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Case Study 5 International Trading Companies

Updated time: Jul 28, 2018 , 12:32 (UTC+08:00)

Scenario 1

Yuri Ivanov lives in Russia. He is purchasing and selling shoes. He buys the shoes from Italy and sells them to department stores in France, Germany and Spain.

Mr Ivanov wonders whether he can structure his business in a tax-effective manner, for example, by using an offshore company.

Suggested solution:

Mr Ivanov can set up a trading company in a low-tax country, thus ensuring that his trading profits will not be taxed in Russia (his country of residence), nor in France, Germany or Spain (because the tax authorities argue that he has a taxable presence in these countries). As all the transactions concerned are European Union transactions, Mr Ivanov must obtain a VAT registration. A good location for conducting trading activities where one can obtain such a registration is the Isle of Man. Thus, if such an Isle of Man company intends to ship the shoes from Italy to Spain, the Isle of Man company would inform the Italian company of its VAT number, so that the Italian company could zero-rate its sales invoice. The Italian company does not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the Spanish company's VAT number and subsequently issue a zero-rate invoice to the Spanish company. For setting up the Isle of Man company, there are a couple of possibilities: an LLC (taxed as a transparent entity, so effectively no tax in the Isle of Man on the profits obtained) or a resident company. An LLC distributes a share of profits and there is no withholding tax thereon. An Isle of Man company is not required to withhold tax on dividends whose owners are not resident in the Isle of Man.

International Trading Companies (Scenario 1)

Scenario 2

Wolfgang Schmidt is a high-net-worth individual and lives in Monaco. He wants to source products from the Far East for sale to one of his business associates in Brazil, and wants to do this in a tax-efficient manner.

Suggested solution:

Mr Schmidt can establish a United Kingdom Limited Liability Partnership whereby he and his wife are the members. The LLP can then source the products from the Far East and sell them on to the Brazilian buyer.

Payment for the transaction would be received into a UK bank account because the UK LLP is treated for taxation purposes as a partnership. The profits derived from the trade would be attributable to the members and taxed accordingly in Monaco.

International Trading Companies (Scenario 2)