Some countries entertain corporate income tax rates significantly lower than personal:
- Ireland: 12.5% vs 20–52%
- Estonia/Latvia: 0% vs 20%
- Sweden: 21.4% vs 32–57%
- Barbados: 5.5% vs 25–38%
Say Bob lives and operates his business through a company in one of those countries. He receives no (or only some nominal) salary/income, but, being the sole shareholder and director, he lends himself money at 0% interest rate. Although he is formally required to pay that back, the company never pursues the repayments (optionally, the loan agreement sets grace periods lasting for decades, or even explicitly up to Bob's death upon which the company will be the first creditor in line to grab his estate).
So, in essence, Bob receives virtually no income to pay tax on, but enjoys living in permanently growing debt to his own company (which pays its corporate income tax, if any, diligently).
What are the possible legal avenues for tax authorities to stop Bob from doing that? How would they overcome the lawfulness of taking loans on whatever terms the lender and borrower agree?
The question is not necessarily about the jurisdictions listed above. As as variation, let's assume Bob actually lives (and is supposed to pay personal income tax) in the US/UK/AU/NZ but still owns a business in a country above and receives loans from it.