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Bases of taxation

Tax Residency

It is a common misconception that a company or an individual may only be tax resident in one jurisdiction at any one time. Most countries will tax an individual who spends between three and six months within their borders.

For example, an individual who spends six months in the UK and the other six months in the US could well be considered tax resident in both countries and so subject to tax on his worldwide income in both.

A similar situation can occur with companies. Most countries consider any company incorporated, managed or controlled within their jurisdiction to be tax resident there. So a US incorporated company with a board of directors who meet and reside in the UK would be liable to tax on its worldwide income in both jurisdictions.

In both these cases the US/ UK tax treaty would eliminate double taxation by giving credit for tax suffered in one state against tax due in the other but the individual and the company would still be subject to the highest level of tax applicable in either country.

The management and control test for tax residency means that an individual residing onshore would rarely be able to act as the director of an offshore company without making the company liable to tax in their home jurisdiction. For this reason ICSG frequently provides directors who will manage the affairs of the offshore company from offshore.

Anti-Avoidance Legislation

Offshore companies can be used extremely effectively to mitigate tax so most onshore countries have now enacted anti-avoidance legislation designed to limit or remove these tax benefits

There will normally be ways in which a company can be structured to avoid being caught by this anti-avoidance legislation but a simple traditional offshore structure will rarely be able to legally reduce tax and a more sophisticated structure will be required, in addition to skilful ongoing management. Expert advice is crucial as a bad structure may actually increase tax and even lead the promoters into criminal liability.