I want to today touch upon a topic which can be used by many of us to protect our wealth and grow at the same time. A few key quotes about finance that I want to share with you all first. Things that I keep in mind whenever I look at any investments:-
1. A big difference between how governments tax individuals and how they tax companies – Individuals are taxed usually on all their income while companies are usually taxed only on their profits i.e. their total income less their expenses.
2. A dollar saved has the same value as a dollar earned.
3. Costs and fees are the biggest enemies of wealth preservation. Every percentage point charged in fees means that there is a lesser amount of money to put to work.
As such, I want to share as a follow up to my earlier article on offshore banking, the use of offshore companies as a means of minimizing your tax exposure. Firstly, the kind of taxes that offshore companies are best suited for in my opinion.
1. Property Related Tax: Usually Stamp Duty and Capital Gains – These are the two common taxes imposed by some governments on the buying and selling of property. A stamp duty is usually imposed on all transactions and a Capital Gains tax is usually applied on the difference between the historic buying price of the property and the selling price of the property when disposing it off.
2. Income Tax: This is a tax which is usually imposed on the annual income of an individual. If you are a wealthy person and especially a businessperson you would have sometimes very large income from trading, consulting or the sale of some long term investments.
3. Capital Gains Taxes on Securities: This is a tax which is imposed on gains from the sale of securities i.e. on the buying and selling of stocks in companies.
4. Inheritance taxes: This tax is usually imposed on the inheritance of assets as a heir.
Now firstly, why use an Offshore company as a tax shelter. The reason is quite simple – you don’t really need to use one – you could use just a corporate vehicle, holding company or a trust to minimize your tax exposure. However an offshore company is usually the lowest cost, most private and also the best solution if your assets, investments are globally diversified. Companies that are offshore also have relatively low compliance such as audit and other requirements meaning they are cheap to maintain over decades as required when holding assets but not really transacting much.
The important things to keep in mind about how offshore companies will help you in protecting your wealth.
1. Reducing your dependency on the country of jurisdiction. When making investments globally, you are sometimes at the whim and fancy of the local government and their policies. Many governments change rules without proper guidance and meaning that your investment or your ability to repatriate your investment could be at risk. As such, owning assets through an offshore company would allow you to exit your investment and use a jurisdiction that is stable and follows English or American law and where you have recourse to the courts there for any litigation. There would usually be no requirement to update any local registers as the asset itself would not change hands and only the company that owns the asset would and so there are limited permissions to be taken and the transaction can be effected immediately as soon as you find a ready buyer.
2. Reducing your personal income tax. As the primary shareholder of the offshore company, you could let your capital remain within the company and thus limit your personal income tax as a very limited portion of the profits are paid out to you. Many countries only tax their citizens at a very nominal rate if they don’t live in the country and many others don’t tax non-resident income. As such, you could decide to establish residency in a very low cost jurisdiction for a few years and then take your capital out of the offshore company thus minimizing your tax losses.
3. Reduction in capital gains and stamp duty charges. By compartmentalizing large investments and assets into individual companies you can also reduce your tax liability by effectively selling the company instead of selling the asset and thus paying very limited gains. Many offshore jurisdictions also make demerging a company out of your primary offshore company very easy thus in effect allowing a single offshore company to become 2,3 or 4 offshore companies depending on the situation.
I hope I have been able to share a quick overview of how offshore companies can be used to protect your wealth. Due to the complications of writing for a global audience, I would recommend sticking with one of the established jurisdictions and getting tax planning advice for your own unique situation.
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