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Pro & Cons of Forming Offshore Companies

My firm is creating a JV with a foreign operating partner for a large scale processing plant in Eastern Europe. We are discussing the most attractive financial and legal structures, and considering creating a holding company in the Cayman Is, Isle of Mann, Dubai etc... Is there any information on the pros & cons of each from a financial, tax and legal/regulatory basis? Our goals are to minimize taxes and have maximum legal protection of our investment/assets/IP in the JV. What questions should we be asking ourselves as we explore what type of entity to form and where? We will be getting professional legal advice, but want to better informed before we start that process.

Answers

Anonymous
(Business Development VP) |

Your off shore holding company will likely be a cost center to start and you would like to make sure that the expenses are at least covered in the off shore entity before paying taxes in the Eastern European JV.

Not sure what your Eastern European JV is bringing, but if they are bringing manufacturing assets, the JV could purchase the partners assets thru a lease agreement paid out of profits made by the JV and you could minimize the share capital of the JV. I have done something similar a while back in Eastern Europe. We bought the assets of the JV partner for DEM 41 million over a 7 year lease, paid for by profits from the JV. The JV had a share capital of CHF 1 million. It was a fantastic deal.

You could route any raw material purchases thru the off shore entity. You should have transfer pricing documentation in place to protect any challenges that may be raised to this set-up. You could also have the off shore entity take over a number of risks and/or offer services, which would allow an improved justification of your transfer pricing.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

That's a very broad question or questions, and a real answer would need more information: which country, when will it be profitable and when, how will it be funded, what do you plan to do with accumulated profits, who is your partner and how comfortable are you in that relationship, etc?
Some points to consider

A legal entity will shield the parent company from creating the uncertainty of a taxable PE permanent establishment in eastern Europe.

Be careful when considering these apparent tax saving locations for a holding company. If your only reason is to avoid tax, and there are no business advantages then this will complicate your life. You will be spending money on tax accountants and lawyers to design, watch over, and operate your business in a way that maintains the tax structure rather then what is most efficient. There will be added cost, sometimes involving re-invoicing, and physical presence in the tax haven, and eventually something will go wrong or be missed. You will be viewed very closely by the IRS and state tax authority, so will likely spend more time and money on your returns and audits, and be more exposed for audit challenges and penalties in the event of a mistake. And in the event of an M&A transaction, I have seen potential acquirors put off by the prospect of the added due diligence , and higher tax risk profile that they might acquire.

For the JV:
Does the EE country have a double tax treaty with US?
How will your investment be funded and in what currency?
How will business decisions be made within the JV (you vs the partner) and do you feel comfortable with the legal system in that country if you have to protect your interests?

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