Advantages: The recognition of a permanent establishment in the foreign country, from the point of view of EU member states, does not require establishment of a commercial business operation (see also EU Freedom of Establishment); also, applicability of the EU Parent-Subsidiary Directive (tax free receipt of foreign dividends, e.g., in the case of a German capital investment firm) and general existence of DTAs.

• Taxes in Europe database:

The "Taxes in Europe" database is the European Commission's on-line information tool covering the main taxes in force in the EU Member States (IP/07/662). Access is free for all users. The system contains information on around 650 taxes, as provided to the European Commission by the national authorities.

1.1. Cyprus: 10% income tax, regardless of profit. Profit distribution is not taxed in the case of foreign shareholders. Holding companies are tax exempt.

• EU Freedom of Establishment Yes
• DTA: Yes, with most countries
• EU Parent-Subsidiary Directive applicable: Yes
• Holding company privileges: Yes
• Banking secrecy: High
• Nominee relationships allowed: Yes

Advantage: EU Freedom of Establishment as well as DTA, very low taxes compared to the rest of Europe, dividend payouts to non-Cypriots are tax exempt (otherwise subject to 15% defense tax). Holding companies are completely tax exempt.

UAE: No taxes, exempt on oil companies, petro-chemical industries and banks. Switzerland: By Kanton. Average tax level is 21%. Singapore: No taxation on first $ 100,00.00; 8,5% taxes on $ 100,001.00 to $ 300,000.00;  Thereafter a Flat Rate of 17%. Exempt companies and foreign income is tax free. USA: Taxation depends also on state law. Federal Corporate Income Tax is 15% on net earnings up to US$ 50,000.00. Taxation thereafter rises progressively to a maximum level of 35%.

Corporate Taxation in the EU

Canary Islands Special Zone: Does not belong to EU VAT territory. Special requirements as providing new jobs and investment have to be met. United Kingdom: 21% taxation on mid-sized business up to £ 300,000.00 net earnings. Taxation thereafter rises progressively to a maximum level of 30%. Germany: Total taxation burden is set by Coporate Tax (15%) and local Business Tax. Madeira Free-Trade-Zone: Special requirements as providing new jobs and investment have to be met. Switzerland: Taxation is ruled by the Kanton. Total taxation burden is set by Federal Tax plus Kanton-Tax and local tax. Total taxation burden alternates between 12,5% and 28%.

1.3. England: 21% for small to medium-sized companies (up to GBP 300,000 in profit), thereafter gradual increase up to 30% VAT registration required only upon reaching GBP 60,000 (approximately EUR 100,000). Very liberal attitude toward offshore companies, maintains a DTA with the Isle of Man.

• EU Freedom of Establishment Yes
• DTA: Yes, with most countries
• EU Parent-Subsidiary Directive applicable: Yes
• Holding company privileges: No
• Banking secrecy: High
• Nominee relationships allowed: Yes

Advantage: EU Freedom of Establishment; also DTA, low tax rates for small to medium-sized companies compared to the rest of Europe

1.3.1  Setting up a UK Ltd with an offshore company, UK Ltd as agent only: Up to 90% profit transfer before taxes allowed

A maximum of 90% of UK profits BEFORE taxes in the UK may be transferred to an offshore country as long as the UK Ltd acts only as an “agent” (profit transfer and domination agreement between the offshore and UK Ltd).

1.4. Ireland

· EU Freedom of Establishment Yes

·DTA: Yes, with most countries

· EU Parent-Subsidiary Directive applicable: Yes

·Holding company privileges: Depending on type of formation

·Banking secrecy: High

·Nominee relationships allowed: No

Ireland has a corporate tax rate of 12.5%. Disadvantages include a high income tax rate of 20-60% for natural persons and the fact that nominee relationships are either prohibited or practically impossible. Suitable for “actual company relocation."

1.5. Portugal/Madeira

Short summary of advantages:

• EU membership, EU Freedom of Establishment and EU Parent-Subsidiary Directive applicable
• Portugal/Madeira belong to the VAT Zone (the Canary Islands and Canary Island Special Zone (ZEC), for example, do NOT); no import sales tax on the import of goods into the EU, 6th EU Directive applicable

Taxes:

• Type I: Completely tax exempt
• Type II: Tax rates of 4 % until 2012 and 5 % until 2020 guaranteed  

Tax exemption or reduced taxation are subject to requirements such as creation of jobs and establishment of a commercial business operation. Our office in Madeira is equipped to meet the necessary requirements (normally only suitable for actual corporate relocation or establishment of an actual business in Madeira.) However, even in the case of no actual business establishment, our partners can help you meet the requirements for tax exemption or reduction. This requires the contractual employment of local citizens in the company (at EUR 400/month) and the leasing of an office. Monthly costs apply in this case.

2. Non-EU, but with DTA

From the point of view of most countries, the recognition of a permanent establishment requires establishment of a commercial business operation in the country of residence. The financial authorities in your home country may require proof of residency from the foreign country's financial authority. If no commercial business operation is established, the domiciling of the company via a Business Center (www.regus.com) with 10 hours of monthly office space use is usually sufficient. The nominee General Manager may act as a permanent employee, in which case his compensation must be "regular." 

2.1. Switzerland: Tax rates vary by canton, as the total tax liability equals the federal tax (8.5%) plus the cantonal tax. An income tax rate of 15.5% is achievable (in Zug). Special conditions: Tax payments are considered business expenses, which correspondingly reduces tax liability as of the second year.

• EU Freedom of Establishment No
• DTA: Yes
• EU Parent-Subsidiary Directive: Switzerland has subscribed to the EU Parent-Subsidiary Directive; bilateral recognition agreements are in place
• Banking secrecy: Very high
• Nominee relationships allowed: Yes
• Bearer stock: YES

Advantages: Low tax liability, easy access to cash, banking secrecy.

Special terms regarding branch offices of EU foreign companies: These are treated as Swiss corporations without the initial CHF 20,000 capital stock investment requirement; commercially established business operation not required. Tax liability under domicile privileges only 8.5%.

2.2. Dubai: ZERO taxation, except for oil companies, chemical companies and banks.

• Low tax country as per the German Foreign Transactions Act (AStG): Yes
• Applicability of Section 8 of the AStG (CFC taxation in the case of dominant influence by a German national): YES
• EU Freedom of Establishment No
• DTA: Yes
• EU Parent-Subsidiary Directive applicable: No
• Banking secrecy: Very high
• Nominee relationships allowed: Yes

Advantages: No taxes. If adequately structured, so-called “white income” (i.e., tax free income in Germany) may be divertible to Germany.

Disadvantage: Very high capital stock required in comparison to other legal structures, high formation and licensing fees, at least 51% of the shares of the company must be held by local citizens except in Free Trade Zones, nominee solution is an option. The “Dubai Offshore Company” allows for the establishment of a legal corporate structure without capital stock.

2.2.1: UAE, Exempted Companies

• EU Freedom of Establishment No
• DTA: Yes, with most countries
• EU Parent-Subsidiary Directive applicable: No
• Banking secrecy: High
• Nominee relationships allowed: Yes

Advantages: No taxes. If adequately structured, so-called “white income” (i.e., tax free) can be channeled outside the country.

2.3. Singapore

• EU Freedom of Establishment No
• DTA: Yes, with almost all countries
• EU Parent-Subsidiary Directive applicable: No
• Banking secrecy: Extremely good
• Nominee relationships allowed: Yes

Singapore is known, not inaccurately, as the “new Switzerland.” Foreign income is not taxed. Domestic income is taxed at 18%; the first 200,000 Singapore dollars are tax-free.

2.4. USA: Tax liability depends on the individual state and the "object of taxation." An income tax rate of 15% is achievable. Normal tax rate: 30%.

• EU Freedom of Establishment No
• DTA: Yes, with almost all countries
• EU Parent-Subsidiary Directive applicable: No
• Banking secrecy: Average
• Nominee relationships allowed: Yes
• Bearer stock allowed: No, but shareholders are not entered in the commercial register

Advantage: The "Inc" is the pure form of incorporation, and is a good structure for capitalization, no capital stock investment required, generally low costs in comparison to other corporate structures, one-person formation possible. Shareholders are not listed in the commercial register.  Most US states have no sales tax.

3. Non-DTA countries (offshore):

· EU Freedom of Establishment No

· DTA: No

·  EU Parent-Subsidiary Directive applicable: No

·  Banking secrecy: Very high

· Nominee relationships allowed: Yes

·Public commercial register: generally none

· Bearer stock allowed: Yes, bearer stock is allowed in most offshore countries In general, no nominee shareholder is required.

·  Taxes: In most countries, Exempted Companies (those that only generate income outside the country of residence) are not subject to taxes. Isle of Man imposes a flat tax of GBP 450. Liechtenstein offers no tax exemption, depending on corporate structure and sales

·   Sales taxes:  Typical offshore countries (Seychelles, Mauritius, Hong Kong, British Virgin Islands (BVI), Bahamas, Nevis, Dominica, St. Vincent, Belize) have no sales tax.

Countries include:

• Asia & Pacific: Seychelles, Mauritius, Hong Kong
• British Virgin Islands (BVI), Bahamas, Nevis, Dominica, St. Vincent, Isle of Man
• Latin America: Panama, Belize

• Liechtenstein (AG, GmbH, Trust, Anstalt [institution], Stiftung [charitable foundation])
• Isle of Man: GBP 450 annual flat tax for foreign income. Is a member of the EU VAT Zone.

When establishing offshore companies, the client should be aware of the political and economic stability of the country.

Advantages: Generally no or low taxes, no public commercial register, no international law enforcement treaties or fiscal extradition agreements with other countries.

Disadvantages: See above.

Excerpt of Article 5 of a DTA:

ARTICLE 5

PERMANENT ESTABLISHMENT

(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(2) The term "permanent establishment" includes especially :

(a) a place of management ;

(b) a branch ;

(c) an office ;

(d) a factory ;

(e) a workshop ; and

(f) a mine, quarry or any other place of extraction of natural resources.

(g) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

(3) the term "permanent establishment" shall be deemed not to includE:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character ;

(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

(4) Notwithstanding the provisions of paragraphs (1) and (2) of this Article, where a person - other than an agent of an independent status to whom paragraph (6) of this Article applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph (4) of this Article which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

For most of our clients, this means that they are protected by an existing Double Taxation Agreement prior to setting up a Permanent Establishment in the home country (client's country of residence), as long as only a representative office, an advisory office (for support activities) or a storage warehouse is established in the home country. In contrast, most countries stipulate that in cases where no DTA exists, a representative office, a storage warehouse or an advisory office does constitute a Permanent Establishment in the home country. This would mean that global taxation or primary taxation of the foreign company would not take place in the foreign country at all but in the client’s home country, even if the “place of management” is located in the country of residence (i.e., in the foreign country).  The formation of a true offshore company (with no DTA) must be carefully considered in light of these factors.

As most countries have DTAs with Cyprus, Switzerland, Singapore or the United Arab Emirates (UAE), the benefit of forming a true offshore company in these countries is often clear. Cyprus taxes active companies at a rate of only 10%. As a member of the EU, it also benefits from the EU Freedom of Establishment law.

Singapore does not tax foreign-earned income, and the UAE imposes no taxes on any income whatsoever. In Switzerland (Zug), the total tax burden for active companies equals about 15.5%. It is also possible to form a foreign company under a DTA scenario in which the company is subject to little or no taxes.

If, due to other considerations, an offshore company is nevertheless required, it should be structured as strictly as possible with regard to the law, and no representative or advisory offices or storage warehouses should be established in the client's home country. Offshore companies do generally offer certain benefits: No international law enforcement treaties, no fiscal extradition agreements with other countries, generally no public commercial register, and Exempted Company status (for companies that only generate earnings outside the country of residence).