How to know if your tax structure is legal

We encounter many people who think they have an awesome idea about how to reduce taxes. 

‘’You know, it worked for my friend. It’s quite simple’’, they often say. 

The little they know is that what they’re thinking about is not legal, and could potentially do more harm than good.

There are plenty of articles out there that are giving horrible tax advice. 

When it comes to taxes many don’t know what they’re talking about

You are a business owner that just wants to decrease the tax burden. Fair enough.

Of course, you’re not a tax expert and nobody expects you to be one. 

However, when it comes to the consequences of bad advice authorities will not care that you were misinformed. In the end, it will only hurt you and your business. This is why it’s very important to be smart, and only trust legitimate sources when it comes to this topic. 

Things to pay attention to

Residency of the company

Where is the company resident vs where is it registered. 

This is the most common thing people get wrong when talking about tax structures. 

Corporate residency is based on management and control. In simple words, where do you run your business from. 

Many people think that they set up a company in Hong Kong, for example, and that they won’t need to pay any taxes in their home country. 

Guess what? It doesn’t work like that. 

Many countries tax companies based on where do they operate. Where the company operates is the residency of the company. 

This means if you have operations, team, offices, etc. in your home country, but you are registered abroad, you still have tax obligations to your home country. Registration abroad doesn’t mean anything in this case. 

Source income

You need to have your income sourced in a place where it’s taxable.

If you want to know more about sourced income, you can check it out here. 

There are all sorts of things that companies can do to shift sourced income, but it must be reflective of substance. 

If it’s just a form without any substance behind it, chances are it will get you into trouble. 

When it comes to sourced income lines are sometimes blurred, so it is very important to be careful about it. 

CFC rules

CFC means controlled foreign company rules. 

This part is a little tricky because not every country has controlled foreign company rules. 

If you want to be sure, you should look at Deloitte tax highlights. There you can find explanation on CFC rules about your particular country. They covered most countries, but not all. 

If you want to know more about CFC rules, you can read our separate article about this topic.

If you don’t pay attention to this, there is a risk that you could get yourself into trouble. 

One size fits all doesn’t work in this case

If someone has the ultimate tax strategy that works every time for everyone RUN. 

Tax structuring is very complicated and depends on your situation, so there is not some universal recipe that you can follow to reduce your taxes. 

Take this very seriously. 

Some people ended up in prison for following bad one size fits all advice from incompetent people. 

Every country has different tax rules, so if you come from Australia you need different advice than someone who comes from Canada, for example. 

We like Labuan in Malaysia for forming companies. It’s fairly easy and affordable setup. It is a place where we can set up a real office and hire local people for a decent price. 

However, if you are an Australian Labuan won’t work. 

Labuan is excluded from the tax treaty with Australia. 

If you are in Portugal they are on the CFC blacklist. Needles to say, it will not work. 

Every case needs a proper analysis 

In order to come with a proper tax strategy we will need to look at many different things: where are your customers from, where are your employees located, where is the management of company taking place from, how do you accept payments, what are you doing with banking, what tax treaties are there and how are they applicable to your situation, are there any shipment fulfilling issues, are there any regulatory issues, etc.

When we really take a deep and detailed look at your situation we can come up with a proper structure plan. 

This process will take some time, it will take some investment but it is completely worth it!

We will make sure that you get something solid and sustainable. 

When someone does the analysis they should be able to site for you the exact laws that are relevant to your situation

It is very important to know which laws apply to your particular situation and which do not.

This  can sometimes be quite uncertain, because not every country has clear rules when it comes to tax consequences. 

However, it is very important to keep in mind that your tax advisor must site for you all the laws that are applicable. If they cannot do it they are not the right person for you. 

Let me give you an example that usually comes as problematic, and many tax advisors don’t understand it well. 

In Portugal they have something called non-habitual residency NHR. They also have a CFC blacklist.

So under the NHR, dividends are supposed to be tax-free. However, companies who meet the CFC criteria of Portugal who trigger this blacklist will have to pay taxes. 

You could go to two different lawyers in Portugal, and they could give you two diametrically different advice. You shouldn’t put much thought into what neither of them say, and we’ll explain why.  

Let’s imagine this situation:

You live in Portugal and have a Hong Kong company. Maybe you’re paying zero tax. Hong Kong happens to be on Portugal’s blacklist. The question is do you have to deal with CFC blacklist rules, or do you just bring back dividends tax-free?

Some lawyers will say that if you’re NHR, CFC rules don’t apply, therefore dividends are tax-free. 

Others will tell you that Hong Kong is on the blacklist and that it will cause you problems. 

Which of these two is right?

Well, the truth is that it is actually not clear. 

If you read the actual laws of NHR, you will see that it does not state anything about the CFC rules. They’re not mentioned at all. 

So it means that it is completely up to personal opinion, and multiple lawyers can give you different advice.  

We prefer to do structures in a safe way

In this case, we would assume there might be an issue with CFC rules, even though we can not tell certainly. But we like to take the approach ‘’better safe than sorry’’. 

There have not been court cases that dealt with this issue yet, and the laws are not very clear, therefore we don’t know what might happen if tax authorities were to go after someone in this situation. 

Some say that the whole NHR program is to attract wealthy foreign investors, therefore Portugal will not go after them and shoot themselves in the foot.

Others will say that Portugal is in debt and they’re short for money. They need cash, therefore they will go after these guys. 

These are only opinions, not legal facts.

What we’d do in this case? Well, we’d not deal with any blacklisted countries. We would structure it in a way that’s compliant both to NHR and CFC rules. That way, we know you’re safe.

Maybe it turns out that you’ll pay a little extra tax, but at least you won’t be in danger of breaking any rules. 

If you’d like us to take a look at your structure and asses it feel free to contact us.