Making earnings more mobile
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7 October 2013
Readily accessible from the UK and mainland Europe, with the convenience of European time zones and excellent communication links, Guernsey has set itself up as an excellent base for the financial affairs of the famous and internationally mobile.
Offshore trusts and companies offer advantages for all those involved in the entertainment and sports industries and can be structured to deal with various types of income, which may come from a variety of sources.
As well as performance fees, there may be income from sponsorship and endorsements, copyright royalties, box office percentages, merchandising and media contracts. The diversity of income sources makes taxation complex, so sophisticated advice and planning is needed to minimise taxes around the world.
The high levels of income earned by international entertainers and sports people in recent years have led to ever-increasing tax burdens and anti-avoidance legislation in most jurisdictions around the globe.
Many of those involved in these industries will only be earning such large sums of money for a relatively short time. Tax systems can result in earnings being taxed on an annual basis with no deductions for past or future losses.
For example, in the UK, the income of farmers can be averaged, whereas entertainers and sportsmen are liable to tax at higher rates in successful years and may pay no tax at all in the leaner years. Income that is earned over, say, a period of five years may have to support the individual and his dependents for the rest of his lifetime.
It is therefore imperative that entertainers and sports people take appropriate advice early in their careers rather than leaving it until after the event when it may be too late.
It is the duty of professional advisers to make sound and lasting financial arrangements on behalf of their clients.
An important aspect of tax planning is to distinguish between performance fees and royalties. Royalty income is often taxed more favourably and licensing companies formed in a suitable jurisdiction can be used to reduce or completely eliminate the burden of withholding tax.
For example, the current rate of withholding tax in the UK is 25 per cent and although this may not appear to be onerous, the fact that this is levied on gross income rather than net income after taking relevant expenditure into account means that the effective rate of tax is much higher. Payments out of the UK to a country with which there is a double tax treaty may escape withholding tax al- together.
A well-structured conduit company can ensure considerable savings are made and cash flows maximised.
It may also be necessary to set up local companies in the various jurisdictions in which performances are given, to collect income gross before passing it on to an intermediate conduit company.
A popular method of avoiding withholding taxes on performance income is using employment companies. These are offshore companies that employ the individual and then contract out their services.
Although there are now often anti-avoidance provisions in the tax treaty network that seek to negate the advantages of such structures, there are still opportunities for obtaining tax savings using the various concessions available.
However, it is important to ensure that there is real substance to the company and that it actually performs a commercial function.
It is preferable that the individual is paid a fixed salary, even a pensionable salary, rather than a share of profits.
The wording of a contract for an individual involved in the music or sports industry may be the deciding factor when it comes to assessing the tax liability in a particular jurisdiction. It is therefore vital that advice be taken not only on the legal aspects of a contract but also on the tax implications.
Where an individual is achieving success on an international scale, it will be necessary to ensure advice is sought from the appropriate professionals in every relevant jurisdictions.
Guernsey is a long-standing offshore centre, having a well-established structure of banks, accountants, lawyers and trust companies. This enables performers or their management teams to have confidence in the advice and propriety of arrangements being made on their behalf.
Perhaps of equal importance, onshore-based or international advisers can take comfort in Guernsey's famed political stability, sound legal system and strong regulatory authorities that make it a favoured offshore centre with which to do business.