If the company can establish itself properly, and is carrying out active business (or business that falls under the exemptions as set out above), then the following will occur:
- Income attributable to the IBC will be taxed in the host jurisdiction at the local rate. In Barbados the maximum rate for an IBC is 2.5% (declining to 1% as income increases).
- This income will not be further taxed as business income by the Canadian government.
- If the IBC is established in a treaty jurisdiction, then the profits can be remitted by way of dividend to the Canadian parent corporation on a tax-free basis. Obviously, once the profits are distributed to the Canadian shareholders, they will face their own individual tax consequences.
- The Canadian parent and the IBC must develop an appropriate transfer pricing agreement and policy to govern the transactions that occur between them.
- The IBC must also meet the "mind and management" rules. This is discussed in more detail later in this paper, but suffice to say that there must be real substance to the IBC. The concept of a "nameplate" company is just not a workable alternative for Canadian companies. This will mean that the company will have to dedicate resources to both plan and implement the management system for the IBC.
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