxation treaties, thus substantially reducing the withholding taxes on royalties paid to the Mauritius company.

Although the Mauritius company is subject to tax in Mauritius at a rate of 15%, the spread between royalties received and royalties paid to the offshore patent-holder can be minimised (Mauritius has not adopted any transfer pricing regulations which could have an impact on the amount of the spread).

Royalties paid by the Mauritius company are not subject to a withholding tax in Mauritius.

Note: If there is no double tax treaty between Mauritius and the country from which the royalties are paid, the set-up of a sub-licensing company in a third country might be considered, e.g. Luxembourg. Luxembourg has a good tax treaty with Mauritius.

Conclusion

It is clear from the above example that careful and tailored tax planning is required to ensure that the right tax vehicles are used. Additionally, it is evident that consideration should be given to the costs in operating the structure (which can vary from £1,500.00 per annum to £25,000.00 depending on its complexity) against both the tax savings and the associated risk should the tax loop hole close.

Notwithstanding, until taxation rules are aligned globally and whilst double taxation treaties remain in force, the use of offshore companies in tax planning will continue well into the foreseeable future.

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