Maximising Savings, Minimising Risks: Corporate Tax Planning Strategies for Your Business

Corporate tax planning is something all new business owners should prioritise. This is particularly the case if your business operates in more than one country/territory (e.g., online business for international customers). Corporate tax planning is the process of implementing strategies to achieve tax efficiency, reducing your company’s taxable income and tax liability, and increasing your profitability and overall financial standing. This requires a solid grasp of business tax law as that will enable your company to determine where to register or claim tax residence to optimise financial gains.  

A. What is corporate tax planning?

Corporate tax planning is the process of arranging your corporate affairs and implementing strategies to increase tax-saving and reduce the effective tax rate and corporate tax rate, taxable income and tax liability of your company; this is done to increase your retained earnings. Corporate tax planning plays a vital role in achieving tax efficiency and maintaining industry competitiveness. It is also a good way to reduce your company's tax bill and avoid illegitimacy or engaging in illegal behaviour such as tax evasion.

Overall, corporate tax planning improves a company’s financial position, making it more attractive to investors. 

B. Why is corporate tax planning important?

Corporate tax planning enables companies to respond to changes in the external environment and make their business activities more systematic. Effective corporate tax planning improves the return on investment for investors. Higher investment return attracts more potential investors, allowing the company to raise more capital and, as we just mentioned, further improve the company's financial situation.

For example, if you want to set up a company in the BVI, you will face a lower tax burden than that from the United Kingdom. It is therefore important that every company has some basic understanding of tax law and how it works when setting up business operations. 

There are certain general guiding principles regarding corporate taxation you should consider: 

1. Separate legal entity

Did you register the business under your name or as a separate legal entity through the incorporation of a company? Corporate tax only applies to companies or corporations that are separate legal entities. 

2. Tax residency 

A country can tax a resident's total income regardless of where the income originates. Whether a company is subject to income tax rates is based on where the company registers its tax residency as well as where the management and control take place. 

3. Carrying on business

A country can place a tax on business activities that carry on within its border. Whether a company is subject to corporate tax is contingent on whether the company is carrying on business within its jurisdiction. 

C. Separate Legal Entity 

1. What does 'separate legal entity' mean?  

In most jurisdictions, corporate tax only applies if a business has been set up as a separate legal entity (a corporation or a limited liability company). This means that the actions of the entity are separated from those of the owner.

If the business is not set up as a separate legal entity, then the profits from the business would generally be combined with the income of the owner and personal tax would be assessed on the individual. 

D. Tax residency

An entity is regarded as a tax resident of a particular common law jurisdiction if (a) the entity is incorporated/constituted in that jurisdiction; or (ii) if the entity is incorporated/constituted outside of that jurisdiction, it is managed or controlled in that jurisdiction.  

Following incorporation, entities/companies are generally tracked by the relevant tax authority at the place of incorporation and issued with a tax return for the first anticipated "year of assessment". If no tax return has been issued, the entity/company must notify the tax authority if assessable profits have arisen.

The common tax law concept of “normally managed or controlled” does not require that both management and control be exercised in that jurisdiction. “Management” refers to the management of daily business operations, or implementation of the decisions made by top management, etc.

“Control” refers to the control of the whole business at the top level, including formulating the central policy of the business, making strategic policies of the entity, choosing business financing, evaluating business performance, etc.

An entity can be a tax resident in more than one jurisdiction. Many companies are set up in tax havens such as the Cayman Islands or the British Virgin Islands but are managed or controlled in another jurisdiction where their headquarters are based.

These companies will be regarded as tax residents of the jurisdictions where the management or control takes place. 

E. Carrying on a business 

Corporate tax is still payable by the entity if it carries on a trade, profession, or business in a country/territory (even if it is not a tax resident) on profits arising in or derived locally from that trade, profession, or business.

Where the entity is not a tax resident, profits that have a foreign source are generally excluded from the territorial scope of the country/territory's taxation system, including those derived by locally incorporated companies.

The concept of "carrying on a business" is fundamentally different from "management" or "control". By properly understanding the differentiation between the two, a company can determine where to register its business (typically at a low tax jurisdiction where offshore incomes are not taxed) or whether the company remains subject to corporate tax in a particular country/territory. 

1. What does 'carrying on business' mean?  

The definition of 'carrying on business' is rather unclear. However, three general themes that emerge in case law can assist in assessing whether a company is carrying on business in a jurisdiction. 

(i) There must be a business

Whether an activity is a 'business' is determined on a case-by-case basis. Having a representative office that does not conduct sales in a territory may not constitute carrying on a business. Additionally, a passive undertaking that gives rise to property income or capital gains, such as interest rate generated by a company saving account, is not considered a business.

(ii) The business must be carried on for a continuation of time

A business venture that is not part of the ordinary business cannot be considered a ‘carry-on business'.

(iii) The business must operate within the jurisdiction

If the country’s geographical landmass is precisely defined, then there will be no issue concerning the determination of territorial boundaries. However, territorial issues might arise if a company is registered in the coastal area or near the borders between two jurisdictions.

Some other indicators can also help to determine whether a company is 'carrying on business in a jurisdiction. 

2. What are some other factors to determine 'carrying on business' in a particular jurisdiction? 

There are a few factors that are often used to determine whether a company is 'carrying on a business in a jurisdiction. 

(i) Place of contract 

This term refers to the location where sales and goods contracts are habitually made. The contract must be essential or profit-producing. Contracts such as leases, purchases of supplies, and labour contracts are not considered essential contracts.  

(ii) Location of operation in which profit arises

This process includes matters that arise before the sales (purchases, manufacture or production of goods, or solicitation of orders) and after the sales (delivery and payment). These matters must be significant business operations or actions to be considered 'operation in which profit arises'. 

(iii) Place of manufacture or production

If goods are manufactured or produced in one jurisdiction, a company is likely carrying on business in the manufacturing country even though those goods were later on exported. 

(iv) Location of an inventory of goods

If it is not indicative that trade is exercised within the jurisdiction, the location of inventory could be a factor in determining the place of business. 

(v) Location of a bank account

There are a few incidents where the location of a business bank account serves as an indication that the business is carried on in that place. However, substantive income generated by the saving might not be considered as business.   

(vi) Business directory 

The place where a business is listed in certain directories can be a factor in determining whether a business is in a certain jurisdiction.

(vii) Location of a branch office

The location of a branch office is a factor used to determine where a business is being carried on. 

F. Where should I incorporate my company?

Generally, a company would have to be incorporated into the jurisdiction where it originally carried on its business to establish its tax residency. However, if your business is not location-specific (e.g. a global online business), you can choose to incorporate it in a more tax-friendly jurisdiction. Some examples are the British Virgin Islands, Cayman Islands, Bermuda, Samoa, Labuan, Mauritius, Hong Kong, Singapore, and Delaware.

However, some of these jurisdictions have implemented economic substance law, meaning that you are required to maintain an appropriate level of economic substance in the jurisdiction rather than merely keeping a shell company. You should also check if a jurisdiction has double tax treaty agreements with the jurisdictions you decide on where to incorporate to establish your tax residency (see below).

Companies applying for exemption from taxation of overseas profits must provide documentary evidence to prove that their sources of profits come from outside the jurisdiction.

G. Factors to consider for different types of businesses

1. Trading Company

The location where the contract takes effect is critical to determining the source of trading profits. "Effective" does not only refer to the place where the contract is executed. It also includes the place where a particular contract is negotiated, concluded, and enforced. Factors such as renting office space, recruiting general staff, setting up offices, etc., are not directly related to trading activities and are not considered to be related to the location of determining trade profits.

2. Manufacturer

The location where the goods are produced is a sign of the profit source of a manufacturer. The profits from the sale of goods manufactured in the jurisdiction are fully taxable. If the goods are partly manufactured in the jurisdiction and partly made outside the jurisdiction, that part of the profits related to the goods made outside the jurisdiction will not be deemed to have been generated in the jurisdiction. Please note that the sales location of manufactured products is not relevant.

3. Service provider

The location where the service is provided is a key factor in determining the source of service revenue. Service fees for services provided in the jurisdiction are taxable.

4. E-commerce

E-commerce business is determined by several factors, including the locations of storage and delivery of goods, customer services, payment, sale and purchase, bank accounts and support services for business. What determines whether the E-commerce business is conducted within a certain location is based on the core physical business operations, not just the location of the server. After all, it is the management and control performed by humans in the physical office, and not the server, that makes the business functional. An E-commerce platform with business operations in a particular jurisdiction must pay profits tax in that jurisdiction.

H. Issues to consider when expanding your business into other countries/territories 

This section considers tax issues that might arise for a company that is planning to expand its business across the world. 

1. An agent working in another jurisdiction 

A company could be carrying on business via an agent. If the intermediary is a dependent agent of the company, the company is likely to be carrying on business in the jurisdiction via the agent. However, if the agent is an independent contractor or if the relationship is determined by a sales and purchase agreement, then the company is carrying on business with the country rather than carrying on business in the country.  

2. How to determine if the intermediary is an agent or an independent contractor? 

It depends on the relationships between the company and the intermediary. The description of the job title is inconclusive. Whether an intermediary is an agent or an independent contractor usually depends on two factors: the arrangement between the parties, and the degree of control exercised by the company over the agent. 

3. A subsidiary company as an agent

A subsidiary is a shell or puppet corporation through which its parent company operates a business. A subsidiary is not necessary an agent but can be one if the parent company dominates the business affair of a subsidiary to the effect that the subsidiary business becomes part of the parent company’s own business.  

4. How to determine if a subsidiary company is an agent? 

The agency relationship is determined by practice between the parties. The fact that a company owns a 100% share of a subsidiary company does not mean the parties are in an agency relationship. An agreement between the parties is also inconclusive as to whether the subsidiary is acting as an agent. 

I. What are double tax treaty agreements?

A company can be exempted from certain taxes if their place of tax residency and place of business (where they carry on a business) have entered a double tax agreement/arrangement (DTA) with another jurisdiction. You should check your jurisdiction of tax residency to see which jurisdictions it has entered DTAs with.  

DTAs are also referred to as tax treaties. They prevent double taxation and fiscal evasion, fostering cooperation between different jurisdictions and other international tax administrations by enforcing their respective tax laws. 

For instance, if a company has registered its business in Ireland but is carrying on its business in Singapore, the company may be subject to tax relief from double taxation. It is therefore important to determine where to set up or register your company before any business development. 

Generally, DTAs operate to:

• Reduce or eliminate double taxation caused by overlapping tax jurisdictions;

• Provide a level of security about the tax rules that will apply to particular international transactions by:

  • Allocating taxing rights between the jurisdictions over different categories of income,

  • Specifying rules to resolve conflicting claims about the residential status of a taxpayer and the source of income,

  • Providing an avenue for a taxpayer to present a case to the relevant tax administrations if a taxpayer considers there has been taxation treatment contrary to the terms of a DTA;

• Prevent avoidance and evasion of taxes on various forms of income flow between different jurisdictions by:

  • Providing for the allocation of profits between associated enterprises on an arm’s length basis,

  • Providing for the exchange of information between the respective tax administrations;

  • Facilitate investment, trade, movement of technology, and movement of personnel by reducing rates of foreign withholding tax.

J. How to use DocPro for corporate tax planning

We have created various documents and correspondence for your tax planning including letters for local tax authorities:

1. Letter to Tax Office / Inland Revenue Department to extend Tax Deadlines for COVID-19

https://docpro.com/doc1482/letter-to-tax-office-inland-revenue-department-to-extend-tax-deadlines-coronavirus-covid-19

2. Letter to Tax Office / Inland Revenue Department Holdover of Tax

https://docpro.com/doc799/letter-to-tax-office-inland-revenue-department-holdover-of-tax

3. Letter to Tax Office / Inland Revenue Department Request for Tax Refund on Cessation of Business

https://docpro.com/doc797/letter-to-tax-office-inland-revenue-department-request-for-tax-refund-on-cessation-of-business

4. Letter to Tax Office / Inland Revenue Department Waiver of Late Tax Payment / Filing Penalty

https://docpro.com/doc795/letter-to-tax-office-inland-revenue-department-waiver-of-late-tax-payment-filing-penalty

5. Letter to Tax Office / Inland Revenue Department Exempt on Transaction / No Transfer of Ownership

https://docpro.com/doc796/letter-to-tax-office-inland-revenue-department-exempt-on-transaction-no-transfer-of-ownership

K. Tax offices in different jurisdictions

You should note that this article is not completely comprehensive - there may be some other principles of tax law you need to learn more about yourself through research/contacting external sources. The details of tax law vary depending on the law of different countries, so you may wish to check with your lawyer or accountant to develop a more comprehensive tax strategy. For your convenience, however, we have created a handy directory of tax offices in major common law jurisdictions: 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your lawyer.