Rietumu Banka - for business and private banking.

In the wake of the crisis, many entrepreneurs often find themselves thinking of ways to reduce costs. One such option is tax planning, which has been practiced in much of Europe for many decades and is now becoming increasingly popular in Latvia as well as Russia and the entire post-Soviet area. Rietumu Bank Vice President Ilya Suharenko goes into more detail about optimising a company’s costs the right way.

– Could you tell us what tax planning means today?

Well thought-out tax planning is on many companies’ agendas at the moment. In the West, taking this into consideration is very natural, both in business and in planning personal budgets. Here though this culture has only just begun to develop.

Of course, I am talking about perfectly legal methods of optimising the amount of payable taxes, methods that don’t contradict the law in any way. This is an entire complex of various measures that include the creation of viable company structure, choosing the most suitable jurisdiction, taking into consideration the nuances of tax laws in various countries, relations with business partners... In a word, all the components of a business.

– But it is a well-known fact that businessmen have long been registering firms in the Bahamas, the Seychelles, and other exotic islands which, they say, is done for tax optimisation purposes.

This is certainly no secret. Any businessman can buy a company in the Bahamas, the Cayman Islands or elsewhere, and use it for a few business transactions. These are the so-called unaccountable jurisdictions, the least expensive and seemingly the simplest ones. But their main disadvantage is that they should not be used for a long-term, serious business. I would say that this is not only not prestigious and likely to scare off your potential partners, it is simply too risky.

There are a few fairly large holding companies that have such “inexpensive” jurisdictions as their basis of operations. This often happens when the structure of a company is not qualitatively revised while the company continues to expand. But sooner or later this leads to problems. All of a sudden, a problematic deal resurfaces that the company concluded a few years ago, a bank account is closed, potential partners start having doubts about the company’s reliability, and so on...

Furthermore, the sellers of such companies usually do not go into detail regarding the jurisdiction and the likely risks. A long-term business calls for a different approach, I believe.

– What exactly?

First of all, such a business has to have long-term perspective, it has to be organised the right way and, I would even say, be meticulous. For instance, a company that is registered in Denmark, England, Switzerland or Gibraltar can be in business with the most respected partners all over the world, and at the same time enjoy significant tax breaks that these jurisdictions provide. The registration and the maintenance of such companies, of course, is a little costlier, but then the pros are obvious.

Even in abstract terms, the reputation of company X which has a registered address in Denmark will be much higher with business partners, banks and the authorities than the reputation of company Y from the Cayman Islands. And quite often this is worth the slightly higher price.

In that case, how should a given business choose what is right for it?

General recommendations will not do here because much depends on the specifics of the business, the existing structure of the holding, the markets in which the company operates, and so on. The role of the given company in your business, and how long it will be in operation, is also very important.

By and large, tax planning can be made good use of in any kind of business, be it international trade, exports, services... Even so, it is quite a delicate matter. You have to take into account all the nuances, of which there are many. That is why I would recommend that any business consult an expert first.

We, for example, have professional financial experts and lawyers who know the specifics of laws and regulations in many countries, follow all the changes in their respective areas, and can deliver good advice on what would be best for your business. We talk to each client, trying to note all of their wishes so as to select an optimum business model. We call this corporate consulting.

Could you give a specific example of how tax planning may be used in a business?

Let’s consider a rather simple example such as the sale of a commercial property. Say your company has built a shopping mall in Russia, and has decided to sell it later. Naturally, the profit from the sale of the property will be taxed. But there is another way of handling this; a separate company that is part of your holding structure may be the owner of the property, and this company is what you will sell. Accordingly, the buyer in this case will acquire, in the legal sense, not just a shopping mall as such but a business; that is, a company to which the mall belongs. For the seller, this will help optimise tax costs.

By the way, Cypriot companies are quite popular for foreign investment. In Cyprus, taxes are not applied to dividends, or to profits made from the sale of company shares or property outside Cyprus, the sale of other investment assets, the transfer or sale of a Cypriot company, etc.

For international trade mediation and commercial services, Denmark’s limited partnerships can be used to good effect. Taxes on international business activity do not exist there, although Denmark has never been considered a tax haven. If you wish, you may register as a VAT payer, which will make it possible to conduct VAT applicable business in the European Union.

– Is corporate consulting suitable only for business planning, or can it also be used in structuring private capital?

Of course it can, and it is used extensively. Often businessmen have to tackle an entire multitude of issues, where these deal with their business as well as those that concern investments and the safekeeping of private funds. There is a vast choice of options for the right capital placement in accordance with the owner’s preferences. This concerns taxes, safety and confidentiality issues.

The planning and distribution of inheritance is another matter. Again, few people ever think about it in our country, but I believe that in the near future most more or less wealthy people will begin to pay more attention to this issue. As you may know, the principles of the distribution of inheritance are explicitly defined by the laws and regulations of each country, and they may differ substantially, giving the heir more or less freedom of action.

What, in your opinion, is the future of corporate consulting in our region?

I believe that the popularity of corporate consulting will increase, and increase quite fast. On the one hand, the economic situation requires that costs be optimised, as does the experience of the crisis that we have all gone through, one way or another. All of this has taught us to consider ways of reducing spending.

In addition, now there are quality services available in the field of corporate consulting. Because it is not enough to simply develop a structure for a company, even a good one, it needs to be constantly maintained, and accounting and legal formalities have to be tackled. In the West, it is usually consultants who work with this multitude of issues.

We are trying to maintain a level standard, and also offer our clients the entire multitude of financial, banking, accounting and legal services for their business. For some this is easier and more advantageous than to co-operate with different partners. The fact that we, as a bank, guarantee complete confidentiality may also be considered an important factor.

Eleonora Gailisha
Mass Media and Public Relations
Phone: +371-67020506
Fax: +371-67020563
E-mail: egailisha@rietumu.lv

Changes in Rietumu’s working hours due to Easter Holidays

6 April 2011, 12:00 Products & Services

Tax Planning for Successful Business

Changes in Rietumu’s working hours due to Easter Holidays