To avoid double taxation when doing business abroad, it is necessary to take into account a number of key points and take appropriate measures. Let's take a closer look at each aspect.
Main instruments to prevent double taxation
1. Use of double taxation agreements
Many states have concluded bilateral treaties regulating the taxation of income of companies operating in different jurisdictions. These agreements establish rules for the distribution of tax liabilities between countries and determine the procedure for exemption from tax or offset of amounts paid.
What to do?
- Find out if there is an agreement between the country of registration of your company and the state in which it operates.
- Contact international law and tax experts to review contract terms and develop a tax optimization strategy.
2. Application of the principle of permanent establishment
A permanent establishment arises if a foreign company does business in the territory of another state through an office, warehouse or other permanent establishment. Income received in this way is subject to taxation in the country where the representative office is located.
Recommendations:
- Determine the presence of signs of permanent establishment in accordance with international norms and domestic laws of each jurisdiction.
- Document and transact in a way that minimizes the likelihood of recognizing a permanent establishment.
3. Optimize your asset ownership structure
The use of holding structures and investment instruments allows you to redistribute profits between different legal entities and reduce the overall tax burden.
Tips:
- Create subsidiaries in countries with low corporate tax rates or preferential tax regimes.
- Apply investment schemes through offshore zones, observing the principles of transparency and compliance with legislation.
4. Set-off or exemption
Some states provide benefits to foreign companies investing in the economy. This can be expressed in full exemption from tax or a partial reduction in rates.
Actions:
- Study the tax code of the countries where you operate for possible preferences.
- Get advice from professional advisers on the possibility of applying tax exemptions.
Examples of practical steps
Suppose your company is registered in Russia and trades with the UK. To reduce the risk of double taxation:
- Check for an agreement between Russia and the UK. Such an agreement exists, it regulates the distribution of taxes on income from commercial activities, dividends, interest and royalties.
- Assess the need for a permanent establishment. The opening of a branch in the UK will entail recognition of a permanent establishment and the emergence of obligations to pay local taxes. Therefore, it is better to consider the option of cooperation through agents or representatives.
- Take advantage of the holding. You can create an intermediate structure in the Netherlands, known for its favorable terms of taxation of profits and the absence of restrictions on the payment of dividends.
Competent use of legal mechanisms and thorough preparation can significantly reduce tax liabilities and successfully conduct international business.
