Classic offshore companies do not pay corporate tax or pay it at a reduced rate. What is the case with other taxes? For example, does an offshore company need to pay VAT? It is worth noting at once that there is no unambiguous answer to this question, as different jurisdictions have different requirements regarding the payment of value added tax by offshore companies.
What is VAT?
Value Added Tax (VAT) is considered to be a relatively “young” tax, which was first used in Germany in 1919. A more specific scheme of such taxation was developed in France in 1954 by a local economist Loret. VAT became effective in this country only four years later, in 1958. Today, more than 135 countries around the world levy VAT. It is a tax that is usually added by the seller of a good or service to the cost of producing or buying the good or service. Value Added Tax (VAT) is an indirect tax, which is included as a surcharge in the cost of goods/services, paid by the buyer, but remitted to the budget by the seller.
In foreign countries VAT may be called either VAT or GST.
Value Added Tax (VAT) is used mainly in European countries. Most companies doing business in the Eurozone face the need to pay VAT. The abbreviation “VAT” is intended to reflect the specificity of the European value added tax. At the level of the European Union there is a unified procedure for the collection of this indirect tax. According to the relevant Directive, the payer of VAT in the EU is “any person who independently carries out in any place any kind of economic activity, whatever the purpose and results of such activity”. This can be both offshore companies and ordinary businesses, as well as individual entrepreneurs. But some jurisdictions have certain relaxations and limits in this regard. There are four types of transactions subject to GST: supply of goods, purchase of goods, provision of services and import of goods.
Another definition of GST or Goods and Service Tax also stands for Value Added Tax and is applicable in a number of countries. It is a destination and consumption based tax that is paid in the state in which the goods and services are consumed. It is worth noting that each country applying GST has its own rules regarding its assessment, and uses different schemes for its calculation and threshold limits. Therefore, it is difficult to determine its exact amount. But usually small suppliers are not required to register for GST. However, an entrepreneur can register for GST at will without waiting for the threshold to be crossed.
In the EU, offshore companies are required to register for GST in any case, but sometimes the rate may be 0%. Taxes in offshore companies rarely exceed this rate and VAT is no exception in this case. An offshore company that performs only export operations, not imports, may have an exemption from value added tax.
Using an offshore company for international trade
Many companies involved in exporting and importing goods actively use offshore companies to trade more favorably in international markets. This tool today is still considered to be an effective solution to distribute profits extremely. But it is necessary to choose the right jurisdiction to register such a structure.
Often trading companies purchase goods at low prices in a developing country and resell them at a substantial markup in a more economically developed country. Such a solution saves on taxes, including VAT.
Why many entrepreneurs prefer to use low-tax offshore jurisdictions to register their trading companies:
- High level of profitability. The entrepreneur spends less money on registration and maintenance of the offshore company. In addition, zero VAT and the absence of the need to pay corporate and other taxes allows you to save a lot of money in the end.
- Opportunity to maintain confidentiality. Many offshore jurisdictions still do not have an open register of companies. This means that it is only possible to find out about the owner and managers of a structure registered in this jurisdiction if you have a court decision in hand, and not always.
- Possibility to protect assets. If you choose the right jurisdiction to register an offshore company, you can reliably protect assets from creditors and other claimants. In some offshore jurisdictions (for example, Nevis) local courts do not recognize court decisions of other instances. In order to claim the assets of an offshore company registered here, it is necessary to file a lawsuit in the local court.
- Expanded opportunities of commercial nature. By establishing an offshore company in a suitable jurisdiction, an entrepreneur has the opportunity to enter new markets and expand his trade opportunities.
The ability to obtain exemption from VAT and other taxes is considered one of the main advantages of offshore companies as a tool for international trade.
Of course, in order for an offshore company to be a profitable solution, it is necessary to choose the right jurisdiction for its registration. You should take into account the structure of the business, the location of customers and suppliers. For example, for companies whose customers are located in one EU country and suppliers in another, VAT exemption is provided on the basis of intra-European transactions. But it is worth remembering that such exemptions will only be available if certain conditions and criteria are met.
How to choose the best jurisdiction for offshore registration
If an entrepreneur wants to register an offshore company for the purpose of profitable international trade, he should choose a jurisdiction with zero or very low taxes. It is also necessary to pay attention to the reputation of the jurisdiction, as it is desirable that it is not in the “black offshore lists”, otherwise there may be difficulties with opening a bank account in another country and not only.
It is also recommended to study the conditions for obtaining trade licenses in the country of presumptive registration of the offshore company, if such are required for trading activities. It is advisable to choose a jurisdiction with zero VAT or full exemption from value added tax.
Incorporating an offshore trading company in a country with free trade rules may also prove to be a strategic step towards developing and expanding your business. There are more than three hundred such agreements in existence today, so the choice of a suitable place of incorporation will be quite wide.
Many entrepreneurs use offshore companies in order to reduce or negate the need to pay VAT. By arranging re-invoicing, which is characterized by a rapid jump in prices for goods and services downward, it is possible to accumulate funds in an offshore company at a zero tax rate.
In order for an offshore company not to pay VAT, it is necessary to competently select a jurisdiction for its registration. Many offshore jurisdictions offer foreign businessmen zero rates of value added tax or completely exempt them from paying this tax. Therefore, before deciding to incorporate an offshore company, it is recommended to take the help of professionals. They will help to choose the best offshore zone for this purpose. As a result, the entrepreneur gets an effective tool for optimizing taxes and making profits.
