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Electronic Products
Business to Business Case Study
- Electronic Products
Consumer Case Study
- Physical Products
Consumer case Study
- Offshore Banking
and Financial Services Case Study
- Offshore Corporate
Functions Case Study
CompDirect is an
established UK based mail order company supplying
pre-assembled computer equipment and sundries
to companies throughout Europe. Founded in the
UK in 1974, CompDirect expanded into continental
European markets in the 80's, and began to develop
strongly into Eastern Europe in the mid 90's.
The main functions of the business including
management, world-wide procurement, marketing
and sales are conducted from the UK head office
in London. CompDirect has two subsidiaries,
both warehouses with extensive despatching facilities.
Comphouse Ltd is based in Bristol and services
all of Western Europe, while the more recently
opened Comphouse GmBH based in Berlin covers
the whole of Eastern Europe. All orders received
are processed through the UK head office with
despatch details forwarded to Bristol or Berlin
as appropriate.
CompDirect has
been aware for some time that a small, but rapidly
growing proportion of sales in its marketplace
is being transacted on the Internet, and that
the establishment of a web site with ordering
facilities would be beneficial to the business,
allowing expansion into a truly global market
place. Costs for establishing a web-site are
also low compared to those for expansion of
current operations.
With growing interests
in Eastern Europe, CompDirect is also aware
of the need for efficient tax-planning. A new
financial director has read about tax opportunities
opened up by e-commerce and wants to explore
this avenue. He seeks professional advice from
a major consultancy firm which recommends a
new structure to take full advantage of tax-saving
possibilities available offshore both in relation
to e-commerce and also to the growing East European
involvement.
CompDirect should
continue with its present catalogue-based sales
operation, but should form a separate company
to handle Internet sales and marketing; this
new company can be based offshore. A number
of criteria affect the choice of an offshore
location, including the availability of adequate
technical infrastructure to support an e-commerce
operation, and well-developed business services.
In fact the choice
for CompDirect is fairly straightforward, since
Cyprus has a considerable network of double
tax treaties with Eastern European countries,
and is very frequently chosen as a base by companies
for their East European trading operations.
It also has good commercial and technical infrastructure.
Although CompDirect doesn't currently intend
to form subsidiaries in Eastern Europe, it is
aware of this as a future possibility, hence
Cyprus is a useful place to be. CompDirect's
longer-term plans also envisage an increase
in out-of-EU sourcing, and the company notes
that the tax-free zone in Larnaca would be a
good location for an additional warehouse should
this become necessary.
In order to ensure
maximum tax efficiency, it is necessary for
the Cyprus company, to be known as CLink Ltd,
to be a completely separate entity dealing solely
with Internet marketing and sales. CLink will
purchase its supplies from CompDirect on an
arm's length basis. Warehousing and despatch,
together with payment of local import tax and
VAT, will be outsourced to Comphouse Ltd and
Comphouse GmBH in the UK and Germany. This arrangement
will avoid the danger of creating a taxable
presence in either country. In order to escape
the UK's CFC (Controlled Foreign Corporation)
legislation, which was tightened still further
in the Finance Act 2000, CompDirect will have
only a minority shareholding in CLink Ltd, with
the bulk of the shares being held by CompDirect's
own shareholders, some of whom already have
offshore residence or trust structures.
When orders are
placed with the Cypriot company, a statement
will be produced including cost of delivery
and local taxes, with a copy being e-mailed
to both customer and the relevant warehouse.
The warehouse will then prepare the goods and
provide a tax invoice on behalf of CLink for
the goods delivered. CLink will then be invoiced
for services provided by Comphouse including
payment of local duty and taxes.
CompDirect and
their consultants then plan a timetable for
the new project:
Phase 1 (with assistance
from a Cypriot company formation agency)
- The establishment
of CLink as a Cypriot International Business
Company (IBC)*.
- The opening
of appropriate banking facilities
- The domain name
www.compdirect.com is registered
Phase 2 (with
assistance from a Cypriot ISP and a London web-site
design agency)
- Web site designed
with on-line catalogue, ordering facilities,
shopping cart
- Secure multi-currency
payment processing package sourced
- On-line credit
card facilities arranged, including merchant
ID, clearance procedures agreed and installed
with CLink's bank.
- Co-location
of the web site at the ISP's server in Cyprus
- Installation
of a dedicated connection to the Internet
for the CompDirect site from the local telecom
provider
- Creation of
all required reporting features of the site
Clink's gross
margin on Internet sales from Cyprus will be
around 50%, and with a much leaner overhead
structure than CompDirect its net margin should
be considerable, once the set-up costs of the
web-site have been amortised. Profits generated
in Cyprus will be taxed at 4.5%, and dividends
paid to most EU countries and the US will suffer
nil or 10% withholding tax. CompDirect, Comphouse
Ltd and Comphouse GmBH all expect to benefit
from the project by acquiring additional custom
from CLink as Internet sales enlarge the group's
overall market.
*
As from 1st January, 2003, an offshore company
(IBC) no longer has a separate taxation status,
and is taxed according to the same principles
as a regular company. IBCs are now allowed to
trade inside Cyprus. However, a pre-existing
IBC which has made an irrevocable commitment
not to trade inside Cyprus until 2006 is able
to claim the existing low tax rate for the three
years 2003, 2004 and 2005.
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