An offshore company instructs an English company, which acts as an agent, to carry out a purchase and sale of goods and finance the transaction. The onshore company acts in its own name, but on behalf of and with the money of the offshore company. Settlements are made through the account of the English company, but its income is only the amount of agency (commission) remuneration.
Features of the agency scheme
Agency scheme in tax planning allows to avoid direct contacts of Ukrainian enterprises with offshore companies. This scheme allows you to conduct activities without violating the requirements of Art. 18.3 of the Law of Ukraine “On Taxation of Enterprise Profit”. Such construction of the scheme leads to the fact that the agency company, under the agency contract, for the money of the offshore principal, on his behalf, in his interests, but on his own behalf, concludes contracts and carries out all business transactions. For this work, the agency company receives an agency commission fee (0.5-5%), which will be subject to taxation at the agent’s place of registration.
Requirements for the agency scheme
The onshore company must meet the requirements that ultimately determine the “workability” of the scheme. The essence of such requirements is as follows:
- firstly, the jurisdiction in which the agency company operates must in any case be absent from the official list of offshore zones, approved by order of the Cabinet of Ministers No. 106-r dated 03.1.2000;
- secondly, it is desirable to have a double taxation avoidance agreement concluded between the agent's country and Ukraine;
- thirdly, the legislation of the country should allow the conclusion of direct contracts with offshore companies without prejudice to the tax status of the agency firm (so, for example, in Estonia, an offshore list was adopted similar to the Ukrainian one, which made it impossible to actively use local firms as intermediaries in “agency schemes”).
Several European jurisdictions meet these criteria, but the most popular among Ukrainian entrepreneurs are Great Britain, the Czech Republic, and Cyprus.
What must be taken into account when building agency schemes?
It is necessary to take into account the requirements put forward by the tax service to companies involved in agency schemes and the agency scheme as a whole. Failure to comply with these requirements may result in the recognition of the principal's income as the income of the company (agent) and the corresponding taxation.
- Companies must have completely independent economic structures. There should not be any relationship between the agency company and the principal that could call into question the independence of the agent. That is, the principal cannot be a shareholder of the company, the director of the principal and the director of the company cannot be the same person, the principal and the shareholder of the company must not have the same address, etc.
- The provision of agency services must be the main and “ordinary” activity of the company, and the agency services must be provided on a permanent and independent basis. That is, the company cannot provide agency services to only one principal, as this may be recognized as a violation of the conditions of “normal” activity on a permanent and independent basis and serve as proof of the company’s dependence on the principal. Therefore, we recommend using several principals instead of one principal and dividing the agency scheme into several schemes in which different principals participate and which are provided agency services by one English company.
- Agency contracts must be concluded and signed between the principals and the onshore company, which clearly state to whom and for the sale of which goods agency services will be provided. Agreements can be made only with those companies and for such goods, which are specified in the agency contracts.
When choosing the country of registration of an agency company, in addition to the main criteria described at the beginning of the article, one should also take into account such factors as the cost of registering and supporting the company, reporting and auditing, and the possibility of obtaining a nominal service.