Bermuda Tax-Efficient E-Commerce

Bermuda - Planning the Tax Structure

There are effectively no taxes on business in Bermuda, apart from annual fees (depending on capital) of BMD2,000 or more, and no personal taxes either apart from a payroll tax on employees. Therefore businesses can plan to locate part or all of their operations in Bermuda without local taxation worries, although it must be said that Bermuda is an expensive place, so that if significant staff or premises are going to be needed, costs should be checked out carefully in advance.

The normal choice of Bermudian entity will be an 'exempt' company - ie exempt from exchange controls applying to local companies. Until recently, a tax certificate was available guaranteeing that no direct taxes will be levied on such a company until 2016. Following the enactment of the Exempted Undertakings Tax Protection Amendment Act 2011 (the "Amending Act"), such certificates now guarantee no direct taxes until 2035.

Because Bermuda has no corporate taxes, it also has no tax treaties, meaning that dividends or other types of income paid from Bermuda to high-tax countries are going to be taxed in the hands of the recipient, depending on the local regime. Many high-tax countries have 'Controlled Foreign Corporation' legislation, meaning that undistributed profits in a Bermudian (low-tax) subsidiary will be deemed to be taxable income in the high-tax residence country of a controlling owner (individual or company). The exact arrangements vary widely.

It follows that the owner of a business in a high-tax country who wants to transfer part or all of the business to a low-tax area such as Bermuda must follow one of the following routes or some more-or-less complicated variation or combination of them (it must be understood that the right solution will depend completely on the circumstances of age, residence, country etc - these are just illustrative possibilities):

Set up a new business in Bermuda with ownership which falls outside the CFC rules, eg don't hold more than 40% from high-tax country, and put remainder of shares in trust for children or in the hands of an offshore relative;
Create a joint venture with other onshore companies or owners whereby ownership is sufficiently distributed to escape CFC rules;
Owner (individual or company) move offshore (not necessarily Bermuda), move business to Bermuda and outsource high-tax area distribution (if physical);
Transfer existing business into trust or other offshore ownership for inheritance tax purposes; set up new offshore business to handle expanded range of products or markets.

NB: Any transfer of all or part of a business away from a high-tax area is likely to trigger a disposal for capital gains, gift or transfer tax purposes - great care is needed to avoid this happening. Companies may be in a better situation than individuals to mitigate the effects of tax on a transfer; equally, companies with international subsidiaries may be able to make use of 'mixer' holding companies, and thus may not be so much affected by the CFC rules.

In fact there are numerous possibilities for arriving at an effective structure; it is normally possible to improve the tax performance of a business substantially by moving part or all of it offshore - but expert professional guidance is essential, and the suggestions above are no more than indications of the sort of thing that may be effective in some circumstances.

What to Locate in Bermuda

It would be wise to consider transferring only those parts of an operation which don't make heavy demands on accommodation, staff and premises, given their cost and scarcity in Bermuda. In fact, with the quite sophisticated facilities available, it is quite possible to set up some parts of a sales, marketing or distribution operation in Bermuda without any physical presence in the jurisdiction, while still ensuring that there is a tax presence.

To date, e-commerce companies have tended to focus on marketing and selling as the most likely business functions to locate offshore, but there is no reason why procurement, administration, payroll and other corporate functions should not be based offshore.

Since physical distribution can be outsourced, and in some countries doesn't even amount to a taxable presence, the use of offshore is by no means limited to digitally-downloadable products. Still, there is no doubt that the greatest cost and tax savings are available to those companies whose products can be delivered electronically, as in the following list:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

Bermuda - Offshore Options for E-Businesspeople

The object of setting up an e-commerce business, or part of one, in an offshore jurisdiction, is evidently to make money, and if the tax structure is correct, profits will accumulate in a local bank from which they can be freely invested according to an individual's preferences, either by being ploughed back into expansion of the business, or into income- or capital-generating investments.

There are as many different offshore investment situations as there are offshore investors, and anyone considering making offshore investments must absolutely take appropriate professional advice. But it can be useful to have a first idea of what kind of investment, and which offshore jurisdictions, might be suitable before approaching professionals.

For this reason, lowtax.net has opened a companion web-site called www.investorsoffshore.com, which explores the world of offshore investment from the perspective of an individual with say more than USD100,000 to invest. The site has sections on the history of alternative investment and descriptions of the main types of investment, along with hints on how and where to invest.

Recognising that investment strategies are heavily dependent on a person's country of residence, life-style and future plans, InvestorsOffshore DIY Guide allows an individual to specify the broad outlines of his or her offshore investment profile, and receive in return some suggestions as to the most suitable investment route to be further explored with professional guidance.

Lowtax Jurisdictions

Bermuda: Tax Efficient E-Commerce

Bermuda - Offshore Options for E-Businesspeople

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