Daria Liashenko, Interlegal associate attorney

A period of quick registration of an offshore company or a non-resident company under one transaction is already in the past, jointly with procedure of anonymous opening bank account.

Today it is difficult to imagine the process of incorporating a legal entity even in offshore zones without identifying the ultimate beneficiary and the source of its funds. Anyway, registration of the company will also require for a clear business description and personal identification of the account manager (most of all, the business owner).

Law regulations on combatting corruption and money laundering are changing rapidly under pressure of global communities and organizations (such as OECD, Organization for Economic Cooperation and Development, and FATF, Financial Action Task Force on Money Laundering).

Hereby we propose business owners to study the key aspects of administering non-resident companies that will help them to anticipate unplanned costs and risks associated with incorporation of non-resident companies.

Due Diligence and Compliance

Basic issue in the process of company registration and opening account shall be checking the client on compliance with regulations. There are almost no jurisdictions where it is permissible to issue bearer shares. Even if such an opportunity is available, information about beneficial owners shall be collected and kept in the company files. As for bank account, anonymous accounts are also no longer available and the opening procedure shall be supported by thorough verification.

FATF recommendations upon due diligence of customers request the financial institution to obtain the following information about customer:

• Identification of the person;
• Information about the supposed nature of business relations. In this regard, banks shall collect information about counteragents, nature of relations, nature of payments, estimated volume of transactions, etc.
• Regular updating the information, comparison of declared and actual activities;

Therefore, there has been minimized an option to use convenient mechanisms, such as:

• Nominee owners (beneficiaries) who are not actually business owners / decision-makers;
• Operations that do not correspond to the declared essence (e.g. payment for services instead of retained earnings).

Tax issues (PPT, MLI)

Besides planning profitability of using a non-resident company in view of tax aspects, the actual possibility of its use should be taken into account. Apart from local legislative regulations of the non-resident company’s country, OECD has developed global instruments aimed at combatting base erosion and profit shifting (BEPS); thus the own non-resident company is far from being just an instrument for making business.

In order to avoid abuse of such privileges, the concept of an economic goal test has been introduced. Ukraine joined the MLI convention and implemented in its national legislation the concept of economic purpose of transaction (Draft Law 1210).

If a non-resident company has been incorporated not for the purpose of taking advantage of the Convention for the Avoidance of Double Taxation, but for use as leverage, there is a risk of recognizing as permanent representative office of such a non-resident company in Ukraine.

In fact:

1) owners of the company are located in Ukraine and therefore conduct management from Ukraine;

2) activities facilitating business income – CIGA (core income generating activity) are also conducted in Ukraine. There is also a professional team which physically/mentally generates profits.

In case of recognizing a non-resident company as permanent representative office, the income received by such person will be taxable in accordance with the Ukrainian legislation. Under such conditions, the company’s maintenance budget shall include standard income tax rate prescribed by the laws of Ukraine, jointly with costs of maintaining and administering the company abroad, i.e. in its registration country.

Advantages of such an instrument are hardly visible.

Personal interests of the owners

Regardless the terms for operating the company, often the owner’s goal is to receive distributed profits for its own needs in foreign currency.

Due to strengthened banking policy upon control over money laundering, in accordance with FATF Recommendations, the possibility of withdrawing funds by means of financial partners is getting more and more illusive, while more and more owners get concerned in receiving transparent dividends from the company, followed by declaration thereof.

Without legal and understandable source of funds, in future there may be rejections in granting a loan, opening an account, including personal one, opening an investment fund.

Natural person will face tax consequences regarding the received income. If the owner who received income is the Ukrainian resident of Ukraine, as set forth in the Tax Code of Ukraine, the obligation to declare and to pay taxes shall arise in Ukraine in accordance with the Ukrainian tax legislation. In such case, the place of making profit and its location will not play a crucial role – either for income generated outside Ukraine, or for an opened personal bank account in Switzerland. Anyway, the subject of received income shall be the resident of Ukraine.

Changing citizenship

In the market there are various ways of creative approach to tax consequences, in particular, changing citizenship.

Many countries offer citizenship programs in return for investments, with investment amounts ranging from 200,000 USD (Caribbean countries) to 2 million EUR (European passports). The main advantage of having a passport, first of all, is the owner’s mobility. Passport owner can, without any restrictions, find the necessary time at the territory of a particular country, as well as freely move around the world in the framework of signed agreements on simplified visa regime with other countries. Is is logical and convenient solution, if decision-makers often need to travel to different countries without wasting time on obtaining visas for temporary stay.

However, the second passport does not solve the issue of the person’s tax residence. You can have several passports, being a tax resident of Ukraine, due to stay therein for over 183 days. Even with frequent business trips abroad, when the person stays in Ukraine for less than 183 days, it remains the center of his/her vital interests, such as business, family, real estate, etc.

It is logical to assume that the main issue to be settled shall be choice of the tax residence country, not citizenship.

For instance, in Cyprus there is a program for obtaining tax residency while staying on the island at least for 60 days within the calendar year, as well as attractive rates for personal income. All dividends received from any source worldwide shall not be taxable by natural persons – residents of Cyprus.

It should be noted that tax residence in Cyprus is possible only in case when there is no other residence (e.g. Ukrainian). In order to lose status of the Ukrainian tax resident for a specific tax period, you need neither to stay in Ukraine for 183 days nor to have a center of vital interests in Ukraine. In fact, it is impossible to implement such a scheme formally, without real enforcement thereof.

In case when the dispute arises and the tax authority accrues tax liabilities on natural person’s income, we believe that it will be extremely difficult to refute the fact of relations with Ukraine.

In the framework of judicial practice, certain case proceedings provide, in the interests of natural person, for establishment of the fact that the person is not the Ukrainian tax resident. In such disputes, the obligatory participant – third party on the merits shall be local tax authorities. In case of any objections, tax authorities may file their own application on doubtful establishment of such fact. In case of filing a lawsuit, followed by an obligation to prove the absence of elements of the Ukrainian tax resident, the chances to obtain a confirmation are quite small.

Substance

If, nevertheless, work solution via the own non-resident company is undisputable, it is extremely important to think over actual presence of the company at its registration place.

Actual presence means a real move to a specific country for work, jointly with using tax, social and economic advantages of that country. Quarantine allowed each country to show its social role in helping business-making and in taking care of their citizens (e.g. in Switzerland, financial assistance to local companies was a widespread practice). Such an approach undoubtedly can impact on choice of jurisdiction for work.

A perfect substance consists of making business in the country where the company is registered, i.e. includes a local team that will be employed by this company and will generate profit on site, without working remotely (i.e. while staying in another country).

Substance is determined by management place, i.e. an actual director should be present at the company registration place. Such director shall get engaged in his/her own decisions in the framework of the company’s business activities, including in account management, shall have relevant experience, knowledge and skills and shall receive salary in accordance with market conditions and his/her own expectations.

A perfect model for incorporating a foreign company corresponds to business project of multinational companies in opening their offices in different countries in order to develop business in another market.

If we would like to open a company by ourselves, we would also think over linking to the country with majority of customers/suppliers, with prospects for opening an actual office/representative office and/or possible relocation.

Conclusions

Therefore, with regards to OECD policy and FATF Recommendations, trends in changing national legislation provide for tax payment in cases where the business really operates. Simultaneous introduction of all the instruments of such industry in all the countries will facilitate significant decrease of business migration.

In such case, with regards to all the legislative restrictions on cooperation with the own non-resident company, the following question arises: whether it is reasonable to use them in principle. Tax legislation of Ukraine prescribes for several variations to minimize tax burden and several ways of tax optimization. The 5% single tax rate for start up is one of the most attractive ones in Europe.