When does international tax planning make sense? Do you need to have a company in Hong Kong, Dubai or on the Virgin Islands? What are the constraints?
Purpose of international tax planning
In general the purpose of international tax planning is to generate your profits in those countries where the tax burden is lowest. This way your net profits will be higher, and you can pay our more dividend.
If you have legal entities in more countries, you can shift your profits by charging service fees from one company to the other, or by changing the price of the goods that you send from one company to the other. This is called transfer pricing.
Please note that tax authorities will be scrutinising these internal cross-border transactions, since they are keen to get the maximum tax income from your company. If a lot of profit is being generated in a (low-tax) country, and there is hardly any activity there, tax authorities in other countries may count that as 'their' income.
In the cloud or on the ground?
if you have production facilities in a certain country, then in general there is not so much to choose. If you ship your goods to one of your companies abroad, playing with transfer pricing is the only option.
If you have activities 'in the cloud', it is easy to hire a server anywhere and incorporate a company there. But be aware: decision making and part of the development also has to take place in that country. So you will have to be there an essential part of your time and hire local people. Is should be credible that there is value being added.
What you can do is to sell a developed product or service at a reasonable rate to the legal entity in that country, to further exploit it. But once again, there needs to be local activity, e.g. to market it.
Different countries, different rules
Please check thoroughly what the specific rules are in each country. If you incorporate in the US, where Delaware is a favourite state, you are suddenly bound by a lot of restrictions, that may selling to for example Iran very difficult.
Hong Kong is interesting, because profit from sales in and out Hong Kong are exempt from taxes. But as soon as you start discovering Hong Kong as a market, you pay a tax rate that is comparable to anywhere else.
International tax planning only for multinationals?
No, this is not the case. Even smaller companies can keep taxes in mind. But business opportunities should prevail. And also other regulations play a role, e.g. how easy it is to get work permits for your foreign staff in a country. But when all that is relatively even, then you can base your decision on tax rates and regulations.