Factoring as a tax planning tool
Factoring – is the provision of financing in exchange for the right for a monetary claim. Factor can be a financial institute as well as any private company. This makes factoring a great tool in efficient tax planning.
By signing the factoring agreement client transfers the right for a monetary claim to a 3rd party (debtor) to a financial agent (factor). Financial agent provides financing and receives a reward for it. The deal, for which the right for a monetary claim is transferred, can be a contract of sale, execution of work or provision of service.
At the same time, factoring doesn’t only consist of transfer of right for a monetary claim and reverse financing. Terms of the agreement can allow other services. For instance, customer credit check, document management, accounts receivable management, collection of overdue debt (for a recourse factoring). The reward for each of the services can be set individually.
Due to that, financing in exchange for the claim right is an interesting tool in international tax planning. One of the companies in low-tax jurisdiction becomes a financial agent (factor). The tax burden of the client decreases by providing substantial reward to a factor for the provision of factoring services.
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