Malcolm Finney looks at the ‘offshore company’ and considers whether it really is a tax saving vehicle.
What is an ‘offshore company’?
The term ’offshore company’ refers to a company incorporated and resident outside the UK. Thus, for example, a company incorporated in, say, Switzerland and resident in Switzerland for tax purposes would be an offshore company.
What is the purpose of an ‘offshore company’?
An individual who is resident in the UK might perceive an offshore company as a means of avoiding UK tax. A non-resident company’s trading profits are not subject to UK corporation tax unless the company carries on any part of its trade within the UK through a fixed place of business. Apart from UK rental income most other types of UK source income are not subject to either UK corporation tax or income tax. This would suggest that a UK resident individual (personally liable to UK income and capital gains tax on worldwide income/gains) could avoid UK tax by setting up an offshore company to carry on a trade and/or other activities wholly outside the UK.
Offshore trading company
For example, a UK resident individual may wish to carry on the business of selling products sourced in China throughout Europe (except the UK) and to avoid a UK tax charge on the profits. A company registered and resident in, say, Switzerland could be set up to avoid any UK tax charge; any Swiss tax charge is likely to be nominal.
The main problem, however, is a practical one. Although registered in Switzerland, if the company is resident in the UK its profits will be subject to UK corporation tax. UK residence will also occur if the company’s ‘management and control’ is conducted from the UK. Broadly, this requires that all the key strategic decisions of the company are taken in the UK, not Switzerland. The individual’s involvement in running the company is likely to be quite significant (eg negotiating sales contracts, sourcing the goods, arranging finance, advertising, etc.); the consequence of which may well be that the company is treated by HMRC as UK resident. The use of so-called ‘nominee Swiss resident directors’ to ‘pretend’ to take such decisions, often suggested by offshore advisors, will simply not suffice.
Offshore investment company
What about using an offshore company for investment, as opposed to trading activities?
For example, a UK resident individual may set up an offshore company to hold Spanish buy-to-lets; to invest in overseas equities; to simply hold surplus unneeded cash on bank deposits; or to hold valuable family heirlooms (eg paintings), with a view to any income (ie foreign income) or capital gains (ie foreign capital gains) from sales falling outside a UK tax charge.
Typically, for such activities, the offshore company would be located in one of the world’s so-called ‘tax havens’ or ‘offshore centres’ which itself levies no (or very minimal) local tax on income/gains (eg Bermuda; BVI; Panama).
Unfortunately, as above, such a structure is unlikely to succeed.
There are two major obstacles to overcome:
- The first is to avoid the company being treated as UK resident (as discussed above).
- The second, and arguably more powerful, is that the UK’s tax legislation contains anti-avoidance provisions designed to in essence ‘look through’ the offshore company. By looking through the offshore company, its income and capital gains are directly attributed to the UK resident individual shareholder and subject to UK income or capital gains tax on the individual, not the company. There are counter arguments to any such attempts by HMRC to apply the provisions but, generally speaking, in most cases are unlikely to succeed.
The non-UK domiciled individual
Perhaps the major use of an offshore company is for those individuals who are (or become) non-UK domiciled (broadly, individuals who do not intend to live in the UK indefinitely/permanently) who, by owning their UK residence through an offshore company, are able to avoid UK inheritance tax in the event of lifetime gifts of the property or on death. Whilst this is still the case, the ability to also avoid a capital gains tax charge on any sale of the property has been much diminished.
Practical Tip:
Except for the non-UK domiciled individual the use of offshore companies by UK resident individuals is unlikely to be tax effective, possibly creating more problems than they solve.
