International Business Companies in Multinational Tax Planning

Although especially recognised as tax saving entities, IBCs have so much more to offer modern commerce and high net worth individuals. When structured correctly, they provide the flexibility and ease of administration for transacting business in the extensive regulatory framework found in the United States, UK and elsewhere in Europe, allowing for a faster, more effective and efficient way of doing business.

Because of the flexible nature of IBC legislation IBCs provide a useful vehicle for international joint ventures. Subject to certain qualifications in some offshore jurisdictions, the IBCs shareholders, directors and officers may be individuals or corporations of any nationality or residence. Meetings of directors and shareholders may be held by telephone or video conferencing. The constituent documents may be customised to provide for special rights, powers and designations to attach to various classes of shares, with management vested either in the directors, or the shareholders, or both. Similarly, the flexibility of the IBC has caused it to be frequently used as a special purpose vehicle in international structured finance and securitisation transactions.

IBCs also offer attractive alternatives and variations in modern international estate and wealth preservation planning. An IBC may be placed under a trust that holds the shares in that IBC. The IBC holds the assets, which enables the client, who may be appointed director or manager of the IBC, to administer and control the assets. In this way, the client has divested himself of the assets by placing them in an offshore company and although he can control the assets and invest them (or maybe run a business) he is not the legal owner of the assets (subject to the laws governing the particular trust). This is a structure commonly used by Hong Kong residents to set up Pre-Immigration Trusts. Alternatively, the IBC may, in some offshore jurisdictions such as the British Virgin Islands, be established to act as trustee of a private trust (normally for a family trust) without having to be licensed under that jurisdiction’s trust companies legislation. This is particularly useful where a family or corporate group seeks to maintain control over certain assets.

IBCs may be used to purchase and take a lease back (i.e. to receive royalties for the use of a name/logo or intellectual property). Alternatively, the IBC may be set up to purchase and take title to an asset and then lease back that asset (commonly used for aircraft and ships). Subject to local tax laws, the lessee may be able to deduct lease payments made to the IBC from operating income resulting in significant tax savings.

IBCs are often used as an entity through which management or consulting services are provided. They allow an individual that has been contracted to provide management or consulting services, outside his country of domicile to do it through the medium of an IBC. In this manner the fees are paid offshore to the IBC (normally to an offshore bank account held in the IBC’s name).

A cross border purchaser or seller of goods may set up an IBC through which to purchase and then resell the goods at a mark up, leaving less profit in the onshore company and more profits in the IBC. A large number of IBCs are used for holding assets such as real estate or investment and brokerage accounts. With legal ownership of the asset vesting in the IBC and subject to the laws of the onshore jurisdiction, capital gains tax may be substantially reduced or, in some circumstances, even avoided altogether. In addition, in today’s highly litigious international arena, IBCs are very useful for asset protection. By transferring assets to an IBC, it is very difficult for creditors (or any one else) to be able to first trace and then act quickly enough to be able to obtain a judgment against the IBC and seize the assets.