International trading companies

Yuri Ivanov lives in Russia. He is purchasing and selling shoes. He buys the shoes from Italy and sells them to department stores in France, Germany and Spain.

Mr. Ivanov wonders whether he can structure his business in a tax-effective manner, for example by using an offshore company.

Suggested solution:

Mr. Ivanov can set up a trading company in a low tax country, thus ensuring that his trading profits will not be taxed in Russia (his country of residence), nor in France, Germany or Spain (because the tax authorities argue that he has a taxable presence in these countries).

As all the transaction concerned are European Union transactions, Mr. Ivanov must obtain a VAT registration. A good location for conducting trading activities where one can obtain such a registration is the Isle of Man. Thus, if such an Isle of Man company intends to ship the shoes from Italy to Spain, the Isle of Man company would inform the Italian company of its VAT number, so that it could zero rate its sales invoice. The Italian company does not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the Spanish company's VAT number and subsequently issue a zero rate invoice to the Spanish company.

For setting-up the Isle of Man company, there are a couple of possibilities: an LLC (taxed as a transparent entity, so effectively no tax in the Isle of Man on the profits obtained) or a tax exempt company. None of these companies are required to withhold tax on dividends.