We have already written a few articles on Tax Free Today about the different types of companies and jurisdictions.
In addition to the typical offshore companies, certain onshore jurisdictions have become popular in recent years, since they resolve common problems that offshore companies face, such as limited access to bank services, poor reputation and lack of recognition of their invoices.
However, companies known as partnerships, rather than mercantile companies, are usually used to stay tax-free in these cases.
In this article, we are going to talk about partnerships and to outline the advantages and disadvantages of this type of company.
Classification of parternships: limited responsibility and partners
Corporate structures can be divided roughly into partnerships and mercantile companies.
If you’ve been working as a freelancer, it will be easier for you to understand the partnership than the other forms of enterprise, since, in essence, it works like self-employment or as a one-person firm and it only has some of the characteristics of a mercantile company.
So partnerships are not legally separate entities (except for the Scottish LP), but are instead formed by people (usually individuals) who participate as partners.
Depending on the model of the partnership, there might be a limitation of liability. It also depends on the type of partnership whether this will only apply to certain partners or to all of them.
We can classify partnerships according to extent of liability and number of partners. The fiscal aspects of nearly all partnerships are similar and we will address them later on.
Registering as a professional
As a professional, you are essentially a partnership, except that you don’t have to register on the Mercantile Registry, so you don’t have to pay income tax.
You work for yourself, with total responsibility for what “your business” does. Depending on the country, being a freelancer can have tax benefits.
You can only register as a professional if you officially reside in the country. That means that you can’t be an accredited freelancer without a tax residence. For those who don’t have a fixed residence, the solution could be to charge as an individual (for more information about this, see our article about how to charge your customers without registering a company or activity).
In any case, even if you don’t have a fixed residence, you can still opt to register a partnership, as we will see later on.
Portugal is sometimes an interesting country to register in as a professional. If you apply there for NHR status, you are subject to a fixed tax of 20% for 10 years and even, in the case of certain foreign revenues, you can stay entirely exempt from income tax (although you will still have to pay social security).
One-person company/ freelance/ sole proprietorship:
Registering as a freelancer works in a similar way to registering as a professional, but it includes a commercial register. Registering in a trade register is an essential requirement for most online businesses.
In this case, also, the business owner is the one who assumes full liability. It is usually required that you be a tax resident, but not necessarily that you live in the country.
So in Germany, for example, it is possible to register as a freelancer with unlimited tax responsibility, as long as at least 90% of the revenue comes from Germany or a maximum of 8,508 euros (tax deduction) of revenue comes from abroad.
There are some countries that offer interesting options for freelancers, like the Trade License in the Czech Republic or the RIF in Mexico.
This type of company is virtually identical to a one-person firm but with two or more partners taking responsibility. In Germany, about it is refered to as a civil company or as a structurally different collective partnership.
This type of company generally exists in every country, but it is only available if at least one of the partners is a tax resident.
As a general rule, the partners can only be individuals. In the context of international tax optimisation, it doesn’t usually play any role.
Limited Partnership (LP)
Probably the most interesting and common form of partnership in the context of global tax optimisation is the limited partnership. Not all of the partners in this case are fully liable; there are some that are just general partners.
The liability of the limited partner, meanwhile, is limited . Sometimes the limited partner is only an investor and doesn’t participate in the actual running of the company.
If necessary, the general partner can (like a limited partner) constitute a mercantile company, with the aim of thereby reducing his or her liability (a SL, LTD, IBC, etc).
Depending on the jurisdiction, it might be necessary to register a local branch (of an extra-provincial company, for example, through a foreign company as general partner of a Canadian LP) or a local mercantile company. In the case of the limited company, this isn’t usually necessary.
Sometimes (as is the case with Canadian LP), the natural person is both general and limited partner. In this case, that person will be responsible for all of the obligations the partnership has with his or her private assets.
This is generally the format preferred by freelancers who are looking for a commercial solution which is widely accepted and has a good reputation.
An alternative is to use the mercantile company itself or a fiduciary. This can be a natural or juridical person. Of course, if you want to remain anonymous; the fiduciaries can appear as limited or general partners.
Within the structures for international tax optimisation, limited partnerships from English-speaking countries (Canada, United Kingdom, Singpore, etc.) and from some European jurisdictions (the Dutch CV, the Danish K/S, etc.) are usually used.
Limited Liability Partnership (LLP)
This type of company was developped in the United Kingdom in the 2000’s by important law firms, so that they would stop having civil liability problems.
Today, most lawyers, tax advisors and auditors join together to form an LLP, since all of the partners enjoy limited liability.
In this case, it is necessary to have 2 or more partners, which can also be mercantile companies or fiduciaries.
In some countries, the LLP’s are exclusively reserved to regulated professions like lawyers and tax advisors. In Great Britain and Ireland, for example, they can be used for any type of business. However, unlike the limited partnership, they usually have bigger obligations in terms of publishing accounts and are subject to an annual audit.
In the international context, the LLPs in British Columbia (Canada), the United Kingdom and Ireland are interesting.
Limited Liability Company
This is probably the most powerful hybrid of a partnership and a mercantile company that exists.
It generally offers limited liability, even if there is only one member. It is taxed as a fiscally transparent partnership.
The LLC from the United States are well-known in the world of tax optimisation.
This type of company, used a lot by new entrepreneurs because of its low cost, lost a lot of its popularity in 2017 but is again very interesting from 2019.
The LLCs are exempt from taxes in the USA if they don’t have employees or offices there and, furthermore, they are formed by just one person (not necessarily natural).
The LLCs with two or more partners are subject to taxes in the same way as any other US corporation. Sometimes those who register their LLC in the USA are not aware of this (or of the obligations to fill out certain annual forms, as we will explain to you in a future article).
Be that as it may, you should remember that the LLCs that are correctly registered and run are one of the most interesting options that exist currently, both for protectting assets, having limited liability and optimizing taxes.
The taxation of partnerships
Unlike mercantile companies, which have to pay corporate taxes, partnerships are taxed in terms of the tax residencies of its associates.
They therefore pay their taxes in the form of income taxes. They might also have to pay for social security, depending on the country.
In the worst cases, the partnerships will have to agree to double taxation agreements between the country the company is in and the tax residence to avoid a possible double taxation.
The main advantage of a partnership regarding taxation is that it is decided according to the tax residence of the associate.
So as long as you are a tax resident in a country where foreign income is not taxed, the tax burden of your business can be reduced to zero.
I remind you that there are many countries in the world where you wouldn’t have to pay taxes, including the Emirates and Monaco, as well as over 50 countries with territorial taxation, like Panama and Thailand, or with special tax regimes, like Mauritius and Malta (if you want to learn about all of your options you can get our enciclopedia for the emigrant here).
With a residence in Cyprus, for example, the solution wouldn’t be so simple, since when operated directly, the partnership would pay income taxes. To avoid this, you would need to introduce a company that would convert the partnership’s revenues into dividends. So remember, in Cyprus, only dividends are exempt from taxes; income above €19,500 tax reduction is charged up to 35%.
Returning to the theme of the partnership’s tax exemption, it is essential to bear in mind that this is only applicable for as long as the national revenues are not made in the country in which the partnership was registered.
In other words, only revenue from abroad is tax-free. In this context, a fiscally transparent partnership is governed by the principle of territoriality.
For example, if you are an associate of a Canadian LP and you notice Canadian revenue, the LP will have to pay tax on the Canadian income on the part of the local taxes.
There is an interesting exception to this principle of territoriality and that is the American LLC. In the USA, the LLC can make local revenue, as long as they aren’t actually present in the USA (neither offices nor employees).
As for national revenue, we always refer to the revenue generated by clients who are residents in that country. That is to say, by individuals who have a tax residence and mercantile companies that are registered in the same country.
If you have a bank account or you use the services of a national card processor, that doesn’t mean that you have national revenue. Nor does anything happen because you spend time as a tourist in the country where you have your partnership.
Nor should bills to other partnerships formed in the same country as yours be automatically seen as national revenue. At the end of the day, partnerships are subject to taxes wherever their shareholders reside.
So if a Canadian LP with a shareholder residing in Panama charges a Canadian LP with an associate in Thailand, the payments wouldn’t be considered national revenue.
This is precisely the reason why, unlike mercantile companies, partnerships can’t make use of the double taxation agreements signed by the country where they have registered; only those signed by the country where they are tax residents on a personal level.
If there is national revenue, this always comes with accounting requirements (only the case of the USA is a bit different).
With most LP, you have to keep accounts but you don’t have to publish them, which contributes greatly to their popularity.
However, as soon as national income is made, the accounts have to publish their accounts every year, since national income and foreign income must be treated separately. Be that as it may, only the partnership’s national income would be taxed.
Sometimes, despite the obligation to publish accounts, it can make sense to deliberately generate national income through a partnership. By making a minimum amount of foreign income we will not pay much tax and, on the other hand, we will be able to avoid the main disadvantages of a partnership, disadvantages that we talk about below.
Disadvantages of fiscal transparency – The advantages of partnerships that pay some tax
As we’ve said, partnerships’ fiscal transparency has many advantages.
Many service providers register their Canadian LP because they provide them with a corporate structure in a jurisdiction with a good reputation, which won’t cause any problems for them regarding the recognition of bills and, despite everything, allow them to have a company without taxes or bookkeeping.
Fiscally transparent partnerships help, therefore, to avoid the usual inconveniences found in offshore jurisdictions, while at the same time keeping their advantages.
However, there are certain obstacles that have been the undoing of many founders who didn’t think things through properly. These are related mostly to problems with opening local bank accounts and accessing certain payment providers, as well as the question of not having tax identification numbers and, therefore, problems getting the VAT deducted with European partnerships.
While a partnership from countries with a good reputation like Canada have better access to global banking than offshore companies, opening business accounts at a national level is difficult.
The vast majority of banks that are in fiscally interesting jurisdictions refuse to open business accounts for partnerships if they don’t have any connection with the country.
Local relationships can be created through links with local business associates or clients.
Although it is possible to establish a business relationship with Canada in order to obtain a business account, it is easier to do it through clients. However, this also means that you will have to pay some tax (on local revenue) and, above a certain business volume, it includes a possible obligation to charge and pay VAT.
So if you want a local bank account, sometimes you will have to pay a minimum of taxes in the country.
In Canada, the taxes would vary according to the state and the total revenue, but in Ontario, they can be above 46% if the business has already been established. For up to 45,000 dollars of national revenue, the taxes in Ontario are 20%. Tax relief can’t be applied to non-resident partnerships.
[Note: we have heard of cases where the head of a Canadian LP has managed to open a local account, but has had to go to the bank’s central office, in person, of course.]
In any case, the lack of access to business accounts in Canada without national revenue is not a big problem. Canada, as a good alternative of service providers with mostly European clients, offers access to various IBAN accounts (for example, Leupay), which adapt, in fact, to clients’ needs better than a Canadian bank.
However, it is a problem for those who registered their Canadian LP in the hope of being able to use Stripe, PayPal or other providers.
They ultimately find that to use these services they need a business account in the same country where the company is registered, that is, in this case, an account in Canada.
At least in the case of Paypal there is a way to avoid this problem by using US banks that the platform always allows access to.
You can work for example with Transferwise Borderless or Payoneer, which work perfectly (upon manual request through the support of PayPal) and can be linked with PayPal.
Be that as it may, Stripe does require the compulsory use of a local bank (a bank, not a provider of financial services).
As we have said, you still have the alternative of finding local clients and establishing a business link with Canada in this way.
And if you can’t get Canadian clients, you can also set up a Canadian corporation and make it a general partner of a Canadian LP in order to avoid responsibilities.
Corporate taxes of over 27% are paid, but only by the corresponding part of the corporation. If it has a share of more than 5% (enough to have access to an account in Canada), the final tax would only be 0.05×27%=01.35%.
This strategy works in a similar way in countries like Ireland and England. If a Ltd becomes a shareholder in the partnership, it is possible, in many cases, to access local banks and payment providers, which would not be available otherwise.
0.05%x 12.5%=0.625% tax in Ireland and 0.05×18% effective tax in the United Kingdom, are definitely quantities that can be paid without any major problems.
Depending on the bank chosen, the share of the local company should increase up to 10% in order to be able to have access.
This strategy of creating local companies can also be advantageous if your business model requires you to get a VAT identification number in the EU.
The tax-free partnerships can only get the local VAT identification number if they have national revenue and if one of their partners (natural or not) is a resident.
The partnerships registered in the EU without a VAT number face a problem that very few people pay attention to.
In the services sector, the self-liquidation procedure is used for transactions between companies within the EU. The entrepreneurs with a tax identification number do not pay VAT in the end, since there is the possibility for them to get the VAT paid back.
An invoice from a partnership that is not in the EU, as is the case for Canada, it is considered to be a bill without VAT.
However, if the bill comes from an EU country and does not have a tax identification number, when the company has to pay the VAT it will not get it back, since there is no way to confirm identity.
In the end, the fiscally transparent partnerships registered in the UE have the same problem as small business owners in most EU countries.
In the private sector they can charge without VAT, but in the business sector their services are 21% more expensive.
Therefore, the fiscally transparent partnership of the EU is only worth the trouble in the services sector and if minimal taxes are paid.
The advantages of its good reputation and the acceptance of bills automatically disappear in light of the burden that a lack of VAT number entails for the client.
However, for the selling of digital products and the retail trade in the private sector and, therefore, also in the case of online affiliates, it can be a good idea to register a fiscally transparent partnership in the EA, since VAT would only have to be charged in the country of the client and, generally, it is not a problem to apply for a VAT number in a country where sales have been made.
Whatever the case may be, given that these activities can also be carried out from offshore companies, EU partnerships often do not bring in much.
In most cases, only English companies register due to the low costs in comparison with the offshore companies.
In the field of lending B2B services, the best option is to use non-European partnerships like the Canadian LPs or the US LLCs.
Registering onshore partnerships in order to use payment providers like PayPal and Stripe without having to pay high taxes can be very useful.
However, it often requires us to have local clients or to additionally register a company and make it shareholder in the partnership. On that note, perhaps the company in Hong Kong might be a better alternative if we want to be free from taxes.
To sum up, the registration of a partnership should not be taken lightly, but requires careful evaluation of the case (perhaps in a consultation). Otherwise, many of the things that in principle didn’t seem viable before suddenly become impossible.
As we said, the most common problems are linked to the opening of local bank accounts and the charging of VAT for companies in the EU.
Examples of Onshore Partnerships
To finish this article, we are going to talk about some examples of jurisdictions that might be interesting for fiscally transparent partnerships.
We will analyse their suitability for various business models and their approximate costs.
The examples given are based on the assumption that the shareholders reside in a country without taxes or with territorial taxation and are therefore exempt from paying taxes on foreign revenue.
Canadian LP (Ontario)
It is currently one of the most popular options among freelancers and this type of service providers.
The partnership based in Toronto can be run by just one natural personal (it does not limit liability).
Canada, as a country with a strong tax burden enjoys, on the other hand, a great reputation and Canadian bills are recognised on a global level.
Contrary to what happens in EU countries, in Canada there are not any problems with the VAT issue.
Another reason why the Canadian LP is so popular is that it is not necessary to present accounts as long as there is no national revenue.
The set-up costs are very reasonable; around €2,200 (including the company address) and a year after formation only €1,000 a year. There is no Mercantile Register for Canadian LP.
If you need limitation of liability, the Canadian LP is quite a bit more expensive. The offshore companies can only become general partners if they have an EPC (Extra Provincial Corporation) registered in Canada.
The EPC does not entail any tax obligations either, but the costs to register it are similar to those of the LP. For the registration of the offshore company and of the EPC you will have to assume an additional cost of 2 to €3,000.
In this case, it is certainly preferable to opt directly for the registration of an LLP in British Columbia.
If you want to interpose the company in order to convert the revenue into dividends (for example if you are a non-dom resident in Cyprus), you will be able to avoid these additional costs, since the offshore company only needs the EPC if it wants to act as a general partner, but this is not the case if it can do it as a limited partner.
Canadian LLP (British Columbia)
The LLP with a base in Vancouver, works in a similar way to its counterpart in Ontario. However, in this case, all of the shareholders limit their liability. However, the LLPs require at least 2 shareholders at the time of their formation.
In this case, a company can be used without registering as an EPC. Nevertheless, if what you’re looking for is anonymity, it is often preferable to use a natural person to serve as fiduciary, since this usually simplifies the opening of accounts (it is easier to open accounts when the shareholder is a natural personal rather than an offshore company).
Of course, the use of a fiduciary generates certain additional costs. With regard to insurance, depending on how it is organised, it should not cause any problems, since it does not have any real power because it will have handed over all of the power to the true boss, in addition to resigning as administrator.
In general, fiduciaries only become problematic if accounts are opened in local branches of banks, since they could attend in person and try to escape with the money.
In the case of online bank accounts, there is hardly any risk of this happening.
In principle, the Canadian LLP has the same type of application as the LP, but it also possesses certain advantages thanks to its limitation of liability.
However, if there is more than one shareholder, the use of this structure becomes very expensive, as it will need a fiduciary or a company to act as a second party.
The LLCs from the USA are a separate issue, which we will publish a new article about soon.
In their day, they were very popular due to their low costs and their simplicity to set up, but they became less attractive due to the changes that came with the the publication of reports in 2017 and currently they are becoming one of the most interesting options again, even though they are more expensive now than they were in the past.
It is only necessary to manage the accounts and the bureaucratic burden is limited to three formulae, but, of course, Canada is also a very attractive option.
States like Wyoming and Delaware are suffering from an increasingly bad reputation, which is why we have switched to recommending the state of Florida for registering an LLC.
One of the biggest problems is opening local business accounts. Luckily, however, we have also found a solution to this problem.
Of course, there are also interesting LLCs in the USA for asset protection (acquisition of property, protection of rights and patents) or to avoid sanctions. In the sate of New Mexico you can register a LLC in complete anonymity.
As we said, we will talk a lot more about the US LLCs in a future article.
The Scottish LP has the unique feature of being a partnership with its own judicial personality (that is to say, it is not fiscally transparent).
The law that oversees the Scottish LP dates back to the 19th century and, due to its anonymity this is the preferred judicial form for the wealthy to protect their assets.
It is also very popular among delincuents and, due to certain sensationalist stories in the last few years (like the robbing of the central bank of Moldavia), it has a lost much of the good reputation that it has had for a long time.
Unlike other English LPs, it is not part of the Registry of Economic Authorities but of the Mercantile Registry. However, anonymity can be achieved through fiduciaries or their own offshore companies.
In essence, the Scottish LPs have the same advantages and disadvantages as the British ones described below. However, their own judicial personality, independent of its shareholders, makes them a special case, and an interesting option as vehicles for investment, especially in tandem with foundations and trusts.
In general, the Scottish limited partnerships are particularly suited to the administration of assets.
The British or Irish LP
The Irish or British LP have some very low set-up costs.
Similar to what happens with EU companies, their use causes problems related to VAT in the B2B sector if they don’t have national revenue (and therefore don’t have a national VAT number).
The imminent Brexit could make England (including Northern Ireland and Wales) an even more interesting option than Canada.
Furthermore, this type of LP is particularly suited for online businesses with all kinds of private clients, which is why it is also possible to go to an offshore company.
The English and Irish LP are not anonymous; they are registered in the Mercantile Registry.
The costs of registering a LP vary from 100 to 500 pounds (depending on if you also need a local address).
The same can be said of the LLP in both countries, which, on the other hand, despite their limitation of liability are required to publish accounts and carry out an annual audit.
This, of course, increases the costs of this option. Currently, for one LLP entails costs of around €3,000-€4,000 a year.
LP in Malta/Cyprus/ etc.
The same applies here more or less as it did in England/Ireland. LP are available in all English-speaking countries, not just in Malta and Cyprus. In Europe we can find them on the Isle of Man, Jersey, Guernsey, Gibraltar and in many overseas territories (see LLP in Singapore).
LLP in Singapore
Singapore is typical of various LP/LLP outside of the EU. The LP is also feasible in other English-speaking countries like South Africa, Australia, India, Malasia, Hong Kong, several Caribbean countries, etc. However, in these countries it is sometimes required that at least one of the shareholders be a resident in the country of registration. So, without a resident in Singapore you cannot set up a LLP there.
If you don’t have a shareholder in Singapore at the moment, don’t wory. Once again there is possibility of using a local fiduciary as a shareholder. Clearly this is not a cheap solution.
Given that you would also have to publish accounts, the yearly operating costs could reach around € 5,000. On the other hand, you would have access to the banking and charging services in Singapore, as well as a great reputation.
New Zealand LTC
The Look-Through-Company in New Zealand is a type of fiscally transparent company. In this sense, the LTC is comparable to a LLC.
In its day, it was very popular thanks to New Zealand’s good reputation and the small amount of bureaucracy that it entailed, but now you need to be a resident in New Zealand to be able to run this type of company.
Unlike what happens in Singapore, it is not enough to have a fiduciary as an administrator. In any event, if you have shareholders in New Zealand, then you can benefit from using this structure.
The Netherlands also have their own fiscally transparent partnership, known as Commanditaire Venootschap.
In tandem with a Dutch BV serving as a minor partner, it can be a good fiscal strategy in some of the more difficult sectors, like eroticism or diet supplements.
Similar to what happens with its English counterparts, there is a Public Mercantile Registry and the obligation to publish accounts. The yearly cost is €3,500 in total.
The Danish Kommanditselskab or its Swedish counterpart (KB) can be very helpful when you want to have a corporate structure with an extremely high reputation.
Also, in this case, having a local company as a local minor shareholder can provide us with the necessary VAT number and give us access to local accounts.
With a 10% share of an A/S (GmbH) with a 25% corporate tax, the effective taxation in the Kommandistelskab is 2.5%.
However, the relatively high costs of the accounting services, and the obligation to submit to audits when certain criteria are met, mean that the costs shoot up.
You will need to have around €6,000 a year to run a Danish KS.
It is impossible to mention all of the partnerships in the world in this list, so we have mainly focussed on the onshore jurisdictions and we have summarised various countries that have similar characteristics. The partnerships are particularly interesting on an onshore level because they allow us to avoid the disadvantages that many offshore jurisdictions with a bad reputation pose.
However, it is important to be well informed, in order to be able to choose the partnership that best suits your interests.
Even though the fiscal transparency of partnerships allows for tax exemption, if it is combined with an appropriate tax residence, in some cases it can be worth paying minimal taxes so that we don’t have to deal with the disadvantages that are inherent in these structures.
Partnerships are the new IBCs, and more and more agencies and law firms are offering them. And with good reason.
In addition to what we’ve discussed here, we also have to take into account the sustainability of these structures. For every tax-free partnership there are at least 50 others that aren’t exempt, that is, they aren’t just used to legally escape paying taxes.
Of course, partnerships are not exposed to the needs of creating a substratum, since they pay taxes wherever their owners reside.
For decades, non-residents haven’t been encumbered by their use, and this will be the case for a long time to come. After all, States gain in this way a source of revenue through a company from their country that in reality has little to do with them.
Because of all this, partnerships are a good option for long-term financial planning.
It might be obligatory to present reports and forms like what happened to the US LLCs in 2017, but there will hardly be any changes to taxation.
Partnerships are here to stay. The well-managed Canadian LPs and US LLCs are definitely some of the best options currently on offer.
All that you have to do now is choose an option. Feel free to contact us if you need help registering your partnership or you want us to advise you.
Because it’s your life!