6. WORKING SCHEMES AND USES or AN OFFSHORE COMPANY

We are convinced that our clients come to us already with specific plans for their future company in mind. After all, no one knows better than the client the intricacies of his business. We also believe that each client needs and deserves a custom made approach to his business, so that the optimum decision may be made as to the right set-up for him. However, certain general suggestions may be useful at the initial stage of choosing a jurisdiction, and as such we set out below the main business areas where offshore companies are useful.

6.1. Trading

Where ordinarily a trading transaction takes place between two companies, goods flow directly one way, and documents and payment the other way. The country where the profit on this particular transaction is shown imposes income taxes on this profit, based on the difference between the purchase price of the goods, and their eventual sales price. An offshore company can be inserted in the middle, with the profit accumulat¬ing on the offshore company books, instead of on the books of the original company. In this way, taxable profits are in effect trans¬ferred from a high tax jurisdiction to one with low or no taxes. The offshore company would take orders from the customer, and the goods would continue to go direct from the manufactur¬er to the final buyer. This addition of an offshore company in the commercial chain of entities is suitable for the seller of the goods in this transaction, as well as for the buyer, (or exporter and importer, in effect). The exporter can use the above scheme to transfer out the profit, which arises as the difference between his cost of goods sold, and the sales price. The importer can use it to avoid paying tax on the difference between the purchase price of the goods and the eventual sales price in his home country.

6.2. Services

Individuals who receive substan¬tial income in respect of their professional services, such as architects, performing artists, consultants or authors may assign an offshore company the right to receive their fees. In other words, the offshore company would contract with the ordering party for the performance of the relevant work, and would invoice and receive payment according¬ly. As such, again profits would be transferred to a no tax jurisdiction. The offshore company can also invoice for various services the mother company in a high tax jurisdic¬tion, thus transferring profits out, and lowering the tax liability of the mother company.

6.3. Investment

Most countries if not all have withholding taxes. These taxes are imposed on income earned on or from the territory of that country by foreign persons, and this income is taxed at source prior to repatriation. The size of these taxes varies, but is most often between 15 and 20 percent. This, admittedly, is a sizeable amount. Double tax treaties exist which allow for a reduction, and in some cases, elimination of this withholding tax. For foreign investors investing in Eastern Europe for example, it would make sense to channel their investment through a country with such a treaty with the investment-recipient country. If this intermediate country has low taxation, then the net result is the avoidance of withholding taxes, as well as avoidance of the dividends being taxed upon their receipt in the investors' country. A very good example of such an intermediate country is Cyprus, with its network of double tax treaties with over 25 countries,with zero withholding rates in most cases. It is no wonder, that in accordance with official statistics of the Russian govern¬ment Registration Chamber, Cyprus holds the 3th place in terms of monetary value of foreign investments into Russia.

6.4. Finance

An offshore company is able to give a loan to a related company located in a high tax area, with tax deductions for interest pay¬ments. In this way, both inward investments from a foreign entity is achieved, which may be advantageous due to foreign investor protection laws, as well as tax savings on the deducted interest.

6.5. Intellectual property

Intellectual property, such as copyrights, trademarks, software or titles may be sold offshore, for later resale or lease or fran¬chise to the home country at a substantially higher value. As such, the bulk of the profits arising from the utilization of the intellectual property are realized offshore, with minimum tax implications.

6.6. Negotiable instruments

This area of offshore utilization relates to Cyprus specifically. Certain clauses in its double tax agreements allow for brokerage and agency services to be conducted in other countries, without being viewed as permanent establishments and as such not being liable to taxation. This scheme is particularly advantageous in conjunction with goods and services, which are not vaitable, and liable only to income tax. One such example is trading in negotiable instruments, where substantial profit may arise, especially in developing, volatile markets. Use of a Cypriot offshore company and its eligibility for the double tax treaty allows for the avoidance of income tax in such cases.

6.7. Real estate

Being a premises owner allow to IBC most times to avoid different taxations. In most countries there is no difference between legal or physical person ownership.

6.8. Insurance

Some jurisdictions allow the registration of insurance companies and create the necessary conditions for them to exist with low or zero income taxation. Registration of insurance companies is much more complicated but the results worth it.

6.9. Banks

Banks can be registered in different jurisdictions with limited internal licenses and can operate in zero taxation regions. Bank registration is complicated and expensive. PPB INC LTD has the experience for the registration of banks.

6.10. Shipping

Certain countries allow for the registration of shipping companies who can operate without any income tax liability. Furthermore, such countries try to offer competitive terms as regards ship registration, over¬seas maritime services, and gen¬eral ship management matters.

As said before, the uses of offshore companies are multifaceted, and they probably should not be viewed as one tool for a particular job. Rather it is like a financial "Swiss army knife", which has many uses and applications.