With the growing demand for professional consultants to work outside their usual countries of residence there is often the possibility of greatly reducing or even eliminating individual and corporate tax consequences - often using tax mitigation companies. The reason that this possibility arises is that it is often possible to legally extricate oneself from the tax system of one's home country for a fiscal year or more. During this expatriate period it may then be possible to avoid the tax system(s) of the chosen host jurisdiction by limiting one's period of residency in any given country to between 4 and 6 months. These being the normal European 'breathing' periods before full local tax obligations exist. The purpose of the offshore or other suitable company is to provide a fiscally beneficial entity to issue necessary invoices, register for VAT and/or act as a controlling vehicle for future 'home' country remittances.
What type of Company can I use?
If you are ordinarily resident in the UK but will be working abroad in one or more external jurisdictions for more than a fiscal year then the key issue becomes where you will be working.
For example, if your consultancy will be provided in a developing or 3rd may well be sufficient to simply set up a ‘traditional’ tax free offshore company to separate you from your business activities and of course benefit from limited liability. If on the other hand, you will be working in a developed country such as another EU member state but for short periods then it may be necessary to establish a company in the most tax efficient EU location probably with VAT registration as the latter is often necessary in order to conduct and invoice for business within the EU. In many cases, international consultants will have a number of short contracts in different countries, which is often the most tax efficient. Further, in many cases the sums brought back to the UK which were earned whilst non-resident for tax in the UK will have no further UK tax consequences but advice should always be sought from a suitably qualified certified or chartered accountant.
Will it really make a difference?
Setting up a structure of course involves expenses and structures which have to operate in the EU, United States or other developed regions must be properly managed and controlled, which will involve more costs to run than a simply offshore company so the answer is that it comes down to the amount a consultant can earn whilst outside of the UK. From our experience, setting up a structure for those earning over £100k a year inevitably makes sense but there is no doubt that highly paid consultants will benefit the most.
Why do I need a Company?
The key benefit to any company is that it is a separate legal entity, taxable in its own right at rates normally far more favourable than those available to individuals. In addition, a company allows for funds to be segregated between the consultant and the company, meaning that surplus funds can be kept in the low tax entity ready for efficient reinvestment in the future and certainly far more sensible than extracting all funds and creating potential personal taxable events when the consultant eventually returns to the UK or the appropriate jurisdiction of ordinary fiscal residence. In fact, if EU companies are being used it may well be possible to benefit from EU directives such as 03/49 which allows interest to be paid back to the company on any loans it may issue without any fear of withholding taxes being applied. In the case of dividends, EU directive 90/435 allows dividends to be paid to the company again without withholding taxes applying. There are of course many other advantages but these will all depend on a consultant particular circumstances which should be discussed with a SCF consultant, accountant or lawyer.
For more information on these benefits please contact one of our tax planning consultants.