Many of our clients move internationally for work, which sometimes means moving from jurisdictions that only tax local income to jurisdictions that tax worldwide income. If their investments over the years have generated significant overseas assets, the cash generated by these assets will now be taxable in the new country of residence. This outcome is clearly undesirable and, depending on the cash generated, can even negate many of the financial benefits of taking the new job.
However, transferring the income-generating assets into a tax-efficient holding company overseas can help to avoid the unpalatable tax implications of moving. They achieve this by being able to receive the income tax-free, so that the owner can defer receiving the income him- or herself. The BVIs, Caymans, Marshall Islands and Seychelles are good examples of suitable vehicles – learn more about them on our page comparing offshore companies.
The offshore vehicle can build up and reinvest those assets tax-free, maximising returns. When our client needs to make use of those assets, they can declare dividends for the amount that they require. If they are still in the jurisdiction that taxes worldwide income then the dividends will be taxed at the appropriate rate, but if they have moved back to a more generous location then the income may be tax free! Singapore, for example, imposes no taxes on either capital gains or overseas personal income.
Things to consider
This sounds like a great idea, but there are several things to think about when weighing up whether setting up an offshore holding company is worthwhile for you. Here are a few things to take into account before moving forward:
- What’s the tax rate on these kinds of income? Some jurisdictions tax dividends, capital gains and other unearned income at a rate below the top marginal income tax rate. The lower this rate, the lower the benefit of setting up a new vehicle.
- What are the lifetime costs of setting up an offshore company? Set-up and maintenance costs are not the only things to consider, as in most cases the vehicle will cease to serve a purpose and need to be dissolved. The longer you expect to live in a place that taxes overseas income, the more you can amortise these fixed costs.
- Do the tax savings cover the cost of upkeep? Offshore vehicles will eat several thousand dollars a year of your investment income, so the portion of the expected income that would otherwise be lost to tax must exceed this amount in order to be worthwhile. Don’t forget to factor in the expected start-up and shut-down costs and spread them across the vehicle’s expected years of life. If the overall saving is minimal, it’s probably better simply to pay the taxes, given that they give a greater benefit than paying a corporate service provider the same amount for a holding company.
- Will the vehicle be acknowledged as tax resident in the jurisdiction of incorporation? If not, the tax authorities in your new country of residence may consider the company to be resident where you live, which would mean that the company would owe corporation tax and wipe out the benefits of using this vehicle. Speak with your tax advisors to find out how to manage your company’s tax residence.
Once you have the answers to all of those questions, there are just two things left to do: decide where you want the company, then set it up! Healy Consultants Group PLC can help you to design and execute your offshore holding strategy, so contact us to begin the process of protecting your assets.