Let’s take the example of a British company CompDirect Ltd.It that is specialized in online sales of computer equipment and various items for other companies in Europe. Established in Great Britain in 1974, in 80s it started to move to the Western European market and by 90s the company had expanded to the Eastern Europe.
All the major functions of this company – management, marketing sales and purchases- are organized from its headquarters in London. It has two warehouses or we can call them as subsidiaries which are created for storage, shipping and delivery purposes.
Necessary information about CompDirect:
The first subsidiary CompHouse Ltd is based in Bristol and because of its beneficial location, it can cover the Western European market.
The second subsidiary CompHouse GmbH is based in Berlin and covers the Eastern European market.
All costumer orders are processed in CompDirect Ltd in London. Depending on the case, they are transmitted to Bristol or Berlin for further process and delivery.
CompDirect have realized that the business activity they are practicing can be accelerated by selling on the Internet. An internet platform where it is possible to make orders and pay online can be very beneficial for their activity. Such a platform also can help them to access global markets, which will certainly optimize their sales. Additionally, the costs to build an e-commerce website are lower than the costs of expansion of the current activities.
Given the evolution of its market share in Europe, CompDirect also wants to review its legal structure for tax optimization. E-commerce as one of the most suitable tax optimization areas offers a number of possibilities.
CompDirect asks for advice from a trustee:
Having studied the case carefully, the trustee offers CompDirect the following solutions.
CompDirect will continue its current operations as they are, but additionally to the already existing structures, they incorporate a company for marketing management and sales on web. The new company will be a non-resident company, i.e. an offshore company.
The Trustee recommends establishing a new company under the jurisdiction of Cyprus. In fact, this jurisdiction has entered into a number of double tax agreements with many countries of the Eastern Europe. Therefore, it is an ideal destination for international companies wishing to conduct business operations in the Eastern Europe. Other than that, Cyprus enjoys a secure commercial and technical infrastructure.
Until then, CompDirect had no plans to create a new subsidiary in the Eastern Europe, but taking into account the many advantages, they admit that an offshore settlement in Cyprus could be the ideal solution.
CompDirect has future plans to expand their business outside of European Union. For this project, the Trustee has suggested a legal structure in the free zone of Larnaca, which will be a great place for an additional warehouse.
The offshore company based in Cyprus will be named Clink Ltd and it will be a different legal entity, which will handle only marketing and online sales. It will also buy merchandises to its parent company.
The storage and shipment of merchandises and the payments of the local import tax and VAT will be the responsibility of Comphouse GmbH (Berlin) and Comphouse Ltd (Bristol).
The British law called Controlled Foreign Corporation (CFC) states that companies registered in the UK are taxable considering the results of its subsidiaries established in another country when these subsidiaries benefit from a lower tax rate than that in Britain. To optimize the fight against evasion and international tax evasion, the British legislation was strengthened by the Finance Act 2000.
To avoid the legislation concerning the control of foreign companies by the UK, CompDirect will have only minority stake in Clink Ltd. Most of the share will be held by shareholders of CompDirect, some of which have already established an offshore residence.
When the company in Cyprus receives an order, a statement of the costs of delivery and local taxes will be provided. A copy of this statement will be sent via email to the costumer and the appropriate warehouse.
Subsequently, the warehouse will prepare the merchandises for shipping and delivery on the behalf of Clink Ltd. Later, the warehouse will charge Clink Ltd for the services of preparing the merchandises. The invoice will also include the local rights and taxes.
CompDirect and the trustee have made a schedule for the project:
1st step: With help of the trustee
- Establishing Clink Ltd as an Cyprus International Business Company (IBC);
- Opening a bank account in the country and outside the country;
Furthermore, the domain name is registered in this first phase of the project.
2nd step: Website for the new company is created
- Website design and content;
- Installation of the functionalities;
- Installation of a multi-currency payment processing system;
- Integration of an online payment system;
The results of project:
Once the project is completed, the gross margin on online sales made by Clink Ltd in Cyprus will reach approximately 50%. In addition, general costs are much lower compared to CompDirect. Thus, when the costs of the website creation will be amortized, the end result and the net margin will be more satisfying.
The profits made by the Cyprus company will be taxed at rate of 4.5%. This tax system ignores the regime that imposes a rate of 10% on net income of the companies IBC in Cyprus. The dividends paid to most of the countries in the European Union and the United States will be subject to a withholding tax of 0% to 10%.