Summary

Legal entities established in tax-free or low tax rate jurisdictions play an important role in tax planning. The article discusses taxation aspects connected with base companies.
The article dwells at length on the concept of foreign base companies. Such companies are established in addition to tax planning purposes in response to favourable business or labour legislation. Another important consideration may be the desire of hiding the real corporate purpose. The income imputed to the base company is protected by the legislation of the country of domicile. Thereby the concept of tax haven is closely tied to the concept of a base company. Such countries are characterised in addition to low tax rates by the absence of international tax treaties, by strong rules concerning banking and the protection of business secrets, and by political and economic stability. Companies established in such countries can be used to transact international operations for the purpose of tax optimisation. Some important concepts in this respect are the use of transfer pricing, inadequate capitalisation, and the misuse of payment contracts. The article takes a close look at the more widespread schemes to reduce tax withholdings and explains their mechanisms of operation.