Considerations for the Client
1. Tax - An offshore company that establishes a "residency" in another country from its place of incorporation by any number of criteria used by domestic tax authorities (this varies from country to country) is often taxable just like a domestic company in that other country and failure to report it as such could lead to adverse consequences including onerous penalties, interest and even in extreme cases criminal charges. Thus the control structure and ongoing management of the company must be given serious consideration to ensure its residency is properly established in the desired location and it is thus compliant with all reporting obligations.
Place of Effective Management (i.e. "Residency)
In the case of an offshore company (i.e. one exempt from tax in the country of incorporation) the "place of effective management", "place of central management and control" or similar criteria is generally the most relevant criteria used to establish the location of residence of the offshore company. While this varies from country to country, most of the OECD members participating in the "OECD Global Form on Transparency and Exchange of Information" have settled on the term "place of effective management" as the criteria to determine the place where the offshore company will be deemed a resident for tax purposes. The place of effective management is described as follows by recent OECD commentary on Article 26 of the Model DTAA Convention:
The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management.
It is important to note however that this definition is used primarily to mitigate double taxation in a case where a company has some presence or level of business activities in two or more countries during a tax year. Each country can and does still have its own criteria for foreign companies to establish tax residency in the country which must be considered. For purely "offshore companies" (i.e those that are not taxed in the country of domicile) overseas tax authorities can and do often apply a higher standard if they suspect that the directors of the company are simply "nominees" and are not really making key management and commercial decisions themselves. Requests through bilateral tax agreements can be such that the tax authorities dig into the company's affairs to determine if the directors are truly exercising a level of "effective management" or if a resident in their country is perhaps controlling the company to a level that makes it tax resident there.
In practice a number of criteria are generally examined when it comes to an offshore company for purposes of establishing this place of effective management:
- country of residence of directors
- location of meetings of directors
- location of the accounts, books, registers, etc.
- level of control exercised by these directors
- country of residence of any other key executives or holders of any power of attorney that make day to day decisions
- country of residence of bank signatories
- frequency of board meetings
- business/mailing address of the company
- whether the company has a telephone number in the country of incorporation
Obviously the more of the above that are in one jurisdiction the more likely that the offshore company will legitimately be deemed to have its place of effective management in the desired location. A situation where there is a "nominee director" who simply issues a Power of Attorney and thereafter has little to no communication nor oversight of the activities of the company (a common service offering of competitors) will not be sufficient to establish the place of effective management where the director is resident in nearly all cases.
Especially given the new realities in terms of cross-border information sharing which is only going to continue to increase, it is important that company management be properly considered to avoid adverse tax consequences. Countries continue to execute bilateral tax information exchange agreements (DTAAs and TIEAs) whereby they are obliged to collect and share tax related information on request by a foreign tax authority. The new OECD Convention on Mutual Assistance in Tax Matters takes this to a new level with a new "Common Reporting Standard" framework that provides for automatic exchange of information for tax purposes with regard to financial accounts (i.e. bank accounts, brokerage accounts, etc.), custodial accounts, passive investment entities and more.
To learn more about the OECD conventions please clink the following links:
OECD Convention on Mutual Administrative Assistance for Tax Matters
OECD Automatic Exchange of Information for Tax Purposes
The Automatic Exchange of Information for Tax Purposes is a difficult read even for the most seasoned practitioners, so please contact us or your tax advisor to discuss your particular circumstances. We can create a structure that best suits your requirements.
Basic Director Service Only
This is what is commonly referred to as a "nominee" director service however company laws and prevailing anti-money laundering regulations require that any director performs his/her duties as would be reasonably expected to maintain sufficient oversight over the affairs of the company. It is a risk and not credible for a sole director of a company to pass off its duties to a third party via a general power of attorney to then have no idea what the company is up to from that point forward. Thus it will still be necessary for the director to be kept up to date with important matters, to ensure that accounting records are being maintained and other basic compliance related tasks. This is not a service for establishing a "place of effective management" where the director resides however.
With the basic director service, we will provide a non-executive director and the day to day affairs will be conducted by the client(s)/owner(s) either as an appointed executive, as another director (executive), as a consultant or similar. The director is able to provide ad hoc services such as execution of contracts/agreements on request or else a power of attorney can be provided for the client or another party to execute these documents. There is a risk in this case that the company could still be deemed a tax resident of another jurisdiction from where the directors reside and make their decisions. Therefore, if this is not desired then the full management solution should be strongly considered.
Full Management Solution
Sterling is able to provide a fully managed company solution to provide the necessary level of service and oversight of the company necessary to establish the "place of effective management" where the directors reside and make their decisions. The exact setup will vary depending on each situation, however the following is a sample of the types of services that may be included with the full company management solution (note that each of these will be discussed and confirmed in advance with the client):
- Professional director services w/ management agreement specifying duties (our directors have experience in real estate, consultancy, e-commerce, securities/investments and more)
- Establishment of corporate governance framework and policies for the company by the director based on international best practices and the particular requirements of the company
- Initial organizational meeting of the company and preparation/review and execution of contracts/agreements
- Review and input on business structure and plans
- Company secretary
- Business/mailing address
- Bank account management (transactions, reconciliations, etc.) - note that this can be a co-signatory arrangement with the directors only co-signing transactions above a certain size (usually US$10,000 and above as this is the limit where most AML laws mandate a heightened level of review) but any involvement with bank transactions by the client may bring risks that the company is being "effectively managed" (i.e the day to day activities" from another country where that person resides which for some countries may bring risk of it being determined a resident there to tax purposes)
- Regular board meetings (at least quarterly board meetings and in the case of active trading/service companies we may recommend this be as frequent as monthly to consider and provide input, record matters considered in the board minutes, etc.)
- Review and execution of contracts/agreements
- Maintenance and preparation of accounts and financial statements (optional, however financial records must be maintained by law for every jurisdiction we offer and we will require that a qualified accountant prepare management accounts at least half yearly if not being maintained by Sterling
- Provision of officers - in some circumstances it may be desirable for Sterling to provide executive directors such as a Finance Director and/or Director of Strategy to further enhance the "effective management" of the company
- and more.................
2. Privacy - In some cases the client may wish to have the company managed by a professional third party for increased privacy, protection against litigation or similar where tax is not the primary consideration.
3. Other - There may be other considerations depending on the client such as a need for the offshore company to be managed by a third party independent of the client. This is often the case in investment structures, special purpose vehicles and similar.