Mr. H, a Russian businessman, buys shoes from Italy and then re-sells them to department stores in France, Germany and Spain. He wants to know if he can structure his business in a more tax-effective manner, such as by using an offshore company.

Suggested solution:

Mr. H could establish a trading company in the Isle of Man, which is a low tax country. This ensures that his trading profits are not taxed in Russia, nor in France, Germany or Spain, where he has a taxable presence in all of these countries. He must obtain a VAT registration, as all of the transactions are European Union transactions. Therefore, if the Isle of Man company (IM Co) starts to ship the shoes from Italy to Spain, it would inform the Italian company of its VAT number, so that the company from Italy could zero rate its sales invoice. In addition, the Italian company does not have to charge VAT to IM Co, which would then obtain the Spanish company’s VAT number and issue a zero rate invoice to the Spanish company. There are a couple of possible options which are worth considering when setting-up this kind of Isle of Man company. These options are an LLC (which is taxed as a transparent entity, so there is effectively no tax in the Isle of Man on the profits) or a resident company. As an LLC distributes a share of profits, there is no withholding tax thereon. It is also worth mentioning that an Isle of Man company is not required to withhold tax on dividends when its owners are not resident in the Isle of Man.

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