Criteria for Selecting the Right Jurisdiction

In view of widespread concerns and demands for tax transparency amid a rapidly globalising economy, the OECD presented a comprehensive action plan to curb tax base erosion and profit shifting (BEPS). Similarly, the Labuan Financial Services Authority (Labuan FSA) intends to upkeep a strong regulatory and supervisory regime and continually enhance its drive for substance and value creation.

The Current Landscape

A Labuan Entity needs to prove that it has an office, staff, and a bank account in Labuan IBFC. Over the past two to three years, the Inland Revenue Board of Malaysia has also been stressing on substance in Labuan, which is in line with the increased spotlight on corporate tax obligations worldwide.

With the recent developments, especially the implementation of FATCA and CRS, one must be very well planned and seek proper tax advice whenever they would like to establish an entity in any jurisdiction. It is not the same as the old days when people were using "offshore jurisdictions" to "avoid" tax, especially those from a high tax jurisdiction.

Tax Planning vs Tax Evasion

Tax Planning is an arrangement of one's financial affairs in such a way that utmost tax benefits can be availed. This can be done by applying the majority of advantageous provisions which are permissible by law, entitling the taxpayer to obtain the benefit of deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the taxpayer would be minimum. Tax planning follows an honest approach, conforming to provisions within the framework of the taxation law.

Tax Avoidance is any arrangement of financial activities, though done within the legal framework, that overpowers the basic intention of the law. It involves taking benefit of the shortcomings in the statute, by deliberately parking financial affairs in a way that neither violates the tax law nor attracts more tax. This may include shifting of tax liability to another person to minimise the incidence of tax.

Tax evasion, by contrast, is an effort to evade the payment of taxes by illegal means, including deliberately misrepresenting or concealing the true state of affairs to the tax authorities.

Criteria for Selecting the Right Jurisdiction

In international trade and investment, the selection of an international business (offshore) jurisdiction requires very careful consideration. It is important to select a jurisdiction that is well suited to specific corporate and personal needs.

Intended Business Profile

Before considering a particular IBFC jurisdiction, you should first consider it in the light of your intended business:

• Whether your prospective customers are concerned that their new supplier or service provider is registered in a particular IBFC jurisdiction?
• Whether your prospective market countries impose any restrictions against transfers of funds to the particular IBFC jurisdiction?
• How will your partners, suppliers, customers or investors react when asked to do business with an IBFC company?

If you can find positive answers to the above issues, the preliminary part of choosing the right IBFC jurisdiction is already done.

Political and Economic Situation

One of the pre-requisites for establishing business or private interests in an international (offshore) jurisdiction centre is to select a jurisdiction that provides both political and economic stability, so that business can be conducted with certainty, confidence and corporate security.

Essential Corporate Characteristics

Most international business (offshore) and "tax planning" jurisdictions have made efforts to ensure that their company law satisfies the following demands:

• Limited liability
• Minimal or optional statutory filing obligations
• Low capital requirements
• Nominee shareholders
• Availability of bearer shares
• Disclosure of beneficial ownership either not required or limited to special bodies
• Broad range of permitted company names and suffixes to denote limited liability
• Directors and/or shareholders meetings can be held anywhere in the world
• No requirement or optional requirement for accounting records to be audited

Legislation Requirements

Another essential criterion is that legislation should be modern, flexible and well proven. Furthermore, the legislation should preferably guarantee confidentiality and complete privacy with regard to a client's business dealings. Nowadays there are more than 50 jurisdictions worldwide providing offshore company legislation. Some jurisdictions, such as Labuan, Malaysia, have introduced new and modern corporate legislation specifically designed for international business; others have amended existing domestic legislation to cater for offshore requirements.

Company Law Models

There are three main models of Company Law:

English Common Law is the most frequent model for classic offshore jurisdictions, based on the UK Companies Act 1948. The Joint Stock Companies Act of 1856 introduced the Memorandum and Articles of Association providing incorporation by registration. Examples include the BVI, the Bahamas, Hong Kong, and Belize.

European Corporate Law is based on French Law (1864). Incorporation procedures require paid-up capital before incorporation, are more onerous and time consuming, and are carried out by a notary. A company's statutes are essentially a contract between subscribers. A legal reserve may be required, and liquidation procedures are time consuming and complex.

US Corporate Law was formed under the influence of both English and Civil Law. US Corporations have officers in addition to directors, by-laws are often adopted after incorporation, and directors are often empowered to change by-laws.

Double Taxation Avoidance Treaties

Jurisdictions around the world can be divided into two groups:

Treaty Jurisdictions: Clients wishing to benefit from relief from a double tax treaty must establish a company situated in a Treaty jurisdiction. This is essential for minimum withholding tax on dividend payments and royalties from contracting states. Treaty jurisdictions also convey a non-offshore image and thus provide cosmetic appeal.

Non-Treaty Jurisdictions: This type of jurisdiction is mainly used because of the absence of corporate taxes on the company's profits and usually only requires companies to pay a fixed annual licence fee.

It is important to assess the taxation implications for the business and to decide whether a treaty jurisdiction is required. Usually, a treaty jurisdiction is not required for international trade, the movement of goods or most services. However, inward investment into certain countries requires a treaty jurisdiction to minimize the impact of taxation.

Legal and Accounting Infrastructure

The infrastructure of an International Business (Offshore) jurisdiction is important. Factors such as quality of telecommunications and internet, physical access to the country, language, work ethics, legal system, confidentiality culture, exchange controls, quickness and variety of administrative and financial services available all can influence the smooth running of your business. Labuan, Malaysia, is second to none, on an infrastructure basis.

Cost Involved

A rather obvious but important factor: what are the registration fees and taxes? What are the costs involved to fulfil the commercial substance?

Key takeaway: Selecting the right jurisdiction requires careful consideration of your business profile, political stability, corporate law requirements, tax treaty access, infrastructure quality, and costs. Professional guidance is essential to make the right choice.

For tailored advice on this topic, contact our team.