International tax planning means developing the fairest tax regime for the taxpayer. Globalization brought new opportunities for both resident and non-resident individuals and legal entities. Based on our practical experience, the following are useful tips for those who want to save tax.
How to lower your taxes
First of all, there are some standard tax planning principles you should never neglect. They are all well applicable to the national and international level of tax planning. The advice includes:
- Reduce your income to reduce tax amounts. One of the best recommended ways is to save for retirement.
- Be aware of the exempt income categories, such as life insurance, gifts, bequests and inheritances, health insurance, employer’s benefits, scholarships, etc. However, remember that it is the recipient who gets these income tax-free.
- Make the most of deductions. Those largest are normally mortgage interest, state taxes and charitable donations.
- Take advantage of tax credits – they don’t lower your taxable income, but reduce your actual tax liability.
- Try to get a lower tax rate whenever possible.
- Consider deferring tax payments – this can be reasonable in many cases.
- Shifting income to other taxpayers, for example gifting highly prized possessions to children.
Aspects that determine your tax liability
Apart from the general rules mentioned above, analyze each of the aspects below that may eventually require notable changes in your business structure.
Subject of tax. Each tax relates to its own independent tax object. This may concern real estate, goods, services, works and/or their realization, but also income, dividends, interest. Changing the taxable object can lead to a better tax regime. For example, the sale of equipment is often replaced by leasing it.
Subject of taxation or taxpayer. It is a natural or legal person who is liable to tax with his/her/its own resources. By changing the legal form, the company can obtain a more favorable tax regime. A classic example is a company originally incorporated in the form of a U.S. corporation that has been converted into a limited liability company (LLC) with a tax stream regime, abolishing the federal level of corporate income tax.
Tax jurisdiction. You are free to choose your tax jurisdiction. Use the benefits of offshore low tax centers in the same way as the favorable features of tax regimes in high tax countries. A number of jurisdictions welcome investment from non-residents in exchange for full tax and reporting exemptions. Some countries prefer certain types of activities that attract investment in specific industries.
Choosing between low tax centers, look for an offshore jurisdiction favorable to trade and professional services check Dominica or Seychelles primarily for financial holding companies and insurance companies BVI, Cyprus, Panamafor ship management and maritime operations – Cyprus, Dominica, Nevis or Panamafor licensing and franchising – Cyprus, Gibraltar, Panama, and so on. There is a good chance that you will find a suitable option for you among the existing range. However, keep in mind that some businesses are not quite mobile in terms of changing jurisdictions.
Establishment of the company and of its management and administration. They also call it the “mind & management” test. This may be the most important factor in determining the tax residency of the company. It depends entirely on the tax policies of the countries involved, but the company may be required to pay taxes in the country where its “mind and management” is located.
Potential double taxation happens when one country claims the right to tax the income based on the residence (or citizenship) of the taxpayer and the other country – based on that source of income. In some cases, this happens because both countries claim that the taxpayer is their resident or because the income comes from their sources.
Prevent double taxation by means of possibly tax credit, tax deduction and tax exemption options. Most of the existing double taxation treaties between countries normally follow the OECD Model Tax Treaty and cover taxes on income and wealth in any form. The choice of jurisdiction according to the “Tax Jurisdiction” section above can often depend on the availability of the appropriate tax agreement between two countries.
In addition to tax treaties, there are a number of developed countries special tax arrangements allowing the foreign tax paid to be credited even without the corresponding tax treaty in force between the countries involved.
Double taxation can also occur within the company’s revenue distribution processes. It can be taxed first as company profits and later as dividends to shareholders, subject to withholding on distribution. Check the related local law to find a possible solution for this case.
- It is more beneficial for avoid tax resident status in the land of the biggest profits, it tries to limit it to withholding tax.
- It is better to postponement of cash withdrawal of business and repatriation of profits. In certain cases, deferral is equivalent to tax exemption.
- Transfer of assets is more preferred as movement of capital rather than revenue or profit movements.
- When comparing tax regimes of different jurisdictions, in addition to the tax rates, attention is also paid to the process of forming taxable income.
Matters that you need to handle in the final stages of tax planning, such as tax-efficient distribution of assets and profits, are not directly related to tax calculation and settlement. However, development of profit accommodation priorities, capital repatriation and investment policies will provide additional tax benefits and some refund of taxes paid.