Today we will explain everything you need to know about non-resident companies, and how you could use them to reduce your taxes.
Recently I had a conversation with some people about companies in Cyprus.
They asked me ‘’Why do so many people go to Cyprus, doesn’t Cyprus have taxes?’’
Well, yes Cyprus certainly has taxes, but you can have a non-resident company in Cyprus.
How countries tax companies
Normally, in most countries in the world when you form a company somewhere the company becomes the resident of a country where it has been formed.
Meaning that this country will apply its tax rules to it.
Once in a while, this can be overwritten by the applicable tax treaty. In that case, it can be taxed in a jurisdiction where it’s managed and controlled as opposed to where it’s registered.
Many countries will tax your company if it is registered there, but it is not the case for all jurisdictions.
Ireland, Gibraltar, and Cyprus were three jurisdictions in Europe that had different rules.
You can check out our article about tax residency, to understand more.
You will notice that many countries will tax the company on one of the two rules, or both of them:
- Where is the company registered
- Where is the company managed and controlled from
Canada will tax you if your company is managed and controlled from Canada, no matter where it’s registered. Bulgaria, on the other hand, will tax you if your company is registered in Bulgaria.
How did Apple manage to pay ZERO taxes for years
In some countries, taxation is only based on management and control rules. Just like we mentioned earlier the three common ones would be Ireland, Gibraltar, and Cyprus.
For example, Apple registered the company in Ireland, but it was managed and controlled in California.
The USA will tax your company only based on where it’s registered.
This is a very interesting loophole. They wouldn’t pay taxes in Ireland because the company was managed and controlled from the USA, but they wouldn’t pay American taxes either, because their company was not registered in the USA. This means that Apple wasn’t a tax resident anywhere.
Ireland closed this rule in 2019.
Now your company needs to be tax resident somewhere, if it’s not tax resident somewhere you will pay taxes wherever it is registered. So now, Apple would need to pay taxes in Ireland.
That why they moved their company to Jersey.
What’s the deal with non-resident companies?
Even though this rule doesn’t apply to Ireland anymore, it still does in Cyprus and Gibraltar.
Gibraltar has a headline tax of 10%. In Cyprus, it is 12,5%.
However, if your company is registered in these places, but is managed and controlled from somewhere else you can have a non-resident company and pay no taxes in Cyprus or Gibraltar.
This doesn’t mean that you will pay zero taxes.
It can still be taxed where your operations are, aka where it’s managed and controlled from.
When you’re forming a company in those places it’s important to point out that you want a non-resident company.
Local service providers are not really fond of this, because they won’t have you as a customer for many services they provide.
Also, they will make a story where they’ll say that if you form a non-resident company can’t take advantage of tax treaties.
This is true because terms of tax treaties will only apply to resident companies.
IBC – International business company
Many places have IBCs.
IBS is basically a non-resident company.
They created a class of companies that is very close to what we described earlier.
You will find it in Barbados, St Kits, Anguilla, Dominica, etc.
You will notice that many of them are not zero tax jurisdictions, but IBCs will not be subject to tax regardless.
So if you register there, if your operations are run from somewhere else, you will not pay any taxes if you form IBC wherever it’s formed.
One thing that is important to note is banking. This is becoming an increasingly big problem around the world.
Banking for IBCs can be quite challenging. In certain situations, it might even be impossible to open bank accounts for such companies.
If you find this topic interesting you might want to check some of our other articles:
How to know if your tax structure is legal
What is the corporate veil and what does it mean to pierce it
What are trusts and how to benefit from using them