Wednesday, July 4, 2007

Jarl Moe Teaches You Dividends Tax Offshore

This week I would like to teach you some basics on dividends tax using UK as an example.
Depending in your country the dividends tax may differ, to make sure you have the right details please contact your local tax office and ask them....

OFFSHORE TAX DIVIDENDS

Lets make this very simple for you!
If you set up a business, including setting up a business in YOUR OWN COUNTRY you can of course choose if it will be YOU or ANOTHER IDENTITY that will own the shares in your new venture.

The people who don't know better (yes im talking to you) usually set up a limited company and set them selves up as shareholders, almost with pride that they own the shares...

Let me tell you in a few words why this is COMPLETELY WRONG!

In setting up any company you must concider tax planning and the benefits you can have by doing things outside the box.

Example:

1) You set up a UK Limited Company and they slap you with up to 31% tax!

2) You set up a foreign company and pay zero!

How is this possible?

The answer is.... because the law say so!


UK vs CYPRUS

The UK has dividends tax and Cyprus does not have dividends tax.
So... If you make a Cyprus company the shareholder in your UK company instead of you, you will not pay any dividends tax on any profits....

This is due to:

a) The tax agreement between UK and Cyprus
b) The Cyprus law

WHAT DO THE SMART PEOPLE DO?

The really smart people set up the Cyprus company to actually do their business with only a sales rep office in the country you operate in.....
In Cyprus the company pay 10% tax flat and NO DIVIDENDS TAX!


If you turn it around and make the UK company the shareholder in the Cyprus corp you can move the max dividents to the UK and pay your self divident tax in the UK and pay only 10%

Lets have a look at the details:

You pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on interest from savings, such as bank and building society interest.

Dividend tax rates 2007-2008
There are two different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic rate Income Tax limit.

The basic rate Income Tax limit is £34,600 for the 2007-2008 tax year.

It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way.

Understanding the dividend tax credit
Companies pay you dividends out of profits on which they have already paid (or are due to pay) tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your 'dividend income'.

How tax credits are worked out
The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the 'dividend income'.


If you pay tax at or below the basic rate
You have no tax to pay on your dividend income because the tax liability is 10 per cent - the same amount as the tax credit - as shown in the tables.

If you pay tax at the higher rate
You pay a total of 32.5% tax on dividend income that falls above the basic rate Income Tax limit (£34,600 for the 2007-2008 tax year). But because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5 per cent.
Note that dividend income, like savings income, is taxed after your non-savings income (for example, wages and self-employment profit) at your highest tax rate.
If it falls both sides of the £34,600 higher rate tax bracket, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).

Can you claim the tax credit if you don't normally pay tax?
No. You can't claim the 10 per cent tax credit, even if your taxable income is less than your personal allowances and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10 per cent 'credit' against any Income Tax due.

Declaring dividend income on your tax return
If you normally complete a tax return you fill in three boxes:

1. The 'dividend/distribution' - the actual amount you were paid
2. The 'tax credit' - as shown on the dividend voucher
3. The total of these two - the 'dividend income'

You pay any extra tax owing via either Self Assessment or PAYE (Pay As You Earn), depending on how you normally pay tax.

Hope this educational session has given you some inspiration on how YOU CAN SAVE MONEY!

If you need me... Im here.

Best wishes
Jarl Moe
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