International Trading Company
Setting up an international trading company for a new business venture
International Trading Company
Setting up an international trading company for a new business venture or where a domestic company is expanding into new international markets can provide many benefits if done correctly. For our purposes, we will define an international trading company as one which trades in tangible goods or commodities.
The world continues shrink with advances in technology, payment systems and in general the barriers to trade between countries continuing to shrink. As such what was formerly the playground of only large multi-national enterprises and the elite is now at the fingertips of nearly everyone with an internet connection and a solid business that is scalable on a regional or global basis. It is now easier than ever to establish a new international trading company or to expand a successful domestic business regionally or internationally.
Several factors must be taken into consideration in setting up the new venture including the following main considerations:
Location of suppliers and customers.
Having a company in the region of your suppliers and/or customers may bring more comfort, provide certain benefits in terms of reduced trade barriers, access to preferred banking facilities and similar.
Similarly, if any of the suppliers or customers are in a jurisdiction deemed to be “high risk” by banks this will make it more difficult to obtain the necessary supporting financial services from banks, payment services providers and similar as applicable.
Controlled Foreign Corporation Rules
If 50% or more of the ownership interest of the new international trading company will be in the hands of residents of a single jurisdiction that has controlled foreign corporation rules, this will need to be considered. CFC rules essentially bring the overseas company into the tax net on an annual basis by the domestic tax authority of the 50%+ owners in that case. There are various ways to mitigate this issue depending on the particular country and the other goals of the client. These include adding other entities to the structure such as a discretionary trust, private foundation or insurance wrapper to hold the shares.
Anticipated turnover and profits.
There is a cost vs. benefit analysis in deciding whether or not to set up an offshore international trading company or use an existing or new domestic company for this purpose. The overall structure and scope of the services provided by overseas service providers must be commensurate with the financial profile of the business operations. For example, if the business is only expected to make $50,000 per year and the structure costs would be $20,000 it may not make sense.
However, this can also be said for the other side of the spectrum where it is also important that consideration toward potential risks around tax residency of the company are factored and the level of services provided are sufficient to mitigate this risk (i.e. that the new overseas company does not become a tax resident of another undesirable country). For example, if the business is expected to make $1,000,000 per year and the structure costs are $5,000 per year then the economic benefit would seem obvious, but it may be difficult to convince tax authorities that the company is being effectively managed and controlled in the offshore jurisdiction for what amounts to only 0.5% in total expenditures. As such, not enough real services being provided and too low of fees may bring additional tax risk that the company could have to defend that it is not a tax resident in an undesirable jurisdiction (e.g. the country where the owners/principals reside).
International Trading Company Case Studies –
Case Study #1
Background
DomCo had been importing goods from China to domestic customers where DomCo is domiciled for many years. The two resident individual owners/principals of DomCo saw an opportunity to leverage their supplier relationships and contacts in other countries outside of their domestic market and make more money. Anticipated annual income was $500,000 per year for this new business. The country where the principals reside has controlled foreign corporation rules.
The principles considered two options for the business
Option 1:
conduct this new business through the existing DomCo where the new marginal income would be taxed at 28%. Individual income tax on dividends paid by DomCo and received by the individual resident shareholders was 20%.
Option 2:
retain Sterling’s services to establish and manage a new Seychelles TradeCo for this venture where the new marginal income would be taxed at 0%. Total annual expenses were estimated at around $5,000 in initial setup and transaction costs and 5% of the gross income or $25,000 on an annual basis for the level of services required to ensure this was established properly and managed properly to avoid any unwanted tax risk in the home country of the two principles. This included two competent Seychelles resident individual directors to manage the company, Seychelles Company Secretary, Seychelles registered office and principal place of business address, dedicated fixed phone line answered in the new company name, frequent board meetings, review of all agreements by in house counsel, execution of agreements by the Seychelles directors, maintenance of accounting records, etc.
Based on the above the decision would seem simple. However, there was an additional matter to consider. The controlled foreign corporation rules of this country stated that the individuals would have to pay individual income taxes at their individual marginal tax rate (let us say is 40% on an annual basis) on the net income of the Seychelles TradeCo whether it actually distributed the profits (i.e. dividends) or not. This would obviously add considerable overall costs to the bottom line. To mitigate this, Sterling proposed that each of the principals purchase an insurance policy whereby the insurance company would own over 50% of the Seychelles TradeCo thus ensuring that CFC rules do not apply. All 100% compliant with their domestic tax laws and legitimate.
The total costs for each party for this additional structuring was $8,500 for the first year and $5,000 annually thereafter. These fees included an insurance policy (i.e. “insurance wrapper”) plus another managed Seychelles IBC (managed by Sterling) which served as a special purpose vehicle under the insurance policy and was necessary for the holding of any illiquid assets (i.e. the shares in the Seychelles TradeCo) pursuant to requirements of the insurance company.
Comparison of Total Structure Costs and Savings
Year 1
Managed Seychelles TradeCo + 2 Insurance Wrappers + 2 Managed SPVs:
$500,000 (Gross Income) – $42,500 (Structure and Insurance Costs) – $0.00 (Business Tax) – $0.00 (Individual Income Taxes) = $457,500 net
DomCo:
$500,000 (Gross Income) – $0.00 (Structure and Insurance Costs) – $140,000 (Business Tax) – $72,000 (20% Dividend Tax) = $288,000 net
NET TOTAL SAVINGS IN YEAR 1 OF $169,000.
Year 2 and After
Managed Seychelles TradeCo + 2 Insurance Wrappers + 2 Managed SPVs:
$500,000 (Gross Income) – $35,000 (Structure and Insurance Costs) – $0.00 (Business Tax) – $0.00 (Individual Income Taxes) = $465,000 net
DomCo:
$500,000 (Gross Income) – $0.00 (Structure and Insurance Costs) – $140,000 (Business Tax) – $72,000 (20% Dividend Tax) = $288,000 net
NET TOTAL SAVINGS IN YEAR 2 AND AFTER OF $177,000.
In addition to the above immediate increased income in the hands of the principles, the additional benefits of compounded income and gains of assets being reinvested under the insurance wrappers brings even more savings.