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International Trade

Tax efficient trading in the procurement and supply of goods and services is often key to the success of many ventures. Through the utilisation of certain Corporate entities clients are afforded treaty relief and other mechanisms offering tax reduction benefits.

Please review the selection of the case studies below that relate to international trade and provision of services.

The UK Company Acting As Agent

The UK Agency company is a popular vehicle within the field of international trade.

The rationale behind the use of such an entity is that the Company, fully liable for UK corporate tax, undertakes business for and on behalf of a non-resident Principal.

The concept of the structure is that the Principal, who has the knowledge, know-how and business acumen, engages an independent UK company to act as its agent for some or all of its international business. The UK Company in turn will enter into trading agreements with customers of the Principal to buy or supply goods from or to third parties for and on behalf of the Principal.

Generally a formal agreement is entered into between the Principal and the UK Company, which would entitle the UK Company to a fee relating to the services that it is requested to perform. All trading operations are executed by the UK Company for and on behalf of the Principal.

The fee charged by the UK Company would be an amount that reflects the responsibility and work undertaken by the UK Company on behalf of the Principal. This fee will be retained by the UK Company to cover its operational and administrative costs. The profit element of the fee will then be subject to UK corporation tax at 30%. An acceptable fee, chargeable by the UK Company would be between 5-10% of gross turnover or profit, whichever is the greater. The balance of the trade would be for the account of the Principal.

If trading occurs within the European Union and the turnover of the UK Company exceeds the threshold for VAT registration purposes of £58,000 the UK Company would be obliged to register for VAT within the UK. A UK company can voluntarily register for VAT should the turnover be below the stated threshold as long as it can demonstrate that it intends to turnover more than the threshold amount.
VAT Registration is an important feature when trading in the European Union as this is the only method of facilitating cross-border triangulation without the need to charge VAT to other corporate bodies within other member States. Put simply, if a UK Company issues a VAT invoice to another Company based in another European Union member State and as long as the recipient company’s VAT/TVA number is quoted on the same invoice the supply can be zero rated.

Operational Case Study

The UK Company enters into agreements, on behalf of the Principal, to buy shoes from a Portuguese shoe manufacturer and supply the same to an Italian fashion group.

The Portuguese company will invoice the UK Company for the market value of the shoes, quoting their respective VAT number and reflecting the UK Company’s VAT number on their invoice, thus zero rating the supply.

The UK Company in turn will request that the goods be delivered to a Freeport where they will take title of the goods and tranship the stores to Italy.

At this time the UK Company will issue an invoice to the Italian fashion group, again reflecting the UK Company’s VAT number and that of the Italian Company, in order to zero rate the supply for VAT purposes. The stores are thus delivered with all documentation reflecting the UK Company and not the original supplier.

Once the goods have been received and accepted in Italy, the Italian fashion group will pay the invoice received from the UK Company direct into the bank account of by the UK Company.

On receipt of the funds, the UK Company will in turn settle the invoice received from the Portuguese Company.

The remaining funds, less the agreed fee for the UK Company, will be remitted to the Principal.

Potential Issues

It is advisable that this structure is not utilised for trading in the UK, as UK sourced income would be subject to taxation.
It is recommended that the Directors and shareholders of the UK Company and Principal are not connected, and the majority of the board of directors are not UK resident.
Any agreements that the UK Company enters into on behalf of the Principal should be signed outside the UK by one of the non-UK resident directors.
A certificate of tax residence may be required in order to avoid withholding taxes.
It is a requirement for all UK Private Limited Companies to file annual accounts with the Inland Revenue and the Registry.

The UK Limited Liability Partnership

The United Kingdom Limited Liability Partnership (LLP) was introduced by the UK Government in 2000. It is a separate legal entity and a body corporate, has all the functionality of a Private Limited Company but is taxed as if it were a Partnership.

The United Kingdom Tax Authorities have confirmed that the taxation base will follow the procedure operated in the past for Partnerships. The income and capital gains of an LLP are thus treated as income attributable to the members and therefore the UK LLP can be utilised as a tax efficient vehicle for international trade. On the proviso that that there is no UK sourced income and the members are non resident of the United Kingdom there would be no liability to UK taxation.

Operational Case Study

A United Kingdom LLP has 95% of its members based in a low tax area such as the Isle of Man or British Virgin Islands. A UK Private Limited Company owns the balance of 5%. The UK LLP intends to purchase goods from Asia for sale to a South American Country.

The goods are sourced from Asia and supplied to the buyer and paid for accordingly from outside the United Kingdom.

Because there is no UK sourced income, 95% of the profits attributable to the non resident members would flow through and be taxed at the rates applicable in their country, the remaining 5% attributable to the UK resident member would be taxed in the UK at current rates after deduction of business expenses.

Potential Issues

The UK LLP must be established with a view to making a profit
To avoid a liability to taxation there should be no UK sourced income and no UK resident members
Anti avoidance provisions
The UK LLP generally does not have access to double taxation agreements
The UK LLP must have a minimum of two members
For further information regarding the utilisation of UK Companies for International Trade please contact a Director or a Consultant at our London office

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US LLC’s are popular vehicles for carrying out international trade, as they offer many of the typical advantages of more well-known island based offshore locations (for example, the British Virgin Islands, Seychelles and Belize) in terms of their simplicity of administration, regulatory and tax regime, as well as associated cost-effectiveness. Furthermore, many international business persons and corporations consider that there are perceived benefits, in terms of esteem and standing, to having a company registered presence in the United States of America. Naturally, using a US LLC for international trade and investment, real and intellectual property holding etc. can also be beneficial due to the relative political and economic stability of the nation

Operational Case study

A non- US client decides he wishes to establish a US LLC for a trading operation worldwide, outside of the United States. The client buys and sells fruit and vegetables worldwide. In this regard the US LLC is incorporated in a US State renowned for such activity. (It is prudent to be creative and establish an LLC in a state that is known for dealing with certain commodities.)

The client has sourced clients in Germany and is seeking a supplier to provide the goods. At this time, the client has found a supplier of the goods required in China and agrees a certain price to acquire the goods and signs the relevant contract on behalf of the LLC.

At the same time, the client has agreed a price with the German Company the buy the goods from them and the German company also accepts they have to pay import duty on importation within Germany and signs the relevant contract on behalf of the LLC.

The goods are shipped from China to the order of the US LLC to a port of the client’s choice for example the United Kingdom. On arrival, the goods are trans-shipped without being imported and the documentation from China is replaced with new documents reflecting the US LLC and if needs be the origin can be changed on the shipping documents from China to UK, even though the goods have not been imported.

The goods arrive in German, are inspected and the German Company pays the US LLC the relevant monies relating to the contract and supporting invoice that has accompanied the goods.

The US LLC in turn pays China the amount due under their respective invoice and contract.

The payment terms of such trading activity is sometimes supported by a Letter of Credit, which is issued by the German company to the US LLC for say USD 100’000 and then transferred on to China for USD 80’000. The Letter of Credit indicates that there are certain monies that have been blocked and will be released once the goods have arrived and acceptable documentation has been accepted by the German company’s bankers.

The profit that the US LLC has made can be transferred to wherever the client wishes.

The US LLC is fiscally transparent for tax purposes.

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Cyprus

Operational Case Study

Mr. Dokic from Romania is a buyer of sports wear from Taiwan and sells to European Companies and has considered using an offshore company to mitigate his tax exposure on his profits, however on research Mr. Dokic has accepted that he requires to establish a company in a tax paying location that has a good image within the European Union, where his buyers are from.

Mr Dokic decides to establish a Cyprus resident company that will acquire the goods from Taiwan and sell within the EU.

The goods are shipped from Taiwan to the order of the Cyprus Company to a port of the client’s choice for example the United Kingdom. On arrival, the goods are trans-shipped without being imported and the documentation from Taiwan is replaced with new documents reflecting the Cyprus Company and if needs be the origin can be changed on the shipping documents from China to UK, even though the goods have not been imported.

The Cyprus Company, registered for VAT in Cyprus, will be obliged to quote their VAT number on their invoice to the European buying party, as well as the European buyers VAT number which will enable the Cyprus Company to zero rate the supply to buyer. The buyer will account for VAT on the supply in the usual manner within it’s own country.

The profits accrued within the Cyprus are subject to 10% taxation within Cyprus, however there are ways to mitigate and reduce this amount. Should this be of interest please do not hesitate to contact one of our consultants.

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Hong Kong

Base for International Trade

The Hong Kong Limited Company has become a popular vehicle within the field of international trade, with currently over 105,000 Hong Kong companies actively trading.

The basic concept central to most trading structures set up by foreign companies using a Hong Kong trading entity is that of outsourcing their back office functions, while retaining full control of their international trading business. This can best be explained by example, as shown below.

The Importer

Many importers from North American, European and Pacific Rim countries have been buying products from China, India and many other Asian countries over several years, to sell to their home markets – typically to large retail chains, or through their own stores.

As their businesses grow and develop, most of these importers look for an effective way to manage this process while giving them an international presence, often enable their larger customers to buy FOB from an Asian port, and expand their sales into new markets around the globe.

The importer now has a truly international business with a local presence in Hong Kong, they retain control of their expanding business and its costs (with the trade services outsourced to Fidelitas), and the profits are retained in their Hong Kong company – usually tax free under Hong Kong’s territorial tax system.

With this structure set up and maintained by Fidelitas, importers get a Hong Kong virtual office (prestigious office address in Central with mail forwarding, telephone, fax and email), full trade services (including PO’s, LC processing, banking, shipping documentation, liaison with freight forwarders), preparation of management accounts and audited profits tax returns, preparation of contracts, employment related matters and trade financing. Fidelitas can also assist by setting up Representative Offices in China so that the importer can have their own staff on the ground to work with their suppliers typically on quality control and shipments.

The Manufacturer

In recent years, foreign trading companies have been increasingly establishing their own manufacturing facilities in China, and other Asian countries, to ensure that they have full control of their supply chain and enable them to sell into local Asian markets (particularly China).

In China, many manufacturing plants set up by foreign companies have been established through Joint Venture arrangements, or direct investment (through the establishment of a Wholly Foreign Owned Enterprise or WFOE) usually in conjunction with a local advisor. While the opportunity for such trading companies can be substantial, the associated are also significant.

The process outlined for the importer in the first example above, becomes the building block for the manufacturer. In addition, Fidelitas’ consolidated approach through its Hong Kong and China offices, enables the manufacturer to set up the right structure the right way – effectively identifying and controlling many of the risks from the outset.

As was the case with the importer, Fidelitas can set up and maintain this structure for the manufacturer. The manufacturer gets a Hong Kong company, a WFOE in China, Hong Kong virtual office (prestigious office address in Central with mail forwarding, telephone, fax and email), full trade services (including PO’s, LC processing, banking, shipping documentation, liaison with freight forwarders), preparation of management accounts and audited profits tax returns, preparation of contracts, employment related matters and trade financing. Fidelitas can also assist other back office functions relating to quality control and shipments.

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Malta

Operational Case Study

An International client is seeking to establish an International Trading Company is a respectable tax paying jurisdiction.

The client, Mr. Rossi, is trading in buying and selling electronic goods from Malaysia to their clients in Italy. It is decided that an International Trading Company (ITC) is registered in Malta which does business exclusively with non-residents of Malta, both in fact and according to its Articles.

An International Trading Company pays an effective rate of tax of only 4.17% under the Maltese tax imputation system. In addition it is able to make use of Malta’s many double taxation treaties. The beneficial owners of an ITC can remain confidential if they incorporate the company through a licensed nominee company. As regards its legal basis, the ITC is formed as a private limited company.

Mr. Rossi has an opportunity to sell electronic goods to an Italian supermarket chain and has sourced a suitable supplier in Malaysia. Mr. Rossi thus wishes to establish a suitable entity that is EU resident, tax paying, as well as being tax efficient for Mr. Rossi’s own personal requirements.

Thus, Mr. Rossi, via his ITC, enters into contracts with the Malaysian supplier and the Italian supermarket chain and arranges to ship the goods from Malaysia to Malta. On arrival of the goods in the Maltese Free trade zone, the documentation is replaced with that of the Maltese company and exported to Italy. There is no VAT charged on the sales invoice from Malaysia to the Maltese ITC as is an export from Malaysia.

The Maltese ITC, registered for VAT in Malta, will be obliged to quote their VAT number on their invoice to the Italian supermarket chain, as well as the Italian supermarket chain’s VAT number which will enable the Maltese ITC to zero rate the supply to Italy. The Italian supermarket chain will account for VAT on the supply in the usual manner within Italy.

The Italian supermarket chain on receipt of the goods will pay the agreed amount by whatever form of payment to the Maltese ITC, who in turn pays the Malaysian supplier.

The profit gained by the Maltese ITC as earlier indicated will be taxed effectively at 4.17%. The resulting dividend can be paid to Mr. Rossi, without suffering any withholding tax and to wherever Mr. Rossi wishes.

Potential Issues

• Malta Company should not carry out activities in Malta.
• Clients may wish to incorporate and appoint an offshore company to act as shareholder to retain beneficial ownership confidentiality.
• The tax imputation system relies on full tax being paid and then refunded.