Tax Efficient EU Trading for Offshore Companies
Anyone trading from within Europe will usually be interested in opportunities to reduce both tax and VAT burdens.
There are lots of options and opportunities available, but using a Swiss trading company to reduce VAT can be highly attractive for certain traders, particularly where this is combined with a tax efficient offshore structure.
Who it applies to:
The typical company that can reap the benefits will be a company carrying out business to consumer (B2C) transactions for VAT purposes. Usually in this case VAT is charged at the place of supply which, in the context of the “supply of services to a person who is not a relevant business person” is defined as “where the supplier belongs”.
There are specific provisions for anyone trading online that can (in simple terms) mean that VAT is charged where the customer is based. These would need to be considered, however one of the key exceptions would be where you are providing services to customers on an individual, personalised basis. The activities would then not be deemed as falling within the provisions of the EU ‘E-Business’ Directive and VAT would be based on where the supplying company is.
In this case it is possible to create a company in Switzerland. This is outside the EU but which is part of EFTA and so largely complies with European VAT legislation, (as defined under the Sixth VAT Directive 2006/112/EC). The Swiss company will sell to EU (including the UK) customers with VAT charged at 8% as opposed to the current 20%. This would dramatically increase the profitability of most companies.
The current VAT regulations re EU B2C place of supply will stay in force until 2015 at the very earliest – but there is currently no reason to believe that this situation will change even in 2015. Given that such a change would need not only the appropriate approval at the European Commission level but also an appropriate preliminary phase before implementation, it can be stated with some confidence that the current EU VAT B2C regulations will remain in force for many years to come.
In terms of corporation tax the effective rate of Corporate Tax in Switzerland ranges from 14.5% to 33.5%, the average being 21.6% which is more or less on a par with the UK. However an offshore structure could be set up to significantly reduce the Swiss profits.
There are lots of different variations on this but for example the Swiss shareholder could control a Panama or Seychelles Private Interest Foundation which in turn would own a Cypriot company. The Cypriot company would have an intercompany agreement with the Swiss company to invoice it for services provided, leaving the Swiss company with substantially reduced profits (this would need to be at a sufficient level to satisfy the Swiss tax authorities),
This would then ensure that the the vast majority of profits ended up in Cyprus with its 10% Corporate Tax rate.
This structure could be added to in terms of privacy with the Shareholder owning an SPV in Delaware so that his/her name doesn’t appear on the charter documents of the Seychelles/Panama Foundation which it owns.
You could also expand the structure further by having the Foundation holding shares in a BVI holding company (inserted to facilitate the later selling a share of the business) which owns a Cypriot company (trading to the USA) which in turn owns both a Swiss company (trading to the UK/EU and paying the Cypriot parent company for management expertise) and a new UK limited company (which provides administrative support to the Swiss company.
The individual could then extract funds as a freelance management consultant of the Cypriot company, leaving the remainder of the profits to accumulate in the Foundation for subsequent investment in property via a Cypriot company.
Key UK tax issues would be establishing the central management and control was overseas and avoiding the UK anti avoidance rules (follow links below)
Therefore this type of structure should ideally be used by a non UK resident individual looking to trade in the EU/Internationally.
Providing there was then no UK permanent establishment there would be no UK tax on the profits generated.
If a UK company was used as a recharge company this would of course be taxed in the UK on these profits.