Registered Here, Taxed There: Corporate Tax Compliance Dilemma

In today’s world, where countries are connected, and business is often done online, picking the right place to register a company is a big decision for business owners. It might seem like the best idea to start a company where you live and plan to work, yet many businesses are set up in one jurisdiction and pay taxes in another. This happens for several reasons, such as different tax rules, legal systems, and business environments in each state.

Let’s see why companies might choose to register and pay taxes in different places. Things like how high taxes are, how easy or hard it is to do business, and agreements between countries may all influence this choice. Knowing about these implications is important for business owners who want to work internationally and keep their taxes as low as possible. 

Why founders choose to incorporate abroad

In the contemporary economy,  more and more companies are starting up with the aim of reaching customers all over the globe. Business founders and creative minds are eager to share their products with people wherever such customers may live. But they run into obstacles because the laws in many jurisdictions haven’t caught up with the quick advances in technology and the new business models that are popping up. This mismatch leads to some tricky issues for those setting up these businesses.

Founders are increasingly looking to foreign jurisdictions for company registration, and they have valid reasons for doing so: 

• Lower Taxes: You will enjoy more ways to pay less in taxes.
• Worldwide Market Access: This is an excellent opportunity to grow the business and serve people around the world.
• Strong Legal Systems: You can benefit from efficient legal systems in certain states.

This is what some other perks may include:

• Startup-Friendly Regulations: Laws that support startups and innovation. 
• Technological Innovation Management: Systems in place that make it easier to use the latest technology.
• Legal System Stability: Dependable legal environments.
• Varied Tax Systems: Tax regimes that offer different advantages.
• Developed Financial Infrastructure: Financial services that boost business development.

These considerations are key as they allow company owners to operate more efficiently and reduce risks resulting from legal and administrative challenges.

Selecting jurisdictions with favorable tax environments

Jurisdictions worldwide are competing to draw financial and intellectual capital into their economies, and they’re using tax incentives as a lure. These incentives are designed to help businesses cut down on expenses and boost their profits.

We will examine the tax conditions that different regions offer, focusing on offshore zones, European jurisdictions (which cover EU member states), and Asian countries.

Island jurisdictions

Island jurisdictions, often referred to as offshore states, are known for their financial incentives, which include low tax rates and sometimes even full tax exemptions. These features are appealing to entrepreneurs and investors who are seeking ways to minimize their tax liabilities and establish companies in a supportive business environment.

Belize

Belize is an attractive jurisdiction for international business companies due to its zero corporate tax rate and various tax incentives. Nonetheless, always be mindful of the financial reporting obligations and international norms. At Q Wealth, we have specialists ready to guide you through the registration procedure and offer the necessary legal assistance.

Cayman Islands

The Cayman Islands is a favored jurisdiction for foreign businesses, particularly those in the investment and hedge fund sectors, due to the absence of corporate, personal income, and capital gains taxes.

British Virgin Islands

Here, you will pay no corporate fees or income taxes, which is a significant advantage for businesses. BVI also offers the perks of easy incorporation and strong privacy protections for companies.

European jurisdictions and their tax benefits

Cyprus, Estonia, and the United Kingdom are attractive destinations for foreign businesses due to their favorable business conditions. These countries each provide distinct tax benefits that are particularly appealing to startups and innovative projects.

Cyprus

Cyprus stands out as a popular offshore jurisdiction thanks to its EU membership and reasonable tax policies. Businesses benefit from a corporate tax rate of only 12.5%, and certain companies qualify for even more preferential benefits.

In Cyprus, foreign companies have the opportunity to exempt up to 80% of their income from taxes if this income comes from intellectual property like inventions and software. The above exemption may lead to an effective tax rate of as low as 2.5% on such income, turning Cyprus into an exceptionally beneficial jurisdiction to launch any innovative projects.

Estonia

Estonia’s tax system offers a significant benefit: taxes are applied only to distributed profits, like dividends and related expenses, at a basic rate of 20%. Companies that channel their profits back into the business for further development enjoy a tax deferral. It means such companies pay no taxes until they distribute dividends. This aspect of the Estonian tax system is especially appealing to startups and innovative ventures that require ongoing reinvestment to grow.

United Kingdom

The United Kingdom draws foreign businesses with its attractive investment climate and streamlined regulations. While the corporate tax rate here is 25% (reduced to 19% for small businesses earning profits up to GBP 48,000), numerous strategies are available to substantially lower tax liabilities for companies that make and use innovative products.

Why choose to pay taxes in Asia? 

Asian jurisdictions are appealing to entrepreneurs worldwide due to their advantageous tax legislation, strong innovation support, and initiatives that promote business expansion.

Singapore

Singapore’s reputation as a thriving economy with forward-thinking tax policies is well-earned. The jurisdiction boasts a standard corporate tax rate of 17%, but it also provides substantial incentives for new and innovative businesses:

• Tax Exemptions for New Companies: Profits up to USD 91,000 are tax-free for the first three years. Beyond this period, profits up to USD 75,000 per annum benefit from a reduced tax rate.
• Incentives for Innovation: Starting in 2024, Singapore offers deductions up to USD 293,000 USD for research and development as well as intellectual property registration costs. This includes a generous 400% deduction on each dollar invested.

Hong Kong

A key financial hub in Asia, Hong Kong offers unique tax benefits for businesses:

• Two-Tier Tax System: Profits up to USD 255,000 face an 8.5% tax rate, and any profits above this threshold are taxed at 16.5%.
• Territorial Taxation: Profits made outside of Hong Kong are exempt from tax, regardless of whether they are brought into the jurisdiction. This principle is a boon for tax savings and cost management.

It is due to these tax provisions that Hong Kong is a magnet for international firms, especially if they earn income around the globe.

Tax implications for foreign entities

While company incorporation overseas may come with multiple benefits, it’s important to weigh potential drawbacks that could impact your business financially. For example, having to file tax returns in the founder’s home country may offset any advantages of the selected jurisdiction.

Dividend taxation

In many jurisdictions, dividends are taxed before they are distributed to the founders. The founder’s country of tax residence may levy additional taxes as provided for under its domestic laws. However, a bilateral Double Taxation Avoidance Agreement between the states in question may lessen the total tax liability.

Common Reporting Standard (CRS)

Under the CRS and FATCA regulations, there is an obligatory automatic exchange of financial account information among the tax authorities of various nations. Consequently, business founders need to be ready for their domestic tax authorities to obtain certain details regarding their overseas business operations.

Permanent Establishment (PE)

A company is generally liable for corporate income tax in its incorporation jurisdiction or the country where its principal business office is. Nonetheless, should the firm engage in international business via a permanent establishment, like offices or other profit-generating physical sites active for over six months, it must also pay taxes in that foreign country.

Taxation of directors’ fees

Founders who happen to be directors of their overseas companies are commonly entitled to a salary. This remuneration is usually taxable in both the director’s country of tax residency and the nation where the company is incorporated.

Controlled Foreign Corporations (CFC)

Following the CFC instructions, founders are obligated to compile supplementary reporting documents and remit taxes on profits in their permanent residency state.

Summing up

Are you planning to set up a business overseas? Before you incorporate one, it is wise to evaluate all the risks and potential implications for your business. To ensure success, contact the Q Wealth team! Our experts will help you develop an ideal tax strategy to reduce risks and boost anticipated business advantages to the max!