The “substance” of a company is the popular, new notion used by the tax authorities in high tax countries to decide if an Offshore company is authentic and whether its invoices should be accepted.
If a company has no substance and it has issued an invoice to a customer located in a high tax country, the invoice will be refused and the client may be obliged to pay tax on his company
How do the tax services define “a lack of substance” and what do they do about it?
In Germany, Italy or France and in many other high tax countries, tax auditors will carefully inspect invoices issued by foreign companies.
They look for the amount paid to the foreign country and examine the company closely in order to demonstrate that it “lacks substance” or in other words, is “unauthentic”. The following points will be taken into consideration, analyzed and exposed by tax auditors during their inspection:
- Is the company in a country with a good reputation rather than in some exotic region? (Seychelles, Belize, BVI, Bahamas, etc.)
- Does the company have a phone number in this country (and not in Switzerland or England)
- Does the company have a fax in this country?
- Does the company have a website?
- Has the company purchased an internet address rather than using a free email address, such as @hotmail.com, @yahoo.com, @gmail.com, etc.
If the answer to any one of these questions is ‘no’, the finance inspector will conclude that the offshore company is not real and that it has no substance.
Finally, he will verify the identity of the director (nominee) of your company, the shareholder nominee, the address and especially the quality of the company’s invoices …
What to do to give substance to a society?
Start by getting competent advice. The points below are only a sample of the artillery they will use against you. Before incorporating offshore, remember that your customers may have to give explanations to tax authorities, so make sure that your company has substance.
Open an Internet site for your company and use an email such as firstname.lastname@example.org, also get a phone and fax in the country where your company is incorporated.
Obviously, incorporation in places like the Seychelles, BVI, Belize or other unlikely business destinations is excellent if your clients are NOT located in countries with a policy of combating tax havens. In that case, it would be best to set up a European company, or a company that will not be criticized for being exotic.