✔️ What is tax planning and what is its purpose?

Tax planning is the process of organising the financial activities of a company or an individual in order to reduce tax liabilities. The purpose of tax planning is to optimise tax payments and comply with legislation.

✔️ What methods are used in tax planning to reduce tax liabilities?

Various methods are used in tax planning, such as the use of tax incentives, optimisation of the company structure, selection of the optimal tax regime, application of international tax treaties, etc.

✔️ What types of tax plans may be applicable for individuals and companies?

For individuals, tax planning may include tax base planning and utilization of tax deductions and incentives. For companies - structure optimization, international planning, and consideration of the tax consequences of business operations.

✔️ What is the importance of tax optimisation for business?

Tax optimisation is important for businesses as it reduces tax costs, improves a company's financial position, enhances competitiveness and ensures legal compliance.

Tax planning - tax planning and tax optimization

Is your company’s profit after deducting all taxes close to zero? Do you not calculate the amount of taxes due up front? Is your business registered in only one jurisdiction? If the answer to one or all of these questions is yes, then you should take a look at the tax planning options available to you

Tax planning, according to the definition, is a set of legitimate measures taken by the taxpayer to reduce the cost of paying taxes, fees, duties and other obligatory payments. The simplest example of tax planning is a preliminary calculation of taxes before the conduct of any economic operation.

You should understand that there is no single prescription for any type of business that will help significantly reduce taxes legally.

Legarithm provides the following tax planning services:

Analysis

of all taxes, fees, duties, and other government charges paid by your company during the last fiscal year

Review

of existing taxation schemes developed by your company's specialists

Providing

advice on individual transactions

Conclusions

of experts on unsettled or disputed taxation issues

Advice

on the elimination of double taxation, in particular in the implementation of FEA

Legitimate

tax minimization through business restructuring, contract base reform, tax base minimization and other tools

Assessment

of risks in the application of various methods of tax optimization

International tax structuring

Selection of the optimal scheme for a group of companies to optimize taxes is based on many factors, ranging from the fact that different jurisdictions have different preferences for different industries and ending with the possibility of full operation (opening bank, merchant accounts) or its absence in some jurisdictions.

With a considerable amount of accumulated knowledge, tax law experts are able to find the best operating model for you. In any case, when it comes to saving some tax through the use of offshore companies, here’s what you should know about the four main types of tax systems:

1. Countries with low tax rates

There are countries where the tax rate is approximately 12.5%, of course it is not zero, but believe me, countries with zero tax rate will suit very few people. Here, the company will be able to access a larger capital market and enjoy the preferences granted by the treaties on avoidance of double taxation, because these countries include Bulgaria, Cyprus, Montenegro, Mauritania. If you still think that 12.5% is a lot, think about the 18%+ that exists in your jurisdiction.

2. Countries with a deferred income tax system

This category of countries, from our point of view, is the most interesting, because despite the fact that in most of these countries the tax rate is quite high (15%+), your company will not pay a penny in taxes until you decide to distribute profits among the owners, in other words, this system is also called a tax on the withdrawn capital. Such countries include Estonia (20%), Georgia (15%), and Macedonia (10%).

This system will allow your company to develop, and you as the owner on the security of corporate rights to obtain bank loans with low tax rates, thus “killing two birds with one stone”, while legally minimizing the tax burden.

3. Countries with special tax regimes

As a rule, this category of countries has a different tax system for businesses that operate across the border. An example of this jurisdiction could be Hong Kong or Malta, because in the first case the tax rate reaches 16.5%, and in the second and even more, but in case you are not a resident, and your business operates outside of Malta special tax rate will be 5%, and in special cases even less.

4. Countries with a zero tax rate

Yes, these are the countries that we imagine when we say “offshore”, because the tax rate is at 0% or not much higher than that, such jurisdictions include Belize, the British Virgin Islands, Seychelles, some territories of the UAE. When incorporating a company in one of these jurisdictions, you should also consider the reputation and your needs.

Tax planning for individuals

After choosing the right tax planning tools for your company and legally reducing the amount of taxes, you should understand that this is not the end, because after paying taxes by the company, you can not yet use that money. There is still personal income tax to be paid.

Again, everything is very individual and opportunities to legally reduce the tax burden depends on the willingness to take “radical” measures: a change of citizenship, tax residency, place of primary residence. We will find a suitable option for you, but first we suggest you get acquainted with the schemes present in different jurisdictions.

1. Countries with a zero tax rate

Obviously? It certainly seems that obtaining citizenship or resident status in one of these countries is the easiest way to pay 0 in personal taxes. But in practice, it is not that easy, because obtaining citizenship in such countries is either virtually impossible (UAE) or requires a financial investment significantly higher than the taxes you pay now (Monaco, Vanuatu). For this reason, this solution is suitable for an incredibly limited number of people.

2. Countries with low tax rates

These are countries that tax those individuals who have spent more than six months in their territory, perceiving them as tax residents. In any case, such countries are becoming more and more popular, they include Montenegro (9%) and Bulgaria (10%). Of course, an important point is not just a low tax rate, but also the absence of rules on controlled foreign companies, in which case only distributed income, salaries will be taxed, while all other profits may remain undistributed.

3. Countries with low tax rates on foreign earnings

This option is much less obvious, but possible for a wider range of people. The bottom line is that the regular tax rate (quite high) applies only to those sources of income that were generated within the country. Such countries include Costa Rica, Georgia, Nicaragua, Singapore, Hong Kong, Malaysia, and Thailand.

4. Countries allowing for status of a non-resident living in the country

A rather strange concept and, again, not suitable for everyone. An example of such a scheme is the United Kingdom, where by purchasing property and investing, it is possible to obtain such a status. The cost of living in such countries tends to be extremely high and this status imposes some restrictions on your ability to do business.

5. Countries that calculate tax on the basis of a fixed sum

This system is not common and consists in the fact that the tax is calculated on the basis of a certain sum, such as the rental value of your home, multiplied by coefficients, an example being Switzerland. Each situation is different and depends on many inputs: your current country of citizenship, your residency, your willingness to change your place of residence, your willingness to invest in other jurisdictions. Of course, it is possible to legally optimize without having to change anything drastically in your own life, but the number of possible instruments in such a case also decreases.

We do not offer clients “tax evasion” and other illegal “schemes”. All our solutions are highly individual and take into account factors such as the size of your business, the industry you operate in, the number of counterparties, your goals and ambitions. Contact the Legarithm lawyers for tax advice.