Is tax optimisation legal?

What is tax optimisation?

Tax optimisation is a complex procedure aimed at minimising tax liabilities. When asked whether tax optimisation is legal, the answer is ‘yes’, as it involves making use of the provisions of the Tax Ordinance and other legislation.  It is defined as a legal mechanism designed to retain funds within a business, or simply in the taxpayer’s pocket. Most importantly, it must be distinguished from tax evasion, as optimisation is always carried out within the bounds of the law. Furthermore**, the Criminal Code** and the Fiscal Penal Code do not classify tax optimisation as a prohibited act.  However, tax optimisation may become overly aggressive, which, depending on the assessment of the authorities, may be deemed tax fraud and subject to appropriate penalties.

What is illegal aggressive tax optimisation?

This issue is best described in the Tax Ordinance. It states that this is a practice intended to achieve a tax advantage, i.e. to minimise tax liabilities. At the same time, it is necessary for it to be inconsistent with the subject matter or purpose of the tax law or its provisions, and for achieving this benefit to be one of the main objectives of the arrangement, whilst the method of operation is artificial, i.e. if it would not have been adopted by a reasonable person acting in accordance with lawful objectives, primarily for legitimate economic reasons.

What are the consequences of using illegal tax optimisation?

The consequences of using aggressive tax optimisation are multi-layered. The authorities may consider that a given transaction produces the same effects as a transaction carried out correctly. When examining such circumstances, the authorities take into account, first and foremost, the mutual intent of the parties to the transaction and the purpose of the transaction, but they also analyse and examine the provisions of contracts and other documents relating to the parties to the transaction.

If a transaction is deemed to constitute aggressive tax optimisation, the entity is required to pay the tax it has underpaid. Furthermore, depending on the specific circumstances, the use of prohibited mechanisms may be deemed to constitute several fiscal offences:

• Tax refund fraud (Section 76 of the Fiscal Offences Code)
• Failure to issue invoices (Section 62 of the Fiscal Penal Code)
• Keeping unreliable accounts (Section 61 of the Fiscal Penal Code)
• Tax fraud (Section 56 of the Fiscal Offences Code)

What are some examples of legal tax optimisation?

There are numerous examples, or methods, of tax optimisation. In fact, it can be said that they are limited only by the law. As long as the action is legal, we are free to apply tax optimisation. Creativity plays a major role in using mechanisms permitted by law to reduce the taxes owed to the Treasury. The most popular methods include:

• The use of tax reliefs and exemptions
• Choosing the appropriate form of taxation
• Choosing the appropriate legal form of business
• Tax planning and international tax planning

The most important aspect of tax optimisation is to carefully consider and weigh up as many possibilities and associated risks as possible in order to avoid unpleasant consequences. One should not approach this type of issue without specialist knowledge; therefore, it is sensible to contact tax advisers and lawyers who can assist with all aspects of tax optimisation.