In an increasingly global and digital market, it is now customary to have to deal with creating corporate structures, even complex ones, to manage the business on foreign markets.
Creating an international corporate and commercial structure concerns significant economic realities and increasingly affects small and medium-sized enterprises.
As entrepreneurs, you know the procedures for properly managing a company abroad and the potential risks.
Good international corporate and tax planning can solve most of the problems related to foreign entities’ management.
When choosing to set up a foreign company.
The choice of setting up a company abroad may be dictated by multiple needs, including:
- Expand activity in new markets;
- benefit from flexible corporate structures;
- opt for a state with more efficient bureaucracy;
- take advantage of favorable conditions from a fiscal and tax point of view;
- relocate production;
- cross-border mergers and acquisitions;
- conditions dictated by foreign legal systems (e.g. impossibility of establishing permanent establishments or more favorable conditions for specific production sectors).
- Criticalities in the management of a company or group of companies abroad.
In the approach to the management of foreign entities, it is essential to focus on domestic and E.U. regulations such as, for example, those on CFCs and tax avoidance.
In principle, the Member States of the European Union agree that, although the freedom of establishment of companies within the Union is guaranteed, it is in any case necessary to combat the so-called tax planning “Aggressive”.
We want to avoid tax avoidance favouring countries with privileged taxation implemented through “constructions of pure artifice” that are not supported by actual economic activity in the country of destination.
Corporate and tax planning.
The European Union, in its treaties, guarantees the freedom of establishment to companies belonging to the Member States that want to be located in countries other than their country of origin.
Over the years, the concept of a permanent establishment of a foreign company has taken root in European legal systems, i.e. the possibility of opening a seat of a company that already exists in another Member State.
The establishment of a foreign company in another state has posed several problems related to applying the legislation of the legal system of origin and double taxation.
These issues have been resolved over time in whole or in part by the intervention of the Court of Justice of the European Union.
The main problems that the Court was called upon to resolve were those relating to aggressive tax planning for evasive purposes and the conflicts between different legal systems.
In any case, both the Court’s judgments and the conventions against double taxation allow companies to legitimately plan their corporate and tax structure at the European and international level.
Each situation is subjective, and each entrepreneurial activity has its characteristics and needs. However, in planning a commercial location in a foreign country, you can opt for different solutions, all valid and in compliance with the Union Directives.
Basic requirements for non-aggressive tax and corporate planning.
It is possible to manage a foreign company’s activities or a group of companies under the Anti-Avoidance Directive and with domestic regulations.
But what requirements must be respected in planning such operations?
Mainly, the following general principles must be respected:
- adopt an adequate corporate and management structure in the foreign country;
- being able to demonstrate effective operation in the country of reference through the company’s actual activity towards foreign customers.
These general principles can also be implemented by establishing permanent organizations, branches, and subsidiaries, benefiting from certain tax advantages.
For example, it is possible to open a company in a country with a low corporate tax (Ireland 12.50% – Bulgaria 10% – Hungary 9%) and its Permanent Establishment in a country with a higher tax rate.
In this case, the “parent” company will benefit from a tax credit on the S.O.’s taxes for the income earned by the latter.
Another example could be related to transferring a company from a high tax country to a more advantageous one, benefiting from the one-off exit tax on latent capital gains under the anti-tax avoidance directive.
In the case of groups of companies in which the holding resides in a country with high taxation and its subsidiaries reside and operate in countries with low corporate tax, the domestic legislation on CFCs would not apply to the holding and Directive 2011/96 would apply instead. / EU on exemptions for inter-group dividends.
Several options, therefore, to be assessed on a case-by-case basis, which allows a significant economic advantage without risking incurring penalties.
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