Tax and financial planning solutions for offshore corporate structures.
Life insurance can offer an attractive solution to the problem of residency determination when using offshore corporate structures in tax planning. These structures are typically arranged so that profits are realized by the offshore company and not subject to domestic tax.
In many countries, however, attribution and anti-avoidance rules exist to make such arrangements transparent for tax purposes. The key issue for residency determination is the location of the central management and control of the offshore company.
Life insurance contracts can allow the taxpayer to effectively address the residency problem. If the shares of an offshore company are owned by an insurance company and form part of the assets of an insurance contract, then the taxpayer can effectively defer taxes indefinitely.
Case 1: International Trade
Scenario:
An international businessman, Exporter, wishes to set up an offshore company to trade goods between China and the US. This is a start up operation. Exporter will only acquire the goods when he has sold and worked through letters of credit. There is no start-up investment.
Exporter expects to make an annual profit of $1 million after the first year of operation.
Typically, such businessmen would set up an offshore company and arrange for the affairs of that company to be managed by offshore directors so that the company could operate completely exempt from tax. However, anti-avoidance rules would attribute the profits directly to the taxpayer thereby removing the benefit of any tax exemption.
Solution:
As no start-up capital is required, Exporter could use the share capital amount of the offshore company, for example $5,000, and instead invest this amount in a life insurance contract by which the insurance firm would become the owner of the shares in the offshore company.
In doing so, the annual profits of $1 million can be shielded from tax until such time as they are withdrawn from the offshore company and paid to Exporter. A legal, effective and indefinite tax deferral is thereby achieved.
Furthermore, the undistributed profits of the offshore company can be reinvested, tax-free, into hard assets such as stocks, shares, real estate or any other assets deemed appropriate.
Case 2: Investment Portfolio
Scenario:
An international investor has his investment portfolio managed by a Swiss bank in Geneva. The portfolio achieves an annual return of 10%, producing income of $100,000 per year. The Investor pays tax at a rate of 40%, thereby incurring an annual tax bill of $40,000.
Solution:
Investor arranges for an offshore company to be set up. The offshore company opens an account with a Swiss bank. The Investor’s $1 million portfolio is then transferred into the Swiss account owned by the offshore company.
The shares of the offshore company are issued to an insurance company and held within a life insurance contract. With the shares of the offshore company now owned and controlled by the insurance firm, the $100,000 in profits can accrue to the offshore company without incurring an immediate tax. payable by the Investor.
The investment portfolio is owned by an offshore company, which is in turn owned by an insurance company. Consequently, a legal, effective and indefinite tax deferral is achieved for the taxpayer.
Tax effect:
As the policy is owned by an offshore company and the Insurance Company is the owner of the Offshore Company, no tax charge is suffered and indefinite tax deferral is achieved.
