Albert Smith is currently working in Luxembourg as an independent IT consultant through a Luxembourg management company. Therefore, he is currently paying Luxembourg taxes (rates up to 38%). Mr Smith is going to conclude a new service contract to work in Italy for a US company. The US company has a European office in the UK. It is contract work and the US company is using Albert's services by subcontracting him out to one of its clients in Italy. Mr Smith wonders whether he can reduce his Italian income-tax exposure (rates up to 45%), for example, by using an offshore company which is directly or indirectly controlled by him.
Mr Smith could set up a new personal-service company in a country which has a good tax treaty with Italy, thus ensuring – with some proper structuring – that any fees paid for Albert's work in Italy are taxed in the country of residence of the service company.
The company makes Albert available for working in Italy. The personal-service company is fully owned by a personal-service company set up by Albert in an offshore jurisdiction. Thus, it is necessary that the service company is established in a country which does not levy a withholding tax on dividends paid abroad.
A country meeting these conditions is Malta. Although the Italian-source fees received by the Maltese company are subject to tax at a rate of 35%, two-thirds of the Maltese tax will be refunded upon the distribution of the dividends offshore, thus reducing the tax burden in Malta to 11.67%. Malta does not levy a withholding tax on dividends.