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Corporate Income Tax

If you don’t have a corporation you probably should it’s potentially one of the best ways to be able to save on taxes.

In many cases proper tax planning with international structuring can result in zero corporate tax.

Yes, you read that right it is potentially possible for some businesses if they are structured and built properly to pay zero tax.

Even when the full income isn’t subject to zero tax it’s often possible to have a portion of the income subjected to zero tax averaging the overall tax rate down substantially (you’ll have read stories about companies like Apple doing this paying nearly zero tax on billions in earnings).

So how does this work and how come more people don’t do it?

Well it’s not easy but here’s how it works.

 

Attributing Income

The key question when dealing with international tax planning (as opposed to domestic tax planning, which might get you substantial tax savings but almost never get you close to zero) is “Whose tax laws apply?”

Let’s clarify what we mean by international tax planning and what it means to you:

“International tax planning arises when there is income, operations in multiple countries”

In other words international tax planning doesn’t matter if everything is happening in say Canada, US, UK, Germany, Spain, etc., which is why so few people pay attention to it.

What big companies do, which you can also do is create an international tax scenario for your business to potentially optimize the company via international rather than local tax.

For example by:

  • Hiring people abroad
  • Selling to customers abroad
  • Sourcing products from abroad
  • etc.

In this case we get into the question of “what portion of that income does the local government get to tax and how do we know?”

This is based on a principle called “attribution”.  In other words wherever you attribute income to it is subject to tax rules there. By planning and structuring properly you can effectively move the taxable income from a higher tax place to a lower tax place.

There’s a whole system of how do to this and what rules determine where the income is taxable but we’ll save it for a future article.

Here’s the important thing to realize.

“The moment you cross borders dealing with two or more countries through operations, customers, etc. the options of where to attribute income is not between those two or three countries, it is based on the entire world giving you almost limitless options.”

Often someone will say “we’re doing business between Canada and the US where should I form a company?”  The answer is “probably a third country, which is a potential option based on being across borders.

 

Common Misbeliefs

The above being said it is NOT true that you can simply get away with paying zero tax legally easily.  All too often people believe things that are false so here are some of the myths:

 

Myth: You can simply form a company in a low or zero tax country and pay tax there

Reality: if it was that easy everyone would be doing it and no one would form companies in high tax countries.

Corporate taxation is not based on where a company is registered it is based on where it is resident and most countries have rules to prevent you from simply forming a company abroad and applying the lower tax rate.

Forming a company abroad is almost certainly necessary but not sufficient to achieving extremely low corporate tax rates.

So take note it doesn’t matter that a Belize IBC or a HK company is taxed at 0% you almost surely are going to be taxable at your regular country’s rates unless you do a bunch of other things.

 

Myth: You can simply invoice your company whatever your profits are for “management” or “marketing” or whatever to transfer your taxable income into a foreign country.

Reality: The tax departments are smart and most of the things you’ve thought of doing they have also thought of and designed rules to prevent.  In this case they have something called Transfer Pricing rules that apply to most countries in the world to prevent this sort of thing (thin capitalization rules are another similar set of rules).

It can be useful to do those sort of arrangements, transfer pricing is common among almost all multi-nationals, which employ them to reduce their taxes as well as for regular business but the process is complex and can create a lot of tax headaches and penalties if you don’t understand how the rules apply to you and follow them.

 

Myth: You can use the same structure your friend is using to save on international tax.

Reality: Tax isn’t a one size fits all situation and nor are structures it’s more like a tailored suit.  Just because your friend is using a Hong Kong company and paying no tax doesn’t mean you can or should.

How come?

Well maybe their business runs differently from yours.

Maybe they are from a different country than you so their rules apply differently.

Maybe they have different CFC rules to consider (we’ll probably devote an entire article to CFC rules as they are very important for you to include in your planning).

Maybe they have customers in different countries than you.

Maybe they have employees or contractors in different countries than you or performing different tasks from you.

Maybe they have partners that change their tax situation or maybe you have partners that make your tax situation different.

The list goes on.

The important thing to realize is there is no single solution and anyone who tells you there is or goes for one particular common option is someone you should run from.

 

What’s Next?

To figure out how much you could save and how is going to require some analysis of your specific situation.

This requires a conversation and a lot of questions.

Contact us today to discuss and learn, no obligation what is and isn’t possible for you to achieve legally.