Tax Planning for Business Owners: Basic Rules of ‘Hygiene’

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Tax Planning for Business Owners: Basic Rules of ‘Hygiene’

Author: Mariia Sybyriakova, Manager of Deloitte Private Practice

During several recent months, we have learned to wash hands and have ascertained once again that basic hygiene is extremely important. However, preventive measures are required not only when a person is solicitous about his/her own health, but also in personal tax planning issues, especially when it refers to foreign assets and businesses operating outside Ukraine.

A fairly large number of owners do not pay sufficient attention to tax nuances when planning transactions both abroad and in Ukraine. As a result, despite hard work on preparing a certain project, all efforts may turn out to be in vain if tax risks arise or fiscal authorities will make you aware that you are, in their view, a criminal.

We offer to consider ten primary errors made in the course of planning business activities abroad and in Ukraine.


This article is also available in Ukrainian

1. Avoid paying taxes by using ‘aggressive tax planning’

By contrast to classical planning that only helps bring to minimum extra tax payments (e.g., avoidance of double taxation) wherever it is allowed by law, ‘aggressive planning’ is used to avoid paying taxes at all. This refers to circumventing revenue officers, creating fictitious companies or arrangements, varied deals that have no business purpose, other than reducing a tax burden.
Fiscal authorities of many countries are currently applying various tools for unveiling ‘aggressive tax planning’ schemes. They have gotten quite a new ‘weapon’ into their hands in the form of the EU Council Directive 2018/822 (DAC6).

DAC6 obliges a broad range of parties, in particular, the EU taxpayers, to disclose to the EU’s tax authorities trans-border transactions that meet certain requirements. All tax authorities in the EU will have access to the information disclosed under DAC6, within the automatic data exchange of tax rulings between the EU member states (as well as Switzerland and Lichtenstein).
Per se, the process envisages for tracking ‘tax benefit’ transactions. And the commencement date for such tracking (25 June 2018) is the moment when using the ‘aggressive tax planning’ was recognized as absolutely unacceptable for the EU.

Besides, penalties for non-compliance with DAC6 requirements in some jurisdictions may be measured by dozens, hundreds of thousands or millions of EUR (e.g., in Cyprus, the penalty may be EUR 20,000, and in Poland – EUR 4,400,000).

If you remember that some European countries have introduced criminal responsibility for tax evasion not only for taxpayers, but also for their tax advisors, you should be more careful in applying ‘creative approaches’ to taxes.

2. Use the services of nominal shareholders in foreign companies

The services of nominal shareholders have been earlier used to ensure the confidentiality of owning a foreign company.
However, to date, nominal shareholders are, for a while, ignored for the purpose of disclosing business ownership structure, in particular, in opening accounts with banks (which require communicating information about actual owners/controllers), for the purpose of financial monitoring of transactions, etc.

Within the framework of Common Reporting Standard (CRS) to be soon implemented in Ukraine, information about beneficial owners of foreign companies will become available to the Ukrainian tax authorities.
In accordance with CRS, a whole range of entities (banks, some insurance companies, credit unions, investment traders, fund management companies) will be obliged to disclose data concerning their clients to tax authorities.
We should not also forget that, for the purpose of rules on controlled foreign companies (CFCs) to become effective in Ukraine from the next year, the actual beneficiary is going to be disclosed to tax authorities for the purpose of submitting CFC reports. This is a reminder that penalties for non-submitting relevant reports will amount to 300 minimum living wages for an able-bodied person (UAH 630,600 as of 2020).

Thus, using the services of nominal shareholders, for some time already, does not save from disclosing the structure of business ownership and is a source of problems and expenses. Businesses have a simple choice – either to transfer their structures in ownership of trustees the relations of nominal ownership with whom are not documented (an extremely dangerous way!) or move to ownership transparency standards.

3. Fail to monitor one’s own tax status or hope that the available tax residence certificate of a foreign country will automatically save you from challenges of the Ukrainian tax authorities

A great number of business owners who are citizens of Ukraine have properties abroad and stay outside Ukraine for quite long periods of time – both on business matters and for recreation purposes. Relationships with foreign countries arise: someone has children born in the USA, and children of others study in London.

There are known cases when tax authorities of a foreign country try to recognize such persons as their tax residents and make them pay taxes.
Here is an example from real life. The Federal Supreme Court of Switzerland has recognized that a family couple have the center of their vital interests in Switzerland, as they have a building under the right of ownership in which the wife resides on a permanent basis. Despite the fact that the husband has leased residential properties and a position in a company in the SAR, and the wife has stayed for a significant period of time in the SAR, the court has recognized that the family are tax residents of Switzerland, since the center of their vital interests is in Switzerland where the spouses have a permanent place of residence.

Let us have a look at Spain, a country so loved by many Ukrainians. Here, a person may be treated as a tax resident if his or her spouse, children, or dependent persons have a permanent place of residence or the center of vital interests in Spain.

Emigration does not always solve the issue. For instance, a Ukrainian tax resident has obtained a permission to stay in another country, carries out minimum requirements for receiving a tax residence certificate there, and believes that now s/he is not the tax resident of Ukraine. But you should remember that the available certificate cannot be a ‘vaccination’ from the interest of Ukrainian tax authorities to your person! The migration process should be taken seriously and responsibly, and you should undertake a range of preparatory steps in the country you would like to leave in the past as a place of tax payment. In particular, you should settle in Ukraine the issues with properties and valuable assets, registration for military services, employment or entrepreneurial activities (if a person is registered as an individual entrepreneur), formalization of a departure to permanent residence abroad with the migration service.

Otherwise, we may not exclude a situation when your money will be claimed by fiscal authorities of at least two countries simultaneously.

4. Combine personal and corporate finance

Ukrainian business owners still exercise a broadly spread practice when a company’s owner covers at its cost his or her personal expenses and uses corporate money for personal goals. Most frequent cases refer to studies of children, expensive medical treatment, recreation, leases of residential properties.

Considering that tax authorities of many countries pay attention in increasing frequency to such transactions, their existence may cause rather unpleasant consequences.

Thus, payment of beneficiary’s and his/her family members’ costs at the cost of a company may be recognized abroad as revenue and subject to taxation in Ukraine (personal income tax of 18% + military levy of 1.5%). At the same time, penalty sanctions may be applied in the amount of 25% of the unpaid tax amounts and fines for each day of the delay.

We believe such practices should be discontinued in the nearest future. As for past periods – in the event there is a high risk of identifying by the tax authorities of ‘improper’ expenses, you should consider a scenario of their voluntary declaration and payment of taxes. Some countries ensure for such purposes an instrument in the form of tax amnesty (Ukraine is also considering this scenario to be used in the foreseeable future).

5. Spend much more at the cost of own official income

Sometimes, an elementary check may prove that annual expenses of a business owner significantly exceed the amount of his/her official income. For tax authorities, it may evidence of an attempt to avoid declaring and paying taxes.

You should pay attention to this aspect and carefully analyze the situation with your personal income and expense, as we are expecting the appearance of a control tool over actual expenses of persons in the nearest future.

Also, you should refuse from ‘uncontrolled’ replenishment of your bank accounts with cash via automated services and bank outlets.

6. ‘Forget’ about potential tax consequences in Ukraine in the event transactions are conducted abroad

This is one of the greatest mistakes that may be made by any business owner in the course of planning operations abroad.

For instance, by paying taxes on certain revenues in Canada or Austria, s/he is completely unaware that s/he is still obliged to declare revenues and pay taxes in Ukraine as well – unless a tax credit (allowance) is received against the amount already paid abroad.

And this is already a breach that may be identified someday.

7. Leave a business structure without modifications and diagnostics from the moment of its creation

Some people are very self-confident and believe that, having once created a reliable business structure, they are secured from any claims on behalf of tax authorities of different countries during at least several years.

For instance, Law # 466 (earlier, Bill # 1210) adopted this year will require that many available international structures and business practices be revised taken as whole and not only for the purpose of spot analysis of tax consequences of a particular transaction.

At the international level, it is worth mentioning the EU Anti-Tax Avoidance Directives (ATAD I and ATAD II) that set CFC rules and General Anti-Avoidance Rules (GAAR). Also, effective from late 2019, the legislations of many countries are implementing anti-hybrid rules and taxation rules on the value of assets when they are withdrawn to other jurisdictions (so called ‘exit tax’).
All this will have an impact on the activities of international business structures, financial flows between companies, and reporting processes regarding certain transactions.

You should at all times ‘have your finger on the pulse’ and, in the event of significant developments, obligatorily test your business and asset ownership structure for compliance with new rules.

8. Own foreign companies and a great number of foreign assets without proper structuring

A chaotic ownership (without a consolidated and understandable structure) or ownership directly by an individual of a significant number of varied foreign assets may complicate the management of such assets, turn the process of their succession into an unfeasible mission, and create a range of other problems.

An asset owner should carefully treat the process of structuring his/her personal assets by understanding the goals set (retaining or accumulating equity, selling, inheriting by the family, etc.).

Depending on the purpose, the personal asset ownership structure should be created on an individual basis. It is important to understand that someone else’s example is not always optimal, as each corporate structure rests on interests of certain persons that may not coincide with yours. Thus, do not make a mistake of the kind “I will establish a foundation because Ivan has already created one!”.

9. Consider that heritage succession may not be planned, by leaving the issue for successors to resolve

A threat of conflicts with successors, loss of business (seizure by a successor’s partners and exclusion of relatives from a list of owners), or financial losses or decrease in the value of properties – all these may result from inefficient arrangement of the inheritance plan.

And if your assets (your future heritage) are ln different countries, then a separate article would be required to list all possible problems and nuances. Thus, establish a trust, make a will, or inquire about other ways for protecting interests of your children.

10. Believe that modern banks work for customers

Times are long gone when bankers tried to satisfy and retain customers. Today, when payments are made, it often seems that a customer tries to ‘hold on to a bank’, and not vice versa.

Considering that, with a flow of time, banks are exposed to higher and higher requirements in the sphere of combatting money laundering and tax abuse (and huge risks in the event banks fail to comply with those requirements!), modern banks are forced to take a role of a hellhound and, in this context, comfort of customers has, for a while now, ceased to be their priority.
Your transactions should be transparent and understandable and reputation irreproachable. However, even in such a case, you may not guarantee that the servicing bank will not create a problem to you for no reason at all when you are not expecting it (e.g., due to transactions conducted by your unrelated counterparties).

Thus, when planning transactions, please consider bankers as a risk factor from the very beginning. It may turn out that, to discuss all details of a significant agreement with a counterparty, you will spend much less time than later on the dialogue with bankers.

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