How about a Contractor Owned ManCo?

[nodric]

If you've been through this with your advisors and satisfied yourself that there is no risk then that is fine (and would of course also show your typical thorough approach).

There is always a risk. BN66 taught us that.

The premise is a simple one. If you are open and transparent, hide nothing and show all, use the laws that exist to defend yourself, then as much as Hector would desire to grab all, he simply can’t.

As a minority shareholder of a Cypriot company, you exercise voting rights, and if the power of attorney is so drafted to enforce the directors to carry out the collective will of the shareholders, then the ‘shadow director’ claim would be very difficult to demonstrate, and would ultimately need testing in court. However, the risk is low, as long as you declare the dividends, and your ‘good’ accountant does his job well in applying the rules.

Even if you were considered a director, or even became one, as long as the Centre of Economic Interest remained in Cyprus, i.e. other directors (nominees), and all the managed services mentioned previously, any corporate profits would remain outside the grasp of Hector. Only the directors income would be taxable, and this would be limited to dividends as a shareholder. Remember, shareholders receive dividends, not directors. Dividends as we all know, are not salary, and are treated independently for taxation.

Clearly, Hectors concept of a shadow director would be impossible to enforce should the company be an independent ManCo, and non of the contractors have any Power of Attorney. Therefore they are simply shareholders receiving a dividend, and in the case of their partners or others not actually doing the work, IR35 would have no jurisdiction at all.

In the end even Hector Osborne and his cohorts have to accept the EU rules in these matters, and if Cyprus make it attractive to operate a business under their jurisdiction, then there ain’t nothing he can do about it.

[ASB]

I guess no risk was a bad choice of words - what I really meant was an acceptable level of understood risk.

I am not convinced that the Notional Tax credit will actually be available, in order for it to be available I believe the individual must own > 10% of the share capital. This could easily be overcome by different share classes. The bigger question is whether or not a Cypriot IBC is one of those classes of company (i.e. those enjoying local tax privileges) which makes them non qualifying.

If it is non qualifying then this would increase the tax paid on the dividends in the UK from 0/22.5% to 10/32.5% (in effect almost exactly the same as UK dividends).

Have you been able to address this with certainty from your advisers?

You also mentioned the possibility of the UK company receiving dividends. This might be a better way - possibly for higher rate payers. Assuming the recipient is a small company (and I would imagine this would be the case) then the received dividends should not incur a corporation tax charge (my assumption here is that the cyprus-uk dta has the requisite non discrimination clause and that the relief is automatically granted simply by virtue of the treaty - it does not appear to me that the things that can potentially make a dividend non qualifying to an individual are extended to corporate dividends).

Good luck with it.

[Sergeant Murphys Cosh]

I noticed you've also considered an Irish company. Which jurisdiction offers the best list of deductibles?

[nodric]

I noticed you've also considered an Irish company. Which jurisdiction offers the best list of deductibles?

Irish company has 12.5% corporate tax rate, which has to be obtained, otherwise it's 25%. Requires local resident directors who are limited as to how many companies they can act as nominees for.

I wrote a few posts back about this, maybe in my main Thread.

Essence is cost. Very high costs to setup and run (nominee alone costs 12.5K Euros a year), more complex rules on DTA and withholding taxes, and several other challenges. I spent several months looking into Ireland as a location, as was used by the old Connexions, and maybe still is, and the consensus from the experts was Cyprus is now just as acceptable, and offers a whole host of pluses Ireland doesn't.

The list of deductibles would need to be very long to offset these high costs as an individual.

The Cypriots are very flexible folks in all matters of tax, including deductibles

[nodric]

The bigger question is whether or not a Cypriot IBC is one of those classes of company (i.e. those enjoying local tax privileges) which makes them non qualifying.

If it is non qualifying then this would increase the tax paid on the dividends in the UK from 0/22.5% to 10/32.5% (in effect almost exactly the same as UK dividends).

There are two types of IBC, and I covered both above. As long as the resident IBC (the one that pays local corporation tax) is used, then the dividends would qualify for the DT credit.

If you use the non resident IBC, then there is no dividend credit. However, should you be using the latter, the chances are you have no intention of paying yourself a dividend into the UK, or anywhere else in the EU

It is very important that each individual, or MyCo, seeks advice from their accountants, and/or specialist tax consultant, when considering this arrangement. If a new Cypriot ManCo is established by someone , the rules will be clarified and published, but as each individual tax liability is unique, I cannot provide a one size fits all guarantee. In the main, provided you structure the solution correctly, play the game legally, you'll be able to reap the benefits.

If a contractor simply wants a quiet life, then all he has to do is pay Hector all he demands, and forget about finding ways to increase net retention legally.

Of course, this is also aimed at Brits who work in the EU, but want to avoid the even higher tax regimes, while receiving dividends into the UK, even if they pay the normal rate of tax on them. The wife/partner/MyCo ensures that the dividends could not be claimed by the EU state in which the services are delivered. If they can then obtain the lower rate of tax I've suggested, then let's consider that a bonus.

As things become more physical in the coming weeks, details will be firmly clarified, and published for all to read and digest when making their choices. Call it Open Source Financial Planning. i.e. Where we all contribute to produce a better product, and then those that want too, make a profit by offering management and support services to those that want to use that product

[Fred Bloggs]

Good luck with this. I'm not in a position to use this service (at least not at the moment) but this seems like you have identified a very nice niche in a marketplace often populated by sharks.

[nodric]

For those Belgian Residents

The personal tax rate on foreign source dividends originating in Cyprus is 15%.

If you hold a 25% stake in the Cypriot company, this is reduced to 10%.

This is defined in the Double Taxation Treaty between Belgium and Cyprus.

Seems 15% is a good tax rate for Belgian resdients

[Sergeant Murphys Cosh]

A further possible pitfall is IR35, arguably the revenue could seek to impose IR35 (depending on the contractual arrangements of course); there are clause that would allow them to (at least try to).

Actually, this arrangement would fall foul of UK MSC legislation.

[nodric]

Actually, this arrangement would fall foul of UK MSC legislation.

As I understand it, the right to assign the contract to someone else is a key element of avoiding IR35.

As a ManCo, one of the founding principles would be to provide a pool of experts who could be called upon to service the needs of another contract, should the original sub-contractor become unavailable, i.e. by invoking the right of substitution clause. This could be futher demonstrated by forming working agreements with agencies.

Once we have a pool of experts, we would also have a powerful voice with the agents, and therefore be able to offer resources back to the agents for new contracts coming along. I'm sure you can see how this can be expanded.

I would argue that by working through a ‘true’ services company with a pool of experts available would strengthen the IR35 defence.

If the ManCo management are also IT contractors, the pool would always have some resources available, which would further differentiate it from the usual offshore boys.

The wording of contacts is also critical. If you as the freelance guy, assigns the contract to the ManCo, as you feel you cannot carry it out on your own , then the ManCo as an IT Services consultancy take on the service delivery. We then use you as a sub-contractor to do the main delivery, but we provide you with professional support services to ensure you are able to fulfil the role. Therefore, we become more than a simple MSC.

Again, whilst I fully believe this would be a legal and fully compliant solution for the UK, it was never the intention to target the UK market. Rather it was always the intention to target the EU market, where tax and SS rates are more than double the UKs, and where IR35 nastiness is irrelevant.

It was primarily aimed at providing a mechanism where you could repatriate the bulk of the income into the UK, avoiding tax and SS liabilities in those EU countries. It also provides a mechanism to distribute the dividends in such a way as to avoid any one person, entity, going into a higher tax bracket.

I remind you that the dividend payments are not legally bound to be paid to the person fulfilling the actual contract of work. Once the contract is assigned to the ManCo, it is their contract! The sub-contract is then between you and the ManCo. Your fees can be low, and fully declared into whatever regime you are living in, and if this is the UK, you can pay your tax and NI as usual.

However, the dividends can go to anyone you so desire. I can sell a share in the ManCo to anyone I choose too, and they can freely receive that dividend into there lower tax regime.

Finally, and not unimportant, the rules in Belgium for instance state you MUST have a degree to work here as self employed, or to form a local MyCo. Working through a ManCo such as described would remove this limitation.

[Sergeant Murphys Cosh]

The wording of contacts is also critical. If you as the freelance guy, assigns the contract to the ManCo, as you feel you cannot carry it out on your own , then the ManCo as an IT Services consultancy take on the service delivery. We then use you as a sub-contractor to do the main delivery, but we provide you with professional support services to ensure you are able to fulfil the role. Therefore, we become more than a simple MSC.

Well, if you say so. I'm not convinced.

It'd be better to have the contract assigned to the ManCo to begin with, and not have the contractor involved in any way with the finding of it. Of course, this only applies to countries that have MSC legislation anyway.