Thursday, 21 March, 2019
3Tel Aviv23:43
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Existing types of companies

The entrepreneur should decide prior to incorporation what form of company is necessary for him in a given commercial situation. He needs to decide whether it will be an ordinary trading company or a holding company. The situation may even demand the incorporation of a licensed broker or insurance company. The options provided by foreign jurisdictions are described below:

Trading company

Most non-resident companies operating in the international market are trading companies. The definition of “trade” does not necessarily restrict the company to buying and selling goods. In the event that an entrepreneur is engaged in production, carries goods, organises tours or gives advice, he is engaged in commercial activities in the broad sense of the term and his company will have the status of a trading company.

The list of jurisdictions used to incorporate a trading company is relatively long and, depending on the specific situation, both tax-free and other jurisdictions ranging from the Caribbean Islands to prestigious European countries are suitable for the purpose.

Holding company

A holding company is an entity that owns shares in other businesses, cash or other assets such as patents, trademarks or copyrights. It is entitled to distribute and place them in other companies, as well as serve as a source of finance for its subsidiaries and businesses. Simultaneously, a holding company does not carry out direct production or commercial activities independently.

Such highly respected jurisdictions as the Netherlands or Luxembourg provide a favourable tax regime for holding companies (subject to meeting certain criteria) without providing any benefits for trading companies.

Holding companies are usually incorporated in jurisdictions that have double tax treaties with the countries where subsidiaries or affiliates of the holding company will be incorporated subsequently. Frequently in this situation, further deductions of such subsidiaries in the form of dividends or other payments to the holding company will not be subject to the withholding tax in the country of payment.

Insurance companies

Frequently large entrepreneurs encounter the following difficulties in obtaining insurance:

  • insurance against all general, property and personal risks with third-party insurance companies entails significant premiums;
  • in the event that the entrepreneur saves on insurance premiums and establishes his own reserve instead, frequently this does not qualify for tax relief.

Accordingly, it may be more advantageous for a large business to establish a wholly owned insurance subsidiary that may accumulate the premiums paid in its accounts as a reserve should insured events occur. Frequently, a certain period of time elapses between the receipt of premiums and the payment of insurance claims during which the insurance subsidiary accumulates a considerable amount of working capital that may be used, inter alia, for low-interest financing of the core business.

Trust companies

A trust provides for the transfer of assets by one person known as the settlor to another person known as the trustee, where the trustee is guided by the trust agreement in his actions regarding the assets. Generally, income from the asset management is intended to be paid out to third parties known as the beneficiaries.

The concept of the trust dates back to the English legislation of the middle ages. In the cases where the wealthy English began thinking about the distribution of their assets such as factories or banks among their heirs and came to the conclusion that the heirs would not be able to cope with the management of the empire they had built, the wealthy English entrusted their assets to trusts managed by their friends who were professional financiers. It was nevertheless stipulated that the income from the trust fund would be distributed among the heirs.

Nowadays, these traditions have acquired much more varied forms. An international trust is now relatively popular. This is an agreement between non-residents of the country where the trust is established in respect of non-resident assets and in favour of beneficiaries who are non-residents of such a country. Frequently, international trusts established in offshore centres are liable to reduced or zero taxation.

Shipping companies

Frequently, registration of a vessel under the flag of its home country results in a relatively higher tax rate, as well as tighter restrictions on the technical state of the vessels, remuneration of the crew and other standards. However, by registering their vessels under the flag of such countries as Belize, Panama or the Marshall Islands, entrepreneurs have the opportunity to pay lower tax. In most jurisdictions, the tax of the “flag of convenience” is payable at a fixed rate depending only on the vessel’s total tonnage, rather than as a percentage of the annual profit. Additionally, the “flags of convenience” may be particularly useful, for example, when an embargo is placed on the home country of the seafarers or in other conflict situations.

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