The Structure
In this chapter we go deeper into the operations of the Trend Style enterprise by looking at how it was setup. We will further provide a newly reengineered structure in order to improve the operations of the entire company.
Current Enterprise Layout
Having explained the history of the Trend Style, we shall now look at what the current structure of the business is like. The current structure of the enterprise is very simple as it is illustrated in the following Exhibit:
Exhibit 1 Current enterprise structure
All Trend Style stores are owned by the Trend Style Holding in Germany of which the Hoffmann family is the owner. The Trend Style Holding was formally established by the founder in order to control its shops in the Netherlands and Germany. There are a total of 200 shops, of which 50 are in the Netherlands and 150 in Germany. The financial details of these shops are as follows:
Exhibit 2 Trend Style shops
The stores, being legal entities, are owned by the German holding, though they are the subjects to local taxes. Since the corporate tax is lower in the Netherlands, when consolidating holding’s income, it needs to pay the difference in taxes to the German tax authorities. Hence all profits are consolidated in Germany where the dividend is paid and taxed as well.
Future Enterprise Layout
Through reengineering the current structure of Trend Style stores we hope to ingeniously exploit the quirks of different jurisdictions to create a charity. The overall setup of the Trend Style structure will minimize tax and disclosure, handsomely reward the founding Hoffmann family and make Trend Style enterprise immune to a takeover or any future potential sale of the business. Below you can find the new structure:
Exhibit 3 Proposed enterprise structure
The parent for all Trend Style stores, the operator of the 200 stores in Germany and the Netherlands will be Trend Style Holding, a private Dutch-registered company. Trend Style Holding, in turn, belongs entirely to Stichting Trend Style Foundation. This is a Dutch-registered, tax-exempt, non-profit-making legal entity, which will be given the shares of Mr. Franz Hoffmann. A stichting, or a foundation, is the most common form of not-for-profit organization in the Netherlands (see more details on stichtings in Appendix A.1). Under the reengineered structure we can also see now that the shops have a franchise agreement. The franchises are paying a 5% royalty on sales to the Trend Style Design Systems, which owns the Trend Style trademark plus the concept and is registered in the Netherlands as a private company. Its parent company is Trend Style Systems in Cyprus, which enjoys 10% corporate tax and zero tax on dividends (see Appendix A.2).
To minimise taxes in Germany, but also to facilitate better logistics of the goods that usually arrive to the Port of Rotterdam, we additionally establish a warehouse in the Netherlands that distributes all goods to all Trend Style shops. Using transfer pricing mechanism, we reduce the profitability of the German operations, and hence shift the corporate profits to the tax-exempt Dutch headquarters. New financial data now looks as follows:
Exhibit 4 Optimised financials
Please mind that under the new structure, all formally purchased goods by shops, i.e., € 400 millions of goods, are now purchased by the warehouse, which then resells them to the shops charging 5% fee for the logistic services. These synergies respectively reduce the related administration costs for the shops by 5%. Consequently, Trend Style shops are able to pay royalties and maintain the same overall profitability as before, i.e. € 50 millions.
As result of the changes presented above, both the retained earnings and the cash compensation to the founder have increased significantly. The table below summarised the benefits:
Exhibit 5 Financial results
Having saved the company and the founder millions of euro per year in retained earnings and also low-taxed dividends, our team charged Hoffmann family mere one million euro in consultancy fees.