Rethinking corporate structure

[daniels27]

It's not like he is managing the offshore company from Canada pretending to not be tax resident in Canada.

His offshore company will form an EPC to do business where he lives.

He will do business throught the EPC.

The day to day activities will be performed by him in Canada.

The fact that he "unfortunately" doesn't have many clients in Canada isn't his fault!

It could work if he investes enough in offshore managers, so that he is no longer part of the company. The, he would be around the PE problem. Then, he only has to ensure that he does not violate CFC rules with the offshore company. Could work, yes. Advantages over the US LLC, none. But it still would be in the jurisdiction he does not want and probably cost him more than he wanted.

But I like the idea. Please keep us posted if you can get this working, I will be moving to Montréal for good.

 

[Marzio]

It could work if he investes enough in offshore managers

The Barbadian company requires a local director so i guess this part is already solved.

Then, he only has to ensure that he does not violate CFC rules with the offshore company.

Honestly Canadian CFC rules are some of the strangest s**t i've ever encountered BUT even in case CFC rules will be a problem theres's a loophole for that too!

Simply the EPC will never send back money to the Barbadian head company so even if he owns 100% of the foreign company, he reports that to CRA, the CRA will do nothing because the Barbadian company will have $0 balance.

Profits will stay indefintely at the EPC level and if one day OP will decide to move, lets say, to Barbados as an ordinarily resident he will cash out big tax free.

Advantages over the US LLC, none.

Well he said he's not a fan of US legal system so not using an US LLC i guess it is an advantage.

 

[daniels27]

Sounds good. Anybody with a good lawyer that can check it?

 

[marct]

Sounds good. Anybody with a good lawyer that can check it?

Yes, waiting for answer.

 

[marct]

Yes, waiting for answer.

Here is what I’ve learned:

- There’s Foreign Accural Property Income (FAPI) rules that could deem any passive income (eg, rent, investments) that flow back to me/a corp in Canada (even EPC subsidiary) as taxable income in Canada, if the activity is not passive income it will not meet this rule;

- There needs to be local director for management;

- The decision making and effective management must be deemed as outside of Canada, wherever that may be;

- It is certainly possible to reside in Canada and remain tax free using the loophole, but there would be larger initial costs to ensure compliance;

- Tie-breaker rules currently favor the other country, and in most circumstances unless one of the clauses above get triggered, always will;

- Keep lots of documentation to demonstrate where effective management is for the inevitable audit one day;

 

[Marzio]

- There’s Foreign Accural Property Income (FAPI) rules that could deem any passive income (eg, rent, investments) that flow back to me/a corp in Canada (even EPC subsidiary) as taxable income in Canada, if the activity is not passive income it will not meet this rule;

Nothing will flow back to you as i said, profits will stay indefinitely at the EPC level.

- There needs to be local director for management;

- The decision making and effective management must be deemed as outside of Canada, wherever that may be;

Barbadian company will have it's own local director for the company and you'll be the one working the day to day operations in Canada as the EPC manager.

- It is certainly possible to reside in Canada and remain tax free using the loophole, but there would be larger initial costs to ensure compliance;

Well knowing that's possibile to reside in Canda tax free is already a win.

Initial costs would be the formation of the Barbadian company, the appointing of the local director, forming the EPC in Canada but since you are Canadian i guess you'll find a way to do it on the cheap by going in person.

Tie-breaker rules currently favor the other country, and in most circumstances unless one of the clauses above get triggered, always will;

Not sure i understand what he mean with "tie-breaker rules" currently favor the other country.

Keep lots of documentation to demonstrate where effective management is for the inevitable audit one day;

Ask him what kind of documents will demonostrate that the effective management of the offshore company is in Barbados.

 

[JustAnotherNomad]

So it's a PE without tax any implications if it doesn't do business in Canada.

It's just a branch. Obviously it does business in Canada if it's managed from Canada.
No need to even check that.

You can tell the article is crap when the author doesn't even understand the difference between a subsidiary and a branch.

Edit: Didn't see the second page.
A branch is not an entity of its own, it's a local registration of a foreign business.
So there is nothing that "stays on the EPC" level - the money is owned by the Barbados company because the branch IS the Barbados company.
You'd just be getting a Canadian tax ID for the Barbados company.
So the tax situation is just like as if you have a Barbados company without the branch, just with an increased risk of an audit since you have now notified them that the company has some link to Canada.

And if there is any kind of business in Canada (not sure about the exact definition, I would expect it to be about management/operations mostly, not customers), that will be taxable - whether the company is registered as a branch or not.

I can't imagine any bank would open a bank account for such a setup, especially not without strong local ties (local office/management etc.), which would trigger tax.

I guess you could own a Barbados company as a Canadian tax resident and not pay tax - if there is sufficient substance and you can show you're not involved in the business, as usual, and you can avoid triggering CFC rules. But that's not some secret hack, that's just how it works in most countries.

 

[daniels27]

I guess you could own a Barbados company as a Canadian tax resident and not pay tax - if there is sufficient substance and you can show you're not involved in the business, as usual, and you can avoid triggering CFC rules. But that's not some secret hack, that's just how it works in most countries.

Yes, and then we are back at my first post:

How much are you willing to spend for the setup annually?

for which I never got a good answer. How can I give you any advice? I mean are you making 100k USD per year in profit or not? (It is a real question we have many idiots here that are afraid of paying 5k USD per year in taxes.)

If you have 10k USD per year, then we could definitely find a company somewhere with cool substance to run a business that you can attach your other venture to.

 

[Despina]

You can tell the article is crap when the author doesn't even understand the difference between a subsidiary and a branch

True but his lawyer confirmed that this setup could be tax free.

 

[Don]

It's just a branch. Obviously it does business in Canada if it's managed from Canada.
No need to even check that.

Not every branch is equal though.

Somewhat comparable would be a Maltese branch of a foreign entity.

A branch of an oversea company (the business of which is managed and controlled outside Malta) would be taxable in Malta only on income arising in Malta and on income arising outside Malta but received in Malta.

In theory, in certain cases for certain types of income double non taxation could happen, but then you will have question about the UBO-s personal tax residence.

 

[JustAnotherNomad]

Sure, but it's Canada, not Malta.

Like I said, I'm sure there are cases where it can work (no income arising in Canada) if it's not a CFC, but then you don't need the Canadian branch.
And you won't be able to get banking for the Canadian branch without any link to Canada.

 

[JustAnotherNomad]

True but his lawyer confirmed that this setup could be tax free.

If you read my comment carefully, you'll see I didn't say it can't be tax free.
But if you can somehow get this registered in Canada and not pay tax and that holds up in an audit (doubtful), then your chances of getting banking are probably something like 0.00001%.

 

[marct]

What I’ve learned is it can be tax free, but it’s not worth the hassle.

I’m leaning towards a WY or NM or DE LLC to consolidate them all, and then another jurisdiction being the owner of the LLC (eg, a Seychelles / KY / BVI), transferring the profits in crypto to the offshore company, along with all the IP/hardware/assets being owned by the offshore company.

I know my plan has holes, what are they? I want to cover all my bases legally.

 

[diro]

There are what in Switzerland? Fake UBOs to get around WHT? Yes, there certainly are, but then, they are taxed on their personal / coporate level on dividends.

nahh you don't understand it. Never mind.

 

[Marzio]

it’s not worth the hassle.

Probably but it was a fun experiment

 

[Marzio]

I know my plan has holes, what are they?

The US LLC and BVI companies will be tax resident in Canada if you manage them from Canada.

To avoid that you will need to create substance in a friendly jurisdiction so that the companies will not be considered tax resident in Canada.

Depending on what you do US LLC income could be consider ECI; whether the income is ECI generally depends upon whether the income is derived from assets used in the conduct of the U.S. trade or busines.

The BVI company will fall in Canada CFC rules because it will receive only passive income.

If you will work for the company without taking any salary you are evading social security taxes and personal income taxes that should be paid on your salary.

If my plan wasn't worth the hassle, this one is no less LOL

 

[JustAnotherNomad]

If there is ECI, there will also be up to 30% branch office tax in the US.
I'm not sure if the income of the BVI company would be considered passive - probably not. From a US tax perspective, the income of the US LLC will be the income of the BVI company (same principle as with the Canadian branch).
It's just not a good idea to involve so many different countries, a lot of things can go wrong. And even if it works, the risk of something "breaking" due to one of the country changing its laws or interpretation of the law also increases.

You can set up a company with substance in Malta for 5% tax and use that to invoice your European clients.

 

[Marzio]

I'm not sure if the income of the BVI company would be considered passive - probably not.

He said BVI will hold IP/hardware/assets so i assume BVI will license those to US LLC that will pay royalties. If that's the case it's 100% passive income.

It's just not a good idea to involve so many different countries, a lot of things can go wrong.

Agreed.

You can set up a company with substance in Malta for 5% tax and use that to invoice your European clients.

It will cost him around 20K/30K yearly to put in place a structure like that and he will still find himself in a grey area by working for the Maltese company without a regular working contract in Canada.

 

[JustAnotherNomad]

He said BVI will hold IP/hardware/assets so i assume BVI will license those to US LLC that will pay royalties. If that's the case it's 100% passive income.

No, not necessarily. If the US LLC is transparent, it is the same company from a tax perspective, but a different entity from a legal perspective.
I'm not sure if it would be possible to pay royalties, probably not.
It would get even more complicated if there is ECI because of the branch office tax. It's just not a good idea. A lot can go wrong.

It will cost him around 20K/30K yearly to put in place a structure like that and he will still find himself in a grey area by working for the Maltese company without a regular working contract in Canada.

He can't work from Canada, period. If he works from Canada, there will be a taxable PE in Canada.
All of the recommendations here are somewhere between a grey area and illegality.
The only thing he can do is move, and if he is unwilling to do that, well, it's difficult.

 

[Marzio]

He can't work from Canada, period. If he works from Canada, there will be a taxable PE in Canada.

That's why i involved Canada in the equation from the beginning.

All of the recommendations here are somewhere between a grey area and illegality.

I'll take that as a compliment

The only thing he can do is move, and if he is unwilling to do that, well, it's difficult.

He said he doesn't want to.