Tax optimization based on a company established in the British dependent territories – practical issues
publication date: January 03, 2023
The article describes the popularity of creating business entities in the Cayman Islands from the perspective of tax optimization. Leveraging one’s own economic interests with an offshore company is an interdisciplinary and multi-jurisdictional problem, and each individual investment requires the purpose of using such a solution from the perspective of the provisions on the anti-avoidance clause (Tax Ordinance) and requires ensuring proper and favorable tax jurisdiction of the owners of the offshore company, taking into account the provisions of CIT and PIT in respect of revenues from a foreign entity.
Tax optimization based on a company established in the British dependent territories – Is it a dubious “foreign remedy” for lower taxes in Poland? – Well, it depends!
Undoubtedly, the British dependent territories are a tempting solution for the so-called tax optimization in relation to the tax realities of business activity in Poland. This is due to the fact that some of them belong to tax havens. The EU list of non-cooperative tax jurisdictions of October 4, 2022 includes[1] two dependent territories of the United Kingdom, i.e. Anguilla and Turks and Caicos Islands. Until recently, the list included the Cayman Islands.
Undoubtedly, the popularity of the Cayman Islands is due to the fact that there is no obligation to pay tax on, inter alia, legal persons, natural persons, inheritances and gifts. The country’s economy, precisely for this reason (the popularity of registering foreign investors in the Cayman Islands jurisdiction), is developing rapidly, e.g. the activity of the construction industry in 2019 was 6.1%[2], which is a consequence of establishing new business entities. Contrary to popular opinion, however, not all established business entities, i.e. capital companies, are exempt from the tax obligation, however, in the case of exempt entities, starting a business is tantamount to receiving an assurance that there is no need to pay taxes for the next 20 years. It is a very important protection of the entrepreneur’s interest in the event of a possible introduction of a tax obligation in the future[3]. Another factor predetermining the popularity of the Cayman Islands is their relationship with their home country, i.e. the UK. The connection of the Cayman Islands with Great Britain gives a relatively simple possibility to change the tax jurisdiction, which results, among others, from the convergent legal system, lack of language barriers and logistical connection. It is worth noting that the opportunities for doing business in the Cayman Islands are very liberal. Business activity is unlimited and allows entities registered there to deal with all branches of the economy, which differs from Polish jurisdiction in relation to the rules resulting from, for example, Polish entrepreneurs’ law from the perspective of, for example, restrictions on regulated activity[4]. Undoubtedly, this factor significantly attracts foreign investors (taxpayers from foreign jurisdictions wishing to obtain a different tax rate). However, the most important element encouraging to do business in the Cayman Islands is the aforementioned lack of tax obligation. Nevertheless, instead of tax liability, the entrepreneur is obliged to pay an annual fee, depending on the amount of capital, which can be described as a fee for conducting business[5][6].
A company in the Cayman Islands – pure abstraction or a real alternative to a Polish limited liability company?
We are focusing on the structure of the so-called “offshore company”, as any company in a country with a friendly tax jurisdiction. An “offshore company” is a company that is established in another country, not the home country. Very often, a company is created to change tax jurisdiction. This is its constitutive feature, independent of its legal nature, i.e. whether it forms one of capital companies or a different type of company.
Company structure and tax liability
It is worth noting that the law of the Cayman Islands does not provide for the absence of tax liability for every company. The obligation depends on the nature of the company[7]. One of the forms of running a business is the Cayman limited liability company, which from the perspective of the systemic principles provided for by the Polish Code of Commercial Companies can be described as a hybrid between a limited liability company and a joint-stock company. However, regardless of the nature of the system, the exceptionally important characteristics of such a company include, above all, the inability to do business with entities located in the Cayman Islands[8]. This is an important element, however, taking into account that mainly companies interested in cross-border operations have their registered offices in the Cayman Islands, the principle of prohibiting the flow of orders between domestic entities does not significantly limit the possibility of conducting business by such companies, because by definition it is aimed at foreign clients.
In terms of organizational and political issues, it is worth adding that when registering a company, it is not required to indicate the minimum share capital, but an obligatory element in this regard is the ownership structure requirement in the form of at least one member[9][10]. An additional horizontal category of company in the Cayman Islands is the so-called “exempt company“. It is a company in which the share capital may be indicated in any amount and currency. A very interesting issue regarding this type of activity is the protection of personal data. In accordance with the law, only fragmentary information, such as the address of the company’s registered office, is entered in the public register, and information containing the aforementioned data is not made public.
Another form of Cayman’s activity with foreign capital is the “Association not for profit”, which is a form similar to the Polish foundation. However, from the perspective of the Cayman law, the association is treated as a limited liability company, but its most important assumptions include non-profit activity, i.e. no profit orientation. Therefore, a foundation company is another type of business that can be established by any person and its purpose does not have to be non-profit. Unlike the founder, however, the company secretary must be a qualified person with the authority required by Cayman Islands law. It is a kind of security guaranteeing the stabilization of such a cross-border investment vehicle. It is worth noting that the company does not require share capital, and its dividends, profits and assets cannot be distributed to members in the sense of owners.
A Cayman company (business entity registered in this jurisdiction) that is not a resident is therefore a very interesting legal form from the perspective of Polish jurisdiction, which, however, is characterized by quite high formalism. The status of such a company can be obtained only after the decision of the Minister of Finance of the Cayman Islands. The most important assumption is – as indicated above – no active business in the Islands (i.e. the sale of goods or services to other foreign entities registered in this jurisdiction). This proves that the form of this company is directly aimed at optimizing the home tax jurisdiction by potential owners of the Cayman entity. The company must have a register on the basis of which the annual exercise of its activities is prepared. Its most important feature, i.e. operating only outside the territory of the Cayman Islands, significantly brings it closer to the status of an exempt entity, which results in the possibility of transforming its legal form into an exempt company.
Among the circulating information, one can also find other terms for forms of business registered in the Cayman Islands, such as:
- “foreign company” (“overseas company”), which is the opposite of a non-resident company and an exempt company, is registered outside the territory of the Cayman Islands, but its registration allows, among other things, to hold grants in the Cayman Islands. It can be concluded that many foreign companies focused on the example of the tourism industry operate in this legal form.
- “resident company” is a traditional type of business, which assumes, among other things, public access to registers and the possibility for the company to own land.
- “special economic zone company” is entitled to operate in this zone. Interestingly, these companies, just like non-resident companies, can be transformed into exempt companies.
- “unlimited company” – the liability of all its shareholders or members is unlimited. Its members or shareholders have a joint, several and non-limited obligation to meet any deficiency in the assets of the company to settle outstanding debts in the event of the winding up of the company. The articles of such companies must state the number of members with which the company proposes to be registered and, if the company has a share capital, the amount of share capital with which the company proposes to be registered.
Cayman “exempt company” as a hybrid of a limited liability company and a joint-stock entity
The structure of an exempt company is undoubtedly, from the perspective of the principles of Polish law, similar to the form of a limited liability company. It is a kind of hybrid of capital companies, showing more characteristics of a limited liability company. The above difference can be illustrated on the basis of a Polish joint-stock company and a limited liability company, i.e. types of capital companies.
Under the Polish legal system, the share capital of a limited liability company is at least PLN 5,000, and of a joint-stock company at least PLN 50,000, which shows similarity to the Cayman exempt company, in which the amount of capital is not specified, i.e. in practice it remains at the level of the so-called “acceptable risk”.
Another point of reference between companies is their governing bodies. In a Polish limited liability company there is an obligatory management board that makes current decisions and a shareholders’ meeting which is not a permanent body, but only convened in given circumstances. Such a structural mechanism is present in Cayman Exempt Companies and is most often regulated in their articles of association. An additional body is the optional supervisory board. On the other hand, in a Polish joint-stock company, there are 3 obligatory bodies, i.e. the management board, the supervisory board and the shareholders’ meeting. The governing corporate bodies are somehow appointed automatically, without the possibility of statutory regulation, which is an unknown construction in the case of the Cayman structural solutions. The above comparison proves that a limited liability company is characterized by greater decision-making leeway specified in the articles of association, such as the creation of a supervisory board, identically to the Cayman exempt company. Moreover, the share capital is not high, and in the case of the Cayman exempt company, it does not exist at all, which can be interpreted as similar characteristics of these entities.
Remote management of an exempt company, which is the most popular type of Cayman company
An exempt company must have one director, but very often the number of directors, specified in the articles of association, can be up to ten. Popular activities that may result from the lack of physical presence of decision-makers in the Cayman Islands, e.g. directors may manage a company from another jurisdiction, include the possibility of appointing proxies. The proxy may be a person unrelated to the company, as well as another director. If another director is the proxy, he votes on his behalf and on behalf of the person being replaced when voting at general meetings. The exception to this situation is the presence of the replaced director, then the proxy cannot vote on his behalf, but only on his own. It is worth noting that most often voting is done by a show of hands, but there are exceptions, e.g. in the circulation mode (poll). The role of the deputy director is very similar to that of the proxy. Both forms of substitution are formally distinguishable, but the difference in competence is small.
The above issues are inevitably connected with general meetings, which, in addition to the traditional personal form, can be conducted by means of telecommunication measures, which results not only from the covid experience, but above all from the specificity of the aforementioned absence of decision-makers in the structures of offshore companies. Undoubtedly, this form of communication significantly facilitates running a business. Information about the assembly, not only remote, but also traditional, can be provided in the usual written form, as well as via the Internet, by publishing a notification on the website. Interestingly, even if the notice is posted in the wrong place on the website, the meeting will still go ahead. Another interesting issue related to an exempt company is the disclosure of secret information. Very often, members are prohibited from disclosing information, even after they have ceased to perform their duties, but there are some exceptions to this, such as disclosure of information on the stock exchange. On the other hand, some decision-making leeway that may be allowed by the articles of association applies to directors, because, for example, if they find that the disclosure of information is to the benefit of the company, they may, in principle, disclose such information.
The clause against tax avoidance and the legality of establishing a business through an offshore company
In accordance with Polish law, pursuant to the Corporate Income Tax Act (Polish Journal of Laws 2021.1800, consolidated text) and the Personal Income Tax Act (Polish Journal of Laws 2021.1128, consolidated text), obtaining revenue from a foreign entity is, as a rule, taxable and amounts to roughly 19%. However, if one changes one’s tax residence, one does not have to pay tax. The starting point generating the tax liability is the country of tax jurisdiction, not the place of business. Running a company in a different, tax-friendly territory entails a tax obligation for Polish tax residents. However, in the case of a change of tax residence, the tax obligation does not exist, so from the perspective of the tax profitability of Polish capital operating an offshore company, the issues of formal tax residence of the owner of the Cayman company are important, and the examination of the possibility of creating conditions for the tax residence of the owner of the Cayman company in a more optimized tax jurisdiction, than the rigorous provisions sealing the revenues of Polish owners of foreign entities, such as the Cayman Company, allow for such solution.
In addition to the issue of tax residence of the Polish owner of the Cayman company outside Polish tax jurisdiction, it is also important to act in accordance with the provisions aimed at preventing conscious and intentional tax avoidance, which include, above all, Article 119a § 1 of the Tax Ordinance (Polish Journal of Laws 2021.1540 consolidated text), which is a clause against avoiding taxation. Pursuant to this provision, an artificial act contrary to the object, purpose or act, the primary purpose of which is to avoid taxation, is invalid. Therefore, obtaining a tax advantage, i.e. avoiding taxation, must be the main objective of the acting entity. Therefore, improper formation of companies and an “artificial” change of tax jurisdiction without operational reasons is, from the perspective of the Polish Tax Code, an action aimed at avoiding taxation. However, the change of tax jurisdiction is not clearly related to the desire to establish a company in a tax haven. Therefore, it is unacceptable to penalize each change of tax jurisdiction, as well as to penalize each potential owner of the company. Other paragraphs of the aforementioned art. 119a refer, inter alia, to situations strictly unrelated to preventing tax abuses.
The European Union is considering the introduction of a uniform 15% corporate income tax, which would prevent the said optimization. According to the draft, the tax would be payable in the country where the companies made the profit, and not in the country of registration. It is worth adding that the only member state not supporting the project is Poland.[11] [12] [13].
The most important factor – Individual approach to the solutions used.
To sum up, the factor predetermining the popularity of the Cayman Islands from the perspective of doing business is, to put it simply, the lack of taxes, e.g. corporate income tax. Conducting business in the form of a company exempt from tax in the Cayman Islands does not involve tax liability, but only the said business fee, but its amount does not correspond to any extent to the potential tax liability. The most important condition guaranteeing no taxation is being subject to the Cayman tax jurisdiction as part of such an entity registered there, which is not contrary to Polish law or to having a registered address in the Cayman Islands.
It is worth noting that the articles of association play a very important role in exempt companies. This is due to the fact that most companies have only their registered offices in the Cayman Islands. Therefore, an indispensable problem for the proper establishment of a cross-border structure with a Cayman company is the proper arrangement of the corporate governance of such a company, not only taking into account the convenient company structure discussed above, but also taking into account the issue of the specific tax jurisdiction of the company’s owners and creating a real need for operational action precisely taking into account Cayman Islands jurisdiction.
Therefore, leveraging one’s own economic interests with a Cayman company is an interdisciplinary and multi-jurisdictional problem that requires the purposefulness of using such a solution. Each such operating activity is therefore particularly individual and requires an original advisory solution from many legal perspectives.
[1]https://data.consilium.europa.eu/doc/document/ST-13092-2022-INIT/en/pdf
[2]https://www.gov.ky/about-us/our-islands/finance-economy
[3]http://www.zakladaniefirm.pl/kraje/kajmany.html
[4]https://sip.lex.pl/akty-prawne/dzu-dziennik-ustaw/prawo-przedsiebiorcow-18701388/art-37
[5]https://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp#citation-4
[6]https://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp#citation-4
[7]https://www.ciregistry.ky/companies-register/types-of-companies/
[8]http://www.zakladaniefirm.pl/kraje/kajmany.html
[9]https://www.offshorecompanycorp.com/faq/incorporated-in-the-cayman-islands-with-limited-liability
[10]https://www.hcsoffshore.com/cayman-islands-limited-liability-companies/
[11]https://spolkioffshore.pl/spolka-zagraniczna-w-raju-podatkowy-a-podatek-dochodowy/
[12] https://www.money.pl/podatki/minimalny-podatek-cit-polska-blokuje-prace-nad-globalna-danina-6767378281642880a.html
[13]https://innpoland.pl/178141,polska-blokuje-cala-ue-ws-globalnego-cit
