We’ve spoken several times about the differences and conflicts between onshore and offshore companies. The advantages of offshore companies (tax exemption, non-compulsory filing of accounting, anonymity and flexibility) can be impressive, but will be useless if you can barely use the company operationally.
After all, invoices from offshore jurisdictions are often not recognised, VAT numbers cannot be requested and there are also many offshore companies from which you do not have access to services such as Amazon FBA, PayPal, etc.
Fortunately, there is a solution for those who, despite having physical businesses in the EU, do not want to give up the benefits of an offshore company.
These people can legally conduct business in Europe, despite not having a Tax Identification Number, a VAT number or representation of any kind in that place. Therefore, it is not necessary to have a residence in Europe if you want to have a business there, too.
The solution is called intermediary agency or Global Agency. At first glance the concept seems simple, but the legal structure is complex.
The company simply hires an self-governed and totally independent company to act as an intermediary (Operative Agent) in some or all of its international business activities.
What is an intermediary agency?
The intermediary agency enters into commercial agreements with clients of the company. Normally an agreement is concluded between the company and the intermediary agency.
This, for example, stipulates obligations for mutual confidentiality, exact definitions of assignments and also remuneration. The intermediary agency receives a previously agreed upon commission for its services. All operations are carried out by the intermediary agency under the direction of the company.
The intermediary agency is a special company established in the EU and has the necessary VAT number, a tax identification number and a bank account in the EU country it is located in. An intermediary agency must have been specifically created for this purpose and, amongst other things, must have several independent clients to be able to be approved by the relevant tax authorities. Otherwise, it could give the impression that there is improper use of a non-legitimate billing company.
How does an intermediary agency work in practice?
How does the agency work in practice? This type of intermediary agency can be used for a variety of possible cases. However, they are often found in the sector of supplying goods and services to companies located in the EU.
Under the orders of its company, the intermediary agency can, for example, enter into a trade agreement to buy suits from a Bulgarian manufacturer in order to sell them to an Italian fashion company.
The suits are delivered to a French port for their subsequent transhipment. The Bulgarian company presents the invoice to the intermediary agency at the shirts’ market price, indicating the respective VAT number. Both EU companies have a VAT number, so the intermediary agency does not have to pay VAT.
Then, the intermediary agency issues an invoice to the Italian fashion company. Both companies, the intermediary agency and the Italian fashion company, have VAT identification numbers registered in the EU, so again there is no VAT to pay.
After receiving and checking the products, the Italian fashion company pays the invoice to the intermediary agency with a SEPA transfer, and then the intermediary pays the suit manufacturer’s bill.
All proceeds from this business, less the commission agreed individually for the intermediary agency, will be paid directly to the customer’s account, whose business can be located in any country. Depending on the amount of orders, the commission paid to the intermediary agency for its services is usually between 3 and 5%.
More time outsourcing accountability
However, an intermediary agency is not only used for commercial transactions. With a bit of creativity you can find a multitude of business models you can take advantage of a Global Agency with.
As well as avoiding B2B sales tax with an offshore company, it can offer, amongst other interesting options, the chance to remain anonymous.
It is usually logical that the intermediary agency should handle all direct settlement. Not without reason, some of the Global Agencies have specialised in factoring and payments.
These agencies issue the invoices, collect them and pay the total of the invoices in factoring before the client has paid them. Obviously, these additional services entail higher costs, however, they can be worth it. Therefore, as an offshore company, you can outsource all of your invoice receipts.
Since most offshore jurisdictions have no accounting or record-keeping obligations, you can focus exclusively on the operational side of your business.
Own billing companies as an alternative?
Obviously, an intermediary agency is not the only option for offshore companies who have to deal with the problem of charges.
They can seamlessly settle accounts with offshore companies, and through profit transfer agreements, transfer most of their profits before taxes.
Alternatively, it is possible to transfer these tax-free profits (after payment of corporation tax) to an offshore holding company where they are taxed with the final taxes. For example, in the case of a holding in Saint Vincent, they would be taxed at 1%.
Own billing companies are legal and carry advantages and disadvantages.
The advantages include greater flexibility and trust. After all, there are customers who would not like to be billed by a third party, as is the case with the Global Agency we dealt with at the beginning.
On the other hand, we lose our anonymity. This is good and bad, because in return it improves your reputation, does not evade taxes or do illegal business with such a clear structure.
We have as a disadvantage that such double structures bring with them additional costs. After all, they have to be set up and managed, keep accounts and also pay their taxes.
However, if it is properly designed, you don’t have to pay VAT. British billing companies are especially popular because if you take advantage of the special regime for small entrepreneurs, they are exempt from VAT as long as the invoicing is below £85,000. Up to that amount, you don’t have to pay sales tax, although, if required, you may also choose to apply for a VAT number before that figure.
So, is it better to hire an intermediary agency or create your own billing company?
Whether it’s an intermediary agency or your own billing company, what you ultimately need to do is make detailed calculations.
In general, using an intermediary agency usually works out as more profitable than having your own billing company.
On the other hand, flexibility and potential tax benefits can often be better exploited with your own billing company.
At Tax Free Today we can help you implement both structures.
Working with an intermediary agency isn’t very expensive. Drafting an individual contract costs €250. Commission is agreed individually and is normally between 3 and 5%.
Having your own double structure (billing company and offshore company) will cost between $5,000 and $7,000 a year. It is not the best option if you’re just starting out and are not yet making reasonable profits, although it’s not expensive either, especially considering the advantages it can bring you.
As you’ve seen today, offshore companies, despite their bad reputation, are not doomed to be useless. In the offshore world there are solutions to almost every problem and every new attempt at regulation.
It is generally wiser to pay a minimum of taxes and have some sort of administrative work (accounting filing), that to have no tax but in return pay huge bank fees or directly lose customers.
Of course, there are still many cases for which offshore companies are the best option. If you need help in deciding the best combination for you, get in touch with us.
Because it’s your life!