Offshore Company Taxation Archives - Page 2 of 2 - Premier Offshore Company Services

Watch Where You Invest Those Retained Earnings – IRS Tracking Luxury Home Purchases from Offshore Companies

10/12/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Tax Debt, Taxation/by Christian Reeves

According to the N.Y. Times, The IRS has begun tracking homes bought through offshore companies and shell corporations in the United States. If you’ve setup an offshore structure, and used your retained earnings to buy real estate in the United States, you’re probably a target of the IRS.

Even if your offshore company is tax compliant, you still may be in trouble with the tax man for using those retained earnings for your personal benefit. You may be living in the property at below market rent or taking the rents as personal income.

If you’ve managed to avoid the worst of the pitfalls, investing retained earnings in the United States might have converted them to taxable distributions to the parent company. For more information, see: How to Manage Retained Earnings in an Offshore Corporation

The bottom line is that offshore retained earnings are best held offshore. Unless you have a tax plan and written opinion from a reputable firm, leave the money alone and allow it to build up inside your operating company.

And now, here’s the rest of the story:

As I said above, the IRS is targeting luxury home sales involving offshore companies. Because buying US real estate is a common, if risky, use of retained earnings, this investigation is likely to net many offshore entrepreneurs.

The first stage of this investigation is now complete. It was focused on Miami and Manhattan, where over 25% of the all-cash luxury home purchases made using offshore companies or shell corporations were flagged as suspicious.

Today, officials said they would expand the program to areas across the country. The IRS will target luxury real estate purchases made with cash in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco, and the county that includes San Antonio.

The IRS says that the examination, known as a geographic targeting order, is part of a broad effort by the federal government to crack down on “money laundering and secretive offshore companies.” As we know, “money laundering” is basically code for “tax cheats.” For every one drug kingpin caught in their net, they’ll land 1,000 tax cases.

Cases will be selected based on the purchase price of the property. Only all cash sales will be targeted in this round of audits. The dollar values involved are as follows:

$500,000 in and around San Antonio;
$1 million in Florida;
$2 million in California;
$3 million in Manhattan; and
$1.5 million in the other boroughs of New York City.

You might be thinking, that the IRS doesn’t have data on every real estate purchase in the United States. How the heck are they going to audit every single transaction over these amounts.

Never fear, the IRS thought of that. All they needed to do is issue an order to every title insurance company in the United States. Basically, they’ve drafted title insurance agents into the IRS army (unpaid, of course), to search through their records and select those who should be investigated.

Title insurance companies are involved in just about every residential and commercial real estate transaction in the United States.

And these insurance agents aren’t just providing information on the home in question. They’re identifying the escrow agent, the US and offshore banks involved, all paperwork from the offshore company, etc.

Once the IRS has the bank account information, they’ll summon your account records. This will enable them to chase down all inbound and outbound wires.

Here’s the bottom line: investing retained earnings into the United States opens up a pandora’s box of trouble. I’ve been telling clients this for years and now it’s come to fruition.

If you have an active business offshore, keep your retained earnings offshore. Don’t make you and your cash a target for the IRS. Even if you’re 120% tax compliant, avoid the audit, avoid the battle, and protect your hard work from the Service.

I hope you’ve found this article on the IRS’s targeting of offshore retained earnings to be helpful. If you have questions on structuring a business offshore, you can reach me at info@premieroffshore.com for a confidential consultation.

Asset Protection for a Puerto Rico Act 20 Business

07/12/2016/0 Comments/in Articles, Asset Protection, Banking Offshore, International Business, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

Once you have your Act 20 business in Puerto Rico up and running, you need to think about protecting its retained earnings or distributed profits. Asset protection for a Puerto Act 20 business becomes urgent because of the amount of capital held in the company tax deferred.

There are two levels of asset protection for Puerto Rico Act 20 companies. The first is retained earnings within the Puerto Rico LLC or corporation and the second is asset protection of dividends taken out under Act 22.

When you operate an Act 20 business based in Puerto Rico from your home in the United States, you get tax deferral at 4%. That is to say, if the business owner is living in the US, you can hold Puerto Rico sourced profits in the corporation tax deferred.

You will pay 4% tax on the net profits earned from work done in Puerto Rico. This cash must stay within the Puerto Rico corporate structure to continue to be tax deferred year after year. When you distribute those profits as a dividends to the US based owner, you will pay US tax on the qualified dividend at 20% to 23.5% + your state.

If you’re operating a business in Puerto Rico under Act 20, and living in Puerto Rico while qualifying for Act 22, then you can withdraw the corporate profits from the corporation each year. This is because residents of Puerto Rico pay zero tax on dividends from an Act 20 Puerto Rican business.

For more on maximizing the tax savings of Puerto Rico, see How to Maximize the Tax Benefits of Puerto Rico

When it comes to protecting the assets of your company, remember that Puerto Rico is a US jurisdiction. Any US judgement will be enforceable in Puerto Rico just as it is in any other State. As a result, you must take steps to protect your cash without changing its status as tax deferred “offshore” profits.

The best asset protection for Puerto Rico Act 20 businesses is to move your cash out of Puerto Rico and into a safe and secure bank. We have relationships with a number of banks in Switzerland, Germany and Austria that will open accounts for your Act 20 company and allow you to hold retained earnings offshore and out of reach of civil creditors.

The next level of asset protection for a Puerto Rico Act 20 company is incorporating offshore subsidiaries. This is done to put a layer of insulation between the Puerto Rico company and the assets held offshore. We can form a corporation in Panama, Cook Islands, Cayman Islands, or any other solid asset protection jurisdiction to manage your corporate capital.

In order to maintain the tax benefits of tax deferral, these offshore companies must be wholly owned subsidiaries of the Puerto Rico Act 20 company. For example, we form a Panama Corporation owned by the Puerto Rico company. This gets us access to all of the banks and asset protection benefits of Panama and allows us to maintain our tax deferral status.

For this reason, we can’t use other more advanced techniques. It would not be possible for the owner of the Act 20 business to create a Cook Island Trust and fund the trust with retained earnings. Once those profits moved from the Puerto Rico company to the Cook Island Trust, they would become taxable in the United States as a distribution.

This limitation applies only to retained earnings. Residents of Puerto Rico operating under Act 22 may use any means necessary to protect their personal after tax assets from future civil creditors. Remember that, unlike a business based offshore, once you have paid your 4% corporate tax and withdrawn the dividends tax free, this is “after tax” money. You can invest and do with it whatever you like, just as you can with money taken from a US business after paying 40% in taxes.

If you’re new to the Puerto Rico tax holiday, and would like to compare it to traditional offshore tax plans, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion and Move Your Internet Business to Cayman Islands Tax Free

One of the best asset protection systems is to have capital paid directly to a Cook Island Trust. This will maximize the asset protection afforded your dividend distribution and keep it out of the reach of any civil creditor.

We can make arrangements for the dividends to pass directly to the Trust and bypassing any risk of a civil creditor reaching them. We can also setup a subsidiary of the Puerto Rico company in the Cook Islands to facilitate this transfer and the related cash management.

Another offshore asset protection strategy for Puerto Rico Act 20 business will allow you to carry forward the tax benefits of Puerto Rico once you move away from the island and no longer qualify for Act 22.

Let’s say you’ve been operating your Act 20 business for 5 years and have been living in Puerto Rico all of this time. You’ve taken out $10 million in tax free dividends, with the only tax paid being 4% to the government of Puerto Rico.

You’ve had enough of island life, your business has run its course, and are want to return to the United States. Once you make the move, all capital gains, dividends and passive income earned on that $10 million will become taxable by the IRS and your State.

One option is to invest this money into an offshore single pay premium life insurance policy. Money held in the policy will be protected from future civil creditors as well as the US taxing authorities.

This is because capital gains earned within the US compliant offshore life insurance policy are tax deferred. You only pay US tax on the gains if you close out the policy or otherwise remove the cash. Of course, you are free to borrow against the life policy with no tax cost.

If you hold the policy until your death, then the total value will transfer to your heirs tax free (or with a step-up in basis). If you put in $10 million, and it’s grown to $20 million, you’re heirs get $20 million tax free… and the only tax you ever paid on any of that cash is the 4% to Puerto Rico. Quite an amazing tax play.

I hope you’ve found this article on asset protection for a Puerto Rico Act 20 business helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on setting up your business in Puerto Rico or on protecting your retained earnings within that structure.

US E-2 Treaty Investor Visa Tax Strategy

07/12/2016/0 Comments/in Articles, International Business, Offshore Company Taxation, Puerto Rico Tax Incentives, Second Passport/by Christian Reeves

Moving to the US on with the E-2 Treaty Investor Visa comes with a very big hidden cost. You are by definition a US tax resident and required to pay US tax on your worldwide income AND report your foreign assets to the US government each year. Here’s how to reduce or eliminate that tax cost for the E-2 Treaty Investor Visa.

First, a few words on the E-2 treaty investor visa. This US residency program allows you to live in the United States so long as you are operating a business that employs a few American citizens. If the business shuts down, you will be asked to leave.

The E-2 treaty investor visa requires two things: 1) you must be from a treaty country, and 2) you must make an investment in the US by starting a business here. For a list of treaty countries, see the US Department of State website. I think you will be surprised with who’s in and who’s out.

The E-2 treaty investor visa is not a path to a green card nor US citizenship. It’s a residency visa that allows you and your family to live in the US while you are working here and employing a few people. Most investors start a business with about $200,000 and hire around 5 employees including the owner (you, the E-2 treaty investor).

The E-2 treaty investor visa doesn’t have a minimum investment amount nor a minimum number of employees. In my experience, businesses that are well funded through break-even with $200,000, and which will add 4 jobs to the economy (5 including the owner) are likely to be approved.

A person in the US on an E-2 treaty investor visa is expected to be running the business on a day to day basis. This is not a program for passive investors. It’s for those who want to start a small business in the US and work in that business each and every day.

Passive investors should go with the EB-5 Investor Visa. Here’s a tax strategy article for that program: Coming to America Tax Free with the EB-5 Visa and Puerto Rico. The EB-5 visa gives you a green card and US citizenship within 5 years but requires 10 employees and an investment of $500,000 to $1 million.

The E-2 treaty investor visa is a “temporary” residency visa that needs to be renewed every few years. Basically your case officer will check to see that the business is operating and the you are employing the agreed number of persons.

Because of its temporary status, you should have a plan to return to your home country once the business has run its course. As a practical matter, these companies can operate for decades. So, as long as the business is profitable, or you can keep it going by adding more cash, you can reside in the US. But, during the application process, we need to show a plan to return home.

E-2 Treaty Investor Visa Tax Issues

Because you are operating the business from the United States to qualify for the E-2 visa, all income earned in that corporation is US source income taxed at about 35% Federal plus your State (0% to 12%). This is to be expected when operating from the US.

What’s often not expected is US tax on your worldwide income.

Here’s an example of the E-2 visa tax trap: Let’s say you bought a house in Colombia in 1995 for $100,000. You move to the US in January of 2016 on the E-2 treaty investor visa and sell the home for $1 million in March of 2016 (yes, Colombia has an E-2 visa treaty).

You pay 10% in capital gains tax to Colombia on the sale, which is that country’s standard tax rate. In addition, you report the entire sale on your US tax return for 2016. The US capital gains rate is about 23.5% and you get a tax credit for the 10% paid to Colombia using the Foreign Tax Credit.

As a result, you owe the US Federal government 13.5% x $900,000 gain or $121,500 on the sale of your home in Colombia. If you’re living in a high tax State like New York or California, you’ll pay an additional 10.5% in capital gains. A very expensive tactical error which could have been avoided by selling the home before becoming a US tax resident.

Note: Had the capital gains tax rate in Colombia been 24% rather than 10%, you would owe nothing to the US Federal government and only paid State tax on the gain. That is to say, if the taxes paid in your home country are higher than the US rate, the Foreign Tax Credit will step in and prevent double taxation. ‘

The same tax expense will apply as long as you are in the US on the E-2 treaty investor visa program. All capital gains, interest income, income from businesses operated outside of the US, and income from any source, will be taxed in the US less any foreign taxes paid.

E-2 Treaty Investor Visa Tax Strategy

Careful tax planning is required before the E-2 visa applicant moves to the United States. Once you’re a tax resident, many planning opportunities are closed. For a high net worth individual, the tax costs of moving to the US can far outweigh the costs of starting the business and complying with the requirements of the E-2 visa.

For example, our Colombian could have sold his home before moving to the US and saved a lot of money and reporting hastle. Other possibilities are that he could have gifted his home to a family member or his heirs, sold it to an offshore trust, or otherwise disposed of it before coming to America.

And the same goes for brokerage accounts and other passive investments. There are a variety of offshore trusts, life insurance structures, and tax strategies that will allow you to manage assets for the benefit of your heirs and avoid US capital gains on any sales.

Also, special consideration should be paid to the US death tax. In certain circumstances, an E-2 visa holder is a US resident for income tax purposes but not for estate tax purposes. If someone was to die in that situation, they would be taxed in the US on all of their US assets and allowed only a $60,000 exclusion. US citizens get a $5.2 million estate tax exclusion.

US trusts and other planning tools should be considered to ensure the E-2 visa holder gets the full $5.2 million exclusion. None of us like to talk about death, but it’s an important conversation to have prior to moving into the United States.

As for an active businesses, different rules apply depending on whether the company is controlled by the US resident or whether it’s a joint venture with a nonresident partner. “Control” means ownership or control of more than 50% of the business.

If you, the E-2 visa applicant, sell or transfer half of their foreign business (not the E-2 business) to a family member who will operate it while you are in the US, you may realize significant tax savings in the US. Note that I am referring to an active partner and not a nominee director.

There is one way to enter the US on an E-2 treaty investor visa and pay zero tax to the US government. If you setup your business in the US territory of Puerto Rico, you will pay only 4% in corporate tax on the profits earned from that endeavor.

Next, if you are a resident of Puerto Rico, and spend 183 days a year on the island, you will pay zero capital gains taxes and zero tax on dividends from your Puerto Rico company.

Combine these two tax strategies together and you get a 4% tax rate on business profits and zero tax on passive income, dividends and capital gains. Compared to the 45% rate some Americans in high tax states pay, this is an amazing offer.

And, as a US territory, an E-2 visa from Puerto Rico is identical to an E-2 visa from New York or California (except for the tax rate of course). You’ll have full access to the United States and the right to come and go as you please. Travel between Puerto Rico and the United States is a domestic flight and there’s no immigration checkpoint.

The tax holiday in Puerto Rico for businesses is Act 20. The holiday for personal income and capital gains is Act 22. For more on this, see: How to Maximize the Tax Benefits of Puerto Rico

Note that my articles on Act 20 and 22 are focused on US citizens moving their businesses to Puerto Rico. We can also combine Act 20, 22, and the E-2 treaty investor visa to get you residency in the US without the tax bill.

I hope you have found this article on US E-2 Treaty Investor Visa Tax Strategy helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information. I will be happy to assist you to build a business in the US or Puerto Rico and qualify for residency.

Step by Step Guide to Taking Your Business Offshore

07/12/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation/by Christian Reeves

If you are going to take your business offshore in 2016, your offshore structure must have substance. No more shelf companies, no more nominee directors, no more trying to fake out the IRS. Taking your business offshore today demands a real office, employees, and work being done offshore.

Here is a step by step guide to taking your business offshore. I’ve assisted hundreds move their businesses abroad over the years and we’ll be happy to work with you to take your business offshore is a tax compliant and efficient manner.

Step 1: Develop a tax and business plan

We always say taxes shouldn’t drive the business… don’t let the tail wag the dog. But, most clients take their business offshore because they want to lower costs – both tax and overhead. If you didn’t want to cut costs and improve the bottom line, you would stay where you are in the United States.

When considering your overhead, focus on employees. Most countries will have lower wages than the US. The issue will be finding quality English speaking workers. How difficult that will be will depend on the level of work you require.

If you’re running a call center, then finding workers will be easy. If you are moving a software development business abroad, or require skilled engineers, finding the right people will be a challenge.

Then there are two types of tax plans. One for small businesses focused on the Foreign Earned Income Exclusion and a second for larger businesses that uses a transfer pricing model.

The Foreign Earned Income Exclusion plan is relatively simple: live outside of the US for 330 out of 365 days, or become a resident of another country, and you get up to $101,300 in salary from your offshore business tax free. If a husband and wife both operate the business, then you get up to $200,000 free of Federal Income Taxes.

Taking a large business offshore is a complex matter. Companies with net profits of $1 million and up need a more robust tax plan. This is especially true if you will have offices in the US and offshore.

These companies go offshore using a transfer pricing model that assigns income to the foreign subsidiary based on the amount of value added by that division. Likewise, the US group is taxed on value they create.

Let’s say you’re selling a widget for $100 that costs you $10 to make. Of this $90 profit, half can be reasonably attributed to the work done offshore and half to the US team. Thus, $45 of the profit is “transferred” the the low tax jurisdiction and half remains in the US.

For an article on taking your business offshore using the Foreign Earned Income Exclusion, see my post Move Your Internet Business to Cayman Islands.
For an article comparing the FEIE to the transfer pricing methodology available in the US territory of Puerto Rico, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

If you would like me to create a custom tax plan for your business, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to work with you to build a comprehensive and compliant tax strategy.

Step 2: Select your country of operation

Now that you have a tax plan, select the best jurisdiction to implement that plan. Your country of choice should have a compatible tax scheme that doesn’t tax foreign sourced profits. When done right, you can operate tax free in many jurisdictions.

As I said above, your country of operation must have low cost and qualified labor, especially if you will use the transfer pricing model and not the FEIE model. If you will be the only employee in the FEIE, then this doesn’t matter – live wherever you like that won’t tax your profits.

Balanced against tax and overhead is the quality of life. We chose to build our business in Panama for the reasons described above. However, Panama City is horribly humid and congested. If big city life is not for you, then look elsewhere.

For example, Cayman Islands is a beautiful place to live. However, labor is very expensive, as is housing and everything else. Cayman is great for a one man online business but horrible for a call center looking to hire 50 workers.

Spend some time making a list of possible jurisdictions, noting the positives and negatives of each. Everyone’s priorities will be different, so this is on you. Also, keep in mind that I’m talking about minimizing tax in you country of operation and incorporation here in Step 2.

Step 3: Form a corporation in your country of operation

Now that you have prioritized and found where you will take your business offshore, it’s time to form a corporation. Do not use an LLC or other structure – you need a corporation so that you can retain earnings offshore.

This corporation will also handle your payroll, office rent, and local expenses.

Step 4: Form a corporation in a second tax free jurisdiction

You want to setup a second corporation in a second country. This entity will bill clients and may help minimize your taxes in your country of operation. Depending on your nation’s tax system, they may only tax profits you bring in the country. So, if your corporation breaks-even at the end of the year, you will pay no taxes there.

This second offshore corporation in a tax free jurisdiction is a key component to minimizing your worldwide taxes. It won’t make a difference for the US, but it should reduce or eliminate taxes in your country of operation.

Step 5: Move your intellectual property offshore and into a separate structure

If you have intellectual property, move that offshore as soon as possible. Doing this will provide asset protection and significant tax benefits, especially for non-US sales.

The catch is that IP built in the US must be sold to the offshore company at fair market value. This means you must value the IP and pay taxes in the US on the sale.

So, if you are in the beginning stages of taking your business offshore, setup an IP holding company and build the IP outside of the US. This eliminates the transfer tax issue.

For some of the considerations that go into transferring IP offshore, you might read this post about the IRS investigating Facebook’s Irish IP transfers.

Step 6: Setup banking and credit cards

You’ll need multiple bank accounts, including one in your country of operation for local expenses, one in your billing country, and possibly in the United States.

I also strongly recommend you get more than one e-commerce or merchant account. Once you move your business offshore, your life’s blood will be payment processing and the procedures offshore are very different than in the US. Spend time to build redundancies into these systems.

For a detailed post on offshore credit card processing, see How to Get an Offshore Merchant Account.

Step 7: In-house bookkeeping and accounting

When Americans take their businesses offshore, they often ignore bookkeeping and accounting. They figure they aren’t in the US any longer, so time to relax.

Unfortunately, the US IRS has every right to audit your offshore business. Likewise, when you file your foreign corporation return(s) on Form 5471, you must apply US accounting standards.

For this reason, I suggest that you have an in-house bookkeeper so that you stay on the straight and narrow. Maybe he or she is a full time employee, or maybe someone who comes in once a week to do the books. Either way, this is a key position to get right from day one.

Step 8: Find local professionals

When you take your business offshore, finding honest local professionals is key. Hook up with the wrong people and they’ll hit you with “gringo pricing” and take advantage of you at every turn. Get this right and you will have a supportive and efficient relationship for years to come.

I would have put this as step 2, but I wanted you to think through the above items first and then look for outside support. Take my advice and learn from my mistakes – don’t try to go it alone in an offshore jurisdiction.

Step 9: Find US tax compliance

Now that your business is offshore, make sure you keep up with your US tax filing obligations. You’ll need to report your foreign corporations and international bank accounts to the IRS each and every year.

The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form FinCEN 114, referred to as the FBAR. Anyone who has more than $10,000 offshore will need to file this form.

The penalty for failing to file the FBAR is $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations.

In addition to filing the FBAR, you must report the account on your personal return, Form 1040, Schedule B.

Other international tax filing obligations include:

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity.

Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.

Form 3520 – Annual Return to Report Transactions With Foreign Trusts.

Form 3520-A – Annual Information Return of Foreign Trust.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation.

Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation.

Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States.

Failure to file these forms can open you to all kinds of penalties and risks, so do it right and don’t fall behind. The penalties for failure to file an offshore form are much higher than for failing to file a typical domestic form late.

Of course, I hope you will select Premier Offshore to handle your US compliance needs. But, no matter who you choose, be sure it’s done right.

I hope you’ve found this article on taking your business offshore to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 if you would like assistance in planning and implementing your international business strategy.

What is Puerto Rico Sourced Income for an Act 20 Business

07/12/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives/by Christian Reeves

Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. Maximizing Puerto Rico sourced income in an Act 20 business, and thus minimizing US sourced income, is the key to unlocking the 4% tax rate offered in Puerto Rico.

The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. Likewise, income sourced to the United States is taxable in the United States at standard rates, even if you run it through a Puerto Rico Act 20 company.

If you’re new to Puerto Rico Act 20, the basics are this: set up a business on the island that employees at least 5 people and pay only 4% in tax on your corporate profits. The balance can be held tax deferred if you live in the US or taken out as a tax free dividend if you live in Puerto Rico.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. Especially for those who want to live in the United States and operate a business based in Puerto Rico. The same goes for US companies that open divisions in Puerto Rico to get that 4% corporate tax rate on a portion of their profits.

If you move you and your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico.

Another reason all income in an Act 20 business will be Puerto Rico sourced income is the type of activities that qualify for Act 20. A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Only service based income will qualify for Act 20.

Service based income is profit from work done in Puerto Rico. Compensation for labor is always taxed where the work is performed. It doesn’t matter where the customer is located… only where you and your employees are when doing the work.

Note that wholesale distribution of products can qualify for Act 20. This is because you are performing the service of sourcing, manufacturing, and/or importing goods that will be sold outside of Puerto Rico.

This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. Retail sales, such as selling online to buyers in the US, is not Act 20 income and will be fully taxed in both the United States and in Puerto Rico.

Of course, there are many types of income that could be earned in Puerto Rico. But, only service based income will qualify for Act 20 tax benefits.

Here is a list of the various types of income and where they are sourced.

Item of Income	Where Income is Sourced
Salaries, wages, and other compensation for labor or personal services	Where labor or services are performed. This is the heart of Puerto Rico’s Act 20 for businesses.
Pensions	Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located
Interest	Puerto Rico if you are a legal resident of the island under Act 22
Dividends	Where corporation or LLC is incorporated. Dividends from an Act 20 corporation will be tax free in Puerto Rico to a resident of the territory who qualifies under Act 22. Dividends from US states are taxable where the company is formed.
Rents	Location of property
Royalties on patents, copyrights, trademarks, etc.:	Where property is used. If used by the Puerto Rico company, then taxed in Puerto Rico. Special benefits can apply to intellectual property created in in Puerto Rico.
Sale of business inventory—purchased	Where sold. If you sell a physical good (inventory) in to the United States, you have US sourced income. For this reason, all Puerto Rico Act 20 businesses must offer a SERVICE and not sell inventory.
Sale of business inventory—produced	Allocation if produced and sold in different locations
Sale of real estate	Taxed where the property is located
Sale of personal property	Seller’s tax home. Personal property includes such things as cars, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, etc.

Above, I gave you the example of the perfect client – someone who moves herself and her business to Puerto Rico, breaking all ties with the United States. Such a person will maximize Puerto Rico sourced income and thus minimize her total taxes.

For more on this topic, see: How to Maximize the Tax Benefits of Puerto Rico

If you want to live in the United States and operate through a Puerto Rico company, determining Puerto Rico sourced income becomes much more difficult and contentious.

The rule is simple enough: Any value added in Puerto Rico is Puerto Rico sourced income and any value added in the United States is US sourced income. So, if you’re selling an online service for $50, and $25 of the value of that service comes from your 5 employees in Puerto Rico, then half your net profits can be attributed to Puerto Rico.

When you’re attributing income between the US with its 35% Federal + state taxes and Puerto Rico at 4%, you will want to maximize the perceived value of the work done in Puerto Rico.

For small businesses, you can look at the amount of hours spent in Puerto Rico vs the US. You can also estimate the value of work done in Puerto Rico by how much you would be willing to pay an independent and unrelated firm to provide those services to your US company.

When income sourcing between Puerto Rico and the US is a major issue ($1 million or more), then you need to hire a professional. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited.

The cost for a transfer pricing study will vary widely the the firm selected and the type of business you are operating. I’ve seen quotes of $6,000 to $65,000 by big name firms in California and New York, as smaller providers in Puerto Rico.

I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to help you structure your business in Puerto Rico.

Who is a Resident of Puerto Rico for US Tax Purposes

07/12/2016/0 Comments/in Articles, Offshore Company Taxation, Puerto Rico Tax Incentives/by Christian Reeves

If you are considering moving you and a business to Puerto Rico for the tax benefits, be aware that the definition of “resident of Puerto Rico” is a complex one. The US IRS has created special forms and definitions as to who is and who is not a resident of Puerto Rico for US tax purposes.

If you’re reading this and saying to yourself, “what tax benefits is he talking about?” Let me begin by outlining them here.

First, you can move a business, or part of a business, from the United States to the US territory of Puerto Rico. So long as that business employees at least 5 residents of Puerto Rico, it will pay only 4% in corporate income tax. For more on how to get this 4% rate on Puerto Rico sourced income guaranteed for 20 years, see: Blood in the Streets Offshore Tax Planning.

Second, you can move yourself out of the United States and into Puerto Rico. By doing this you will be exempt from US and Puerto Rico tax on capital gains. You will also pay zero tax on dividends from your Puerto Rico corporation. This zero percent tax rate on capital gains applies to assets acquired after you move to Puerto Rico. For more, please read my article titled How to Maximize the Tax Benefits of Puerto Rico.

Puerto Rico is the only country or territory that can cut your capital gains and dividends tax. When you move offshore, you still pay US tax on capital gains and dividends. The only tax savings for expat Americans is the Foreign Tax Credit. For more on this see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

Third, foreign persons can immigrate to the United States by starting businesses in Puerto Rico and get these same tax benefits. Both the EB-5 business investor visa and the E-2 treaty investor visa are available from Puerto Rico. For more, see: Coming to America Tax Free with the EB-5 Visa and Puerto Rico.

Now that you’re caught up, let’s talk about who is a resident of Puerto Rico for US tax purposes.

IRS Publications 1321 and 570 define a resident of Puerto Rico as someone who:

Meets the presence test by spending at least 183 days a year in Puerto Rico or qualifying under one of the other tests,
Does not have a tax home outside of Puerto Rico, and
Does not have a closer connection to the United States or to a foreign country than to Puerto Rico.

The first of these criteria for being considered a resident of Puerto Rico for US tax purposes is known as the physical presence test. The easiest way to satisfy this test by spending at least 183 days a calendar year on the island.

If you can’t hit 183 days (for example, you are starting your residency in November), then you need to qualify for Puerto Rico residency using the 3 year test. You are a tax resident of Puerto Rico if you spend a minimum of 60 days in Puerto Rico during each tax year and at least 549 days over 3 consecutive years.

Once you establish residency in Puerto Rico, and break ties with the United States, there are other tests you can use to ensure you are classified as a tax resident of Puerto Rico in future years.

You can qualify as a resident of Puerto Rico if any of the following is true:

You were present in the United States for no more than 90 days during the tax year.
You had earned income in the United States of less than $3,000 and spent more days in Puerto Rico than you did in the United States during the tax year.
1. Earned income is pay for personal services performed such as wages, salaries, or professional Fees. This amount does not include capital gains.
You had no significant connection to the United States during the tax year.

Important Note: If you are moving to Puerto Rico from the United States, you must first qualify under the 183 day test or the 3 year test described above. Then, once residency is established, you can use these less restrictive tests.

Foreign Persons: If you are not a US resident or citizen, and are applying for an E-2 or EB-5 visa from Puerto Rico, you can use any of these tests to prove you are a tax resident of Puerto Rico. For example, so long as you are in the US less than 90 days of the year, it doesn’t matter how much time you spend in Puerto Rico.

The key to the Puerto Rico tax deal is to understand who is a tax resident of Puerto Rico. To determine who is a resident of Puerto Rico, we must consider what it means to be “present” in Puerto Rico and the United States.

You are considered to be present in the United States on any day that you are physically
in the US at any time during the day. So, if you make a quick trip to Miami to buy a new laptop, that is a day in the United States.

Connecting through a United States airport to a foreign country is usually not a day in the US. If you don’t leave the airport, you are not in the United States. If your flight is delayed, and you are in the airport for more than 24 hours, it will be counted as a day in America.

And, beginning this year (with tax year 2016), some days spent in a foreign country will be considered days in Puerto Rico for tax purposes. Under this new rule, you can count up to 30 days abroad as days in Puerto Rico. For more information, see IRS publication 570, page 4. Note that this 30 day bonus does not count for the 60 day rule when you are using the 3 year calculation described above.

You must also have more connections to Puerto Rico than the United States to qualify as a tax resident of Puerto Rico.You will be considered to have a closer connection to Puerto Rico than the United States if you have developed more contacts with the Puerto Rico and broken your ties to America.

The facts and circumstances around your move to Puerto Rico will be reviewed carefully if you’re spending a lot of time in the US, your wife and children are living in the US, etc. If you have significant tax free income in Puerto Rico, you should consider your US connections carefully. I expect audits on this issue to increase significantly in the coming years.

Ties to the US vs Puerto Rico for residency purposes include, but are not limited to:

Where is your permanent residence – note that Puerto Rico’s Act 22 requires you to buy a home on the island and that this must become your permanent home.
Where your spouse and children are living.
- Note that US states will also try to tax your Puerto Rico income if your spouse is living outside of Puerto Rico. For example, if your wife is living in California, that state will consider half of your income CA source income to him or her under its community property rules.
The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
The social, political, cultural, professional, or religious organizations that you belong. You should be cutting relationships with the US and joining clubs in Puerto Rico.
Where most of your banking activities take place. I suggest banking for a Puerto Rico company should be in Puerto Rico or offshore. We can open accounts in Switzerland elsewhere for Puerto Rico companies.
Where you have a driver’s license and where you vote. Both of these should be in Puerto Rico.
The location of charitable organizations to which you contribute.
Where you list as your residency in official government and legal documents. For example, the address you list on contracts, loan applications, and government documents such as Form W8BEN or Form W9, Request for Taxpayer Identification Number and Certification.

In an audit, your connections to Puerto Rico will be compared to your connections with the United States and foreign countries. They will also review your bank statements, airline history, and credit / debit cards to determine how many days you spent in the United States vs Puerto Rico.

When structured carefully, incorporating and operating from Puerto Rico will cut your US tax rate from 40% to 4% overnight and eliminate tax on capital gains for assets purchased after you move to the island. The key to this tax plan is proving you are a resident of Puerto Rico. Remember that the burden of proof is on you.

I hope you have found this article on who is a resident of Puerto Rico for US tax purposes to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on how to qualify for the tax benefits offered by Puerto Rico.

Coming to America Tax Free with the EB-5 Visa and Puerto Rico

05/28/2016/0 Comments/in Articles, International Business, Offshore Company Taxation, Puerto Rico Tax Incentives, Second Passport, Taxation/by Christian Reeves

If you are thinking about coming to America, get ready for high taxes on your worldwide income. In this article, I will explain how to become a US citizen using the EB-5 Visa and Puerto Rico to pay near zero US taxes.

The US taxes its citizens, as well as green card holders and residents, on 100% of the money they make from all sources around the world. If you are living in the United States, America wants her share… and that share is often over 40% of your total earnings.

If you are operating a successful business from Hong Kong, and you move to the US, all profits of that Hong Kong business become taxable. If you move to America and then sell your home in Singapore, you will pay US tax on the capital gains realized.

There is one, and only one, way to get US citizenship without paying these taxes. That is to come to America tax free with the EB-5 Visa from Puerto Rico.

Because Puerto Rico is a US territory, US Federal immigration laws apply but US tax laws do not. The tax laws of Puerto Rico supersede the US tax rules for residents of the island. Because of this hybrid legal system, you can immigrate to the United States through Puerto Rico using the EB-5 visa and qualify to live tax free under Puerto Rico’s tax laws.

Resident: A “resident” of Puerto Rico is someone who spends at least 183 days a year on the island. Travel between Puerto Rico and the US is a domestic flight with no immigration checkpoint. As an EB-5 visa holder, you may spend the rest of your time (180 days a year) in any part of the US you choose.

Once the EB-5 visa process is complete, you will be a US citizen with all of the rights and privileges of someone born in the US and who pays 40%+ in taxes. You will have a US passport and the right to live and work anywhere in the country.

The same is true of children born in Puerto Rico. Anyone born in Puerto Rico is a US citizen at birth, just as they are if born in a State. The only difference between Puerto Rico and the US in this case are its tax laws.

Here is a description of the EB-5 Investor Visa, a summary Puerto Rico’s tax laws, and how to maximize the benefits of both to become a US citizen tax free.

What is the EB-5 Investor Visa

The EB-5 investor visa is a path to US citizenship. Unlike many other US immigration programs, the EB-5 visa has no waiting lists, quotas, or lottery. The terms are simple – make the investment, wait five years, and become a US citizen by going through the naturalization process. If you follow the steps, citizenship and a US passport are guaranteed.

The investment required for the EB-5 investor visa is far higher than any other program. You must invest in a business that creates at least 10 new jobs and maintains those jobs for about 6 years (the total time to complete your citizenship process).

The amount of money you are required to invest will depend on where the business is located. Most cities in the US require an investment of $1 million. If you set up the business in a distressed region of the country, the investment is reduced to $500,000.

Basically, all of Puerto Rico is designated as a distressed region for the EB-5 investor visa. Any business created on the island will qualify for the discounted investment amount of $500,000.

Of course, you will need to keep the business operating and profitable for at least 6 years with 10 employees. If you can do that with $500,000 in capital, great. If it requires more, then you will need to invest more.

What is Puerto Rico Act 20 and 22

When the EB-5 investor visa is combined with the tax benefits of Puerto Rico, you may be able to immigrate to the United States, obtain a green card, and finally citizenship with a US passport, all without paying a dollar in tax.

In order to accomplish this feat, we combine the EB-5 Investor Visa with Act 20 and Act 22 in Puerto Rico. I will briefly summarize them here.

Act 20 is the business tax holiday that gets you a 4% corporate tax rate on any profits earned by your Puerto Rico company. The requirements are simple:

The minimum number of employees required for Act 20 business is 5. However, to qualify for EB-5, you need 10. So, we setup an Act 20 company with 10 employees.
The company must be providing a service from Puerto Rico to persons or companies outside of Puerto Rico. Internet marketing, call centers, import / export, sales teams, and any online business are good candidates for Act 20. Retail businesses, franchises and restaurants do not qualify for Act 20. They do qualify for the EB-5 visa, but not for the tax deal.

For more detailed information on Puerto Rico’s Act 20, see: How to Maximize the Benefits of Puerto Rico Act 20

Act 22 is the personal tax holiday. A legal resident of Puerto Rico, who purchases a home, spends at least 183 days a year on the island, and signs up for Act 22, will pay zero capital gains tax and zero tax on dividends from his or her Puerto Rico company.

When you combine Act 20 with 22, you get a corporate tax rate on profits of 4% and zero tax on distributions of dividends from those profits. The only tax paid is the 4% corporate rate.

I also note that salaries in Puerto Rico are lower than anywhere in the US and that they might be going lower. Minimum wage is $7.25 and a recent House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years.

For more information on recent legislation, see: Good News from Congress for Act 20 Business in Puerto Rico

How to Combine the EB-5 Investor Visa with Puerto Rico Act 20 and 22

In order to combine the immigration benefits of the EB-5 investor visa with the tax benefits of Puerto Rico, we can setup an internet business or other service based company for you on the island. That company will have 10 employees and qualify under Act 20 and EB-5.

For example, the business might provide content, design, advertising, and SEO services to persons and companies outside of Puerto Rico. Alternatively, the business might import goods from China and sell them to a distributor in the US (may operate as a wholesaler but not a retailer).

For a complete list of services that qualify for Act 20, please send an email to info@premieroffshore.com.

You may fund the business with $500,000 to $1 million in capital. Remember that the business must be self sufficient for at least 6 years and that your investment should cover costs until break-even. Your business plan must show a stable and profitable business will be operating from the United States with at least 10 employees.

As I said above, profits of this business will be taxed at 4%. Dividends to you, a resident of Puerto Rico, will be tax free.

What if you Don’t Want to Live in Puerto Rico?

You are not required to live in Puerto Rico to qualify for Act 20 or for the EB-5. Only Act 22, the personal tax holiday, requires you be a resident of the island.

If you immigrated to the US with an EB-5 investor visa, and setup an Act 20 company, but did not live in Puerto Rico, you would pay 4% in tax on Puerto Rico sourced income. You could then hold net profits from Puerto Rico sourced income in the corporation tax deferred.

If you are living in the US, you would pay US tax on any dividends or distributions from that Puerto Rico company. You would also pay US tax on income from your investments outside of the US.

So, Act 20 will get you tax deferral in your EB-5 business. Act 22 gets you tax free distributions from that EB-5 business. Act 22 also cuts your US tax rate to zero on capital gains on assets acquired after your move to Puerto Rico.

How to Use an E-2 Visa to Expedite an EB-5 Visa Application

The EB-5 visa process is a long one. Remember that it comes with guaranteed US citizenship and green card. As such, the process is demanding.

It will take well over a year to have your EB-5 visa approved. If getting into the United States as quickly as possible is important to you, then you might apply under the E-2 visa program first.

We can setup an Act 20 business with an E-2 and get your temporary visa in 30 to 90 days. This gets you and your family into the country.

You then operate the business with 5 employees under E-2 until your EB-5 is approved. When you get your green card under the EB-5, you hire 5 more employees for a total of 10. This is because the E-2 and Act 20 require 5 employees. When you are ready to upgrade to the EB-5, you can add 5 more for a total of ten employees in Puerto Rico.

Note that the E-2 visa is only available to those from treaty countries and has different requirements from the EB-5. For more information, see E-2 Treaty Investor Visa

How I can Help

We can assist you from start to finish in setting up an EB-5 and Act 20 compliant business in Puerto Rico. This includes writing the business plan, financial analysis, and everything related to applying for the EB-5.

Next we will incorporate your business, lease office space, hire and train employees, and get the business operating. This will include an Act 20 contract with Puerto Rico that will guarantee your tax holiday for 20 years.

We provide a turnkey solution in Puerto Rico that will maximize the benefits of the EB-5 and tax benefits of Puerto Rico. For more information, you can reach me directly at info@premieroffshore.com or by calling (619) 483-1708.

Move Your Internet Business to Cayman Islands Tax Free

05/13/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Travel, Lifestyle and Culture/by Christian Reeves

Are you looking for a high quality of life, no taxes, and a cool offshore jurisdiction from which to operate your internet business? Ready to move you and your team to paradise for a few years to rake in the cash tax free? Then consider moving your internet business to Cayman Islands.

Cayman Islands had a tax deal you can’t refuse. Move to this business-friendly group of islands with its first-world infrastructure and amazing climate, and pay no taxes. You will also get a 5 year renewable work / residency visa for you, your staff, and their families. There are no restrictions on the number of workers you can bring with you and no requirement to hire locals.

Historically, visas and work permits were extremely difficult to obtain in Cayman. Securing residency previously required you to buy real estate of $500,000 to $1 million dollars and navigate river of red tape.

Because a residency permit and work visa are essential for the American to qualify for the Foreign Earned Income Exclusion, very few small businesses set up in Cayman.

Suffice it to say, those days are gone and now Cayman Islands is open for business. Today, you can relocate your internet business to Cayman Islands efficiently and without (most) of the impediments.

Moving a business to Cayman also gets you access to their world-class banks and credit card processing facilities that have been shut to Americans for several years now. Only US persons with a licensed business or a home on Cayman may open a account on the Island.

For example, to further reduce your contacts with the US, you might process credit cards through First Atlantic Commerce, a leading global online payment solutions provider. This enables you to accept payments in up to 145 world currencies in real-time on a 100% PCI-compliant platform. Merchant services include:

Multi-currency, multi jurisdictional settlement
Real-time processing
Virtual Terminal
Repeat and Subscription Billing
Card Number Tokenization
3-D Secure™ (bank dependent)
CVV2/CVC2/CID and AVS checks
PCI Compliant gateway

We also highly recommend banking and credit card processing services from Royal Bank of Canada.

Now on to US Taxes.

Here’s how to move your business to Cayman Islands tax free. Do it right and you and your staff can earn up to $101,300 tax free in salary. That’s right, everyone who moves to Cayman with you gets $101,300 tax free. That equates to about a 35% pay increase on your first $100,000 in salary… certainly worth hanging out on a beautiful Caribbean island for a year to earn.

You will pay US taxes on salary over $101,300. You might create defined benefit or other retirement structures to further defer tax. A small business might simply hold retained earnings tax deferred.

Even better, you and your team won’t be required to pay self employment tax or any of the US social taxes. No FICA, Medicare, or Obama taxes. That’s a savings of about 15% (7.5% to the employer and 7.5% to the employee).

Of course, you’re in business to make a profit, not just pay your employees. Any income generated by the Cayman Islands corporation can be held offshore tax deferred. If you accrue $5 million in net profits over 3 years on the island, so long as you hold them in your Cayman corporation, you won’t be required to pay US taxes.

The devil is in the details of the US tax code and I’ll get to that.

First, let me point out that I am talking about moving you and your business out of the United States and to the Cayman Islands. This is not some tax dodge using shell companies or hiding from the IRS. This is committing to the business, making the move, and earning the tax benefits.

Shell companies and offshore structures with no substance behind them are so 2000. These days, if you want to cut your US taxes, you must have employees and operations outside of the US. For most businesses, this means moving you and your workers out of the United States for a time.

Then and only then will some of the income generated by this division qualify to be held in the Cayman Islands corporation tax deferred. More on this soon….

In support of this fact, the Cayman Islands Government has granted a number of globally competitive tax holidays / tax free zones throughout the Island. They allow your businesses to establish a physical presence plus offer fast-track business licensing and visa processing. These programs attempt to eliminate the red-tape, excessive costs, and uncertainty that one would normally experience when trying to set up a business in Cayman Islands.

These tax free zones provide the following benefits:

No corporate, income, sales or capital gains tax in Cayman Islands – tax payable in the USA is a complex matter summarized below.
100% foreign company ownership permitted
A 3-4 week fast-track business licensing regime
Renewable 5-year work/residency visas granted in 5 days
Cutting-edge IT and business infrastructure
Offshore hosting & payment gateway
Minimal Government regulation
No Government reporting or filing requirements
A tech cluster with massive cross-marketing opportunities
’One-stop-shop’ Administration services
Work visas for your staff and residency permits for your spouse and children at no additional cost.

Note that you must operate your business in one of the Island’s tax free zones to get these benefits. Also, your business must be in one of the industries to which a tax holiday is available. Qualified businesses include:

Internet & Technology
Media, Marketing or Film
Biotechnology & Life Sciences
Commodities & Derivatives
Maritime Services

How to Maximize the US Tax Benefits of Moving Your Business to Cayman Islands

Let’s get back to the devil (the IRS) and those details.

The key to the offer in Cayman is the fact that you and your employees will receive work and residency permits on the island. In the past, these have been extremely difficult to get and required that you hire a proportional number of Cayman citizens.

As of 2016, Cayman understands that the days of the shell company are coming to an end. The government is moving to a service based offering that allows you to establish a real business with substance and employees who qualify for the Foreign Earned Income Exclusion. One that will pass muster with the IRS and allow you to minimize your US taxes.

Of course, you need to do your part to make Uncle Sam happy as well. You need to move your business, your workers, and yourself to Cayman Islands. You must reside on the island as a legal resident with a work permit (we have that covered for you), qualify for the Foreign Earned Income Exclusion, and obtain a license from one of their tax free zones.

To qualify for the Foreign Earned Income Exclusion, you need to move to Cayman for the foreseeable future, make the Island your home base, and stay out of the US approximately 8 months of the year.

Cayman Islands should be your home base and the jurisdiction from which you operate your business. You don’t need to spend a certain amount of time on Cayman, but you do need to be out of the United States for about 8 months a year.

This allows you to earn up $101,300 in salary from your Cayman corporation tax free in the United States, avoid US social taxes, and retain net profits from your active business in the Cayman corporation tax deferred. The fact that you are structured and licensed in one of the Cayman tax free zones means you operate tax free in Cayman also.

Note that I said net profits / retained earnings in your Cayman Islands corporation will be tax deferred – not tax free – in the United States. When you will decide to take out these retained earnings from your corporation, they will be taxed in the United States. You can decide when that occurs, but you must pay Uncle Sam some day.

The Foreign Earned Income Exclusion is a complex topic, and I have merely skimmed the surface here. For more details, see:

As you read through these thrilling posts, keep in mind that we are talking about moving you and your business to Cayman. You will qualify for the Foreign Earned Income Exclusion using the residency test and not the physical presence test.

Costs of Setting Up in Cayman Islands

I’ve been working offshore since 2000 and I can tell you that Cayman Islands is without a doubt the most beautiful tax paradise. Add to this their world class services, IT infrastructure, and top legal and business talent, and it’s an amazing place from which to operate an internet business. Cayman Islands is NOT a low cost option Cayman is the Hyatt or Nieman Marcus of the offshore world, not Wal Mart or Best Western.

Cayman is one of the more expensive jurisdictions from which to run your business. You will need to pay your employees the same as you do in a major US city like Los Angeles or New York to cover the cost of living. Everything you do, from equipment to meals to lodging, will cost about the same as the United States. And everyone will want to travel back and forth to the US to escape that Island Fever.

If you are looking for one of the most beautiful and professional spots on the planet from which to operate your business, Cayman Islands is it.

If you are looking for a place that offers low cost labor and a 4% tax rate, and you have at least 5 employees, consider Puerto Rico.

If you want to maximize the value of the Foreign Earned Income Exclusion in a lower cost city, consider Panama. Yes, Panama regardless of the BS you read about the Panama Papers.

Here is a summary of the costs of setting up your business in Cayman Islands. Note that the minimum number of employees in Cayman is one. The tax benefits described here assume you (the business owner) are the first employee. You might be the only employee or you can bring with you as many support staff as you like.

The tax free zones have created turn-key offerings that include your residency visa, work permit, and office. The total cost for all of this in a shared / group space is about $1,550 per month. The minimum term of the lease is 3 years and the first year of $18,500 is due at signing.

You can have up to two people working in the group space. If you have 3 or more employees, you will need a private office. See below.

The cost for a private office for one person with 90 to 100 sq ft., again including all permits, is about $3,000 per month on a three year contract. This includes furniture, phone system, etc. Payments are made quarterly at $9,237.50.

A three person office is $53,450 per year and a 2 person office can be either $41,250 or $49,250 per year depending on if a chooses the standard or large 2 person office. Payments are made quarterly and the minimum term is 3 years.

In addition, each resident will need to have health insurance, which starts at about $200 per person per month. Family plans are available.

And, speaking of families, there is no additional cost to bring your spouse and dependent children under 18 years of age to Cayman in this program. Their residency permits are basically processed for free and included in your office rent.

However, you might consider setting up an office and work permit for your spouse. That will allow him or her to also earn $101,300 per year tax free under the FEIE working in your family business In this way, you can double the value of the Foreign Earned Income Exclusion.

Also, your kids must be enrolled in private school in Cayman. They are not allowed to roam the streets unchecked. Private school costs about $1,300 per month and a wide range of options and price points are available.

Finally, employees are required to have some type of retirement account on Cayman after 9 months of employment. This may provide additional tax planning options.

As I said above, the cost of living in Cayman Islands will be the same or higher than a major US city. Rent in a residential neighborhood for a two bedroom will run you $2,000 to $3,000 per month. The commute would be about 20 minutes to the office. .

If you want to go big, the rent for a two bedroom on Seven Mile Beach will run you $5,000 to $6,000 per month. If you would like to scope out the area, I suggest you stay at one of the many hotels on Seven Mile.

We can have you setup and operating from Cayman Islands in about 40 days. For more information, and a quote on forming your Cayman corporation and US / Cayman tax planning, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

Cayman Islands vs Puerto Rico

Allow me to close by comparing Cayman Islands to the US territory of Puerto Rico. Puerto Rico offers a tax holiday at 4%, a tax rate which is guaranteed for 20 years. The catch is that your business must move to Puerto Rico and have at least 5 employees on the island.

If you have fewer than 5 employees, Puerto Rico is not an option. Focus on Cayman Islands or Panama.

The tax deal in Puerto Rico is very different from that of Cayman Islands. In fact, it’s the reverse of the Foreign Earned Income Exclusion described above.

In Cayman, you earn $101,300 tax free and leave the balance of the profits in the offshore corporation tax deferred.

In Puerto Rico, you draw a reasonable salary and pay tax at ordinary income rates on that money. The remaining net profits of the business are then taxed in the corporation at 4%. If you are living in Puerto Rico, you can pull these profits (less the 4%) as tax free dividends.

So, if your salary is $100,000, and your remaining profit is $2 million, you will pay about $110,000 in Puerto Rico tax (($100,000 x 30%) + ($2 million x 4%) = $110,000). This is all of the tax you will ever pay on this income.

In Cayman, the $100,000 salary is tax free. At some point, you will pay US tax at 35% on the $2 million, or $700,000. This might be years or decades in the future, but the bill will come due.

For more on this topic, take a read through Puerto Rico’s Tax Deal vs the Foreign Earned Income Exclusion.

I also note that you, as a US citizen or resident, do not need an visas or special permission to move to Puerto Rico. It’s a domestic flight and you can relocate as easily as you would from New York to Miami.

Next, your cost of labor in Puerto Rico will be 30% to 40% lower than in Cayman Islands. The same goes for your cost of living and operating the business.

Finally, Puerto Rico allows you to spend more time in the US. You should be on the island for 183 days a year, not 240 as you should with the Foreign Earned Income Exclusion using the residency test.

Conclusion

Whether you want to operate your business from an island paradise like Cayman Islands or a fiscal paradise like Puerto Rico, all tax deals these days require substance. This means a business with employees abroad adding value and working in the business.

You need to move you and your business outside of the US to maximize the benefits of the Foreign Earned Income Exclusion or of the US territorial tax offerings of Puerto Rico.

I hope you’ve found this article helpful. For more information on moving your business to Cayman Islands or Puerto Rico, please contact me at info@premieroffshore.com or (619) 483-1708 for a confidential consultation.

Mossack Fonseca Searchable Database Goes Online – Who Should be Afraid of the IRS and Panama Papers?

05/09/2016/0 Comments/in Articles, Offshore Company, Offshore Company Taxation, Panama, Taxation/by Christian Reeves

Do you have a company or bank account in Panama? Are you wondering if you should be worried about the IRS and Panama Papers? Do you know that the searchable database of Mossack Fonseca clients came online today? Is the thought of the IRS knocking on your door keeping you up at night?

Let me explain who should be afraid of the IRS and Panama Papers and who has nothing to worry about. Hopefully this will help most of you to rest easy, and those who have issues will take action before it’s too late.

First, a bit of background. A few months back, a hacker stole the records of one of the largest incorporators and law firms in Panama, Mossack Fonseca. The German newspaper Sueddeutsche Zeitung obtained the 11.5 million files and shared them with the Washington D.C.-based group of investigative journalists. This trove of documents became known in the press as the Panama Papers.

The Panama Papers have shone a light on many illegal uses of offshore corporations and offshore bank accounts. As Vice put bluntly in April, “The politicians who have taken and made bribes, dodged taxes, and amassed fortunes of unimaginable scale are your politicians.”

Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers.

Also exposed have been scammers and fraudsters hiding behind shell companies. For example, companies setup by Mossack Fonseca were used to dupe over 1,000 UK residents in a ponzi scheme.

I applaud the person who obtained these documents for shedding light on the dark side of the industry. Cleaning out those who use offshore structures to hide crime – or even hypocrisy – is a worthy goal that helps those of us trying to do things the right way. Those who use offshore companies within the law to minimize taxation and maximize privacy.

But, what about privacy for those who are following the law? What should reporters do with this data? Should they have the right to report on the private dealings of thousands of innocent people with legitimate uses for these companies?

Isn’t this akin to receiving stolen business records and financial data from Apple and putting in on the front page? No newspaper on the planet would do that… it would be immoral.

Does anyone have a right to know that Simon Cowell formed two offshore companies in the British Virgin Islands to buy property in the Caribbean?

What about the fact that Jackie Chan has an offshore company to manage his international projects?

What about Mossack Fonseca drafting the contracts for the sale of David Geffen’s 377-foot-long yacht? The boat was flagged in Panama, which is very common. Do we need to know this?

It appears that these were perfectly legal and compliant entities. Are they newsworthy?

Is there no right to privacy in our business and financial dealings? Do those who write on these topics owe a duty of care when using stolen data?

Job well done by the hacker… now how about some level of responsibility from the reporters?

OK, I’m off my soapbox. Back to who should be afraid of the IRS and Panama Papers.

If you or your representative used Mossack Fonseca to form your offshore structure, you need to be prepared for that information to become public. A searchable database of 200,000 offshore accounts, and thousands of companies went online today.

This online database will list:

The name of anyone listed as a director or shareholder of an offshore company formed by Mossack Fonseca.
The names and addresses of more than 200,000 offshore companies.
The identities of dozens of intermediary agencies that helped set up and run those structures with Mossack Fonseca.

NOTE: If you have a company in Panama, you should ask your incorporator who they used as the resident agent for service of process. If your lawyer or tax planning firm incorporated through Mossack Fonseca, your data is probably in the public domain. Premier Offshore has never worked with Mossack Fonseca.

Most clients list themselves as the director and shareholder of the offshore company. Those who decided to be as transparent as possible in their dealings with Mossack Fonseca will be listed in the database.

In fact, I would never setup a company with a nominee shareholder or officer. To do so would put your corporate assets at risk. Nominee directors in Panama are fine – they have no power.

It is possible to keep your identity private in Panama without using a nominee. You can incorporate a Limited Liability Company in another jurisdiction, and use that company as the shareholder. In this way, you keep control of the assets while maximizing privacy. For more on this, checkout The Bearer Share Company Hack.

If you are listed in the Mossack Fonseca database, should you be afraid of the IRS and Panama Papers?

If you’ve been filing your US tax forms and reporting your transactions accurately, you have nothing to worry about. To you, the Panama Papers is a data breach that has compromised your privacy, but nothing more.

I suggest the Panama Papers won’t even increase your risk of an audit. At most, the IRS will compare your filing to the database, find that you are in compliance, and that will be the end of it.

Considering that your offshore bank is reporting your transactions to the IRS under FACTA, the Panama Papers is only giving unto the IRS that which they already receive.

On the other hand, if you have an unreported account or company in Panama, you should be very afraid. You know that the IRS will download the Mossack Fonseca database and use it to find those who are not in compliance.

If you’ve used nominee shareholders or as singors on your bank account to avoid FATCA, you are now in extreme danger. The IRS will consider this “wilful” and come after you with a vengeance.

But you still have time to take action and save yourself. If you signup for one of the IRS Voluntary Disclosure Initiatives before you become a target, you will pay only interest and penalties.

If you are deemed willful, and the IRS comes looking for you, you are at risk of significant jail time.

The IRS is currently offering five flavors of the Offshore Voluntary Disclosure Initiative.

Offshore Voluntary Disclosure Program (“OVDP”),
Domestic Streamlined,
Foreign Streamlined,
Transitional Relief, and
Delinquent FBAR.

If the IRS might consider your actions willful or intentional, you need the Offshore Voluntary Disclosure Program. This program one is the most costly and complex, but it will save your bacon if you are nearly in the fire. The OVDP gives you cover for your prior bad acts and a get out of jail card – not for free – but out of jail.

The OVDP requires you file 8 years of amended tax returns and FBARs, plut pay taxes, interest and a 20% penalty on whatever you owe. Now for the kicker, there’s also a 27.5% penalty on your highest offshore account balance. In some cases, that penalty may be 50% depending on the bank and timing.

If the bank where your account is located is under investigation when you apply for the OVDP, the government figures they would have caught you eventually and charge a 50% penalty.

If you are living abroad, or you have paid US tax on your income, but forgot to submit a form or two, you might qualify for OVDI Lite. Penalties for these programs range from zero to 5%, and the cost of getting back in the government’s good graces will be much lower than the OVDP.

No matter the cost, I can guarantee you that the risk of doing nothing far outweighs the financial burden of coming forward now.

To repeat, if you have an undeclared an account in Panama, you MUST take action before the IRS finds you. If you or your Panama structure are out of compliance, you should be very afraid of the IRS and the Panama Papers.

I also suggest anyone with unreported accounts or offshore companies in Panama should join the OVDI. Just because you were lucky and did not use Mossack Fonseca to incorporate your corporation, don’t think you are safe. I expect the IRS to pressure Panama to report all foreign structures owned by Americans. I think that this is just the tip of the offshore corporation iceberg in Panama.

I hope you found this article informative. Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers. Please contact me at info@premieroffshore.com or call us at (619) 483-1708 for a confidential consultation on the IRS Offshore Voluntary Disclosure Initiative.

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

12/04/2015/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

The Puerto Rico tax deal is the inverse of the Foreign Earned Income Exclusion. Here’s why:

With a Puerto Rico tax contract you can live in the US, your first $100,000 or so in salary is taxable, with rest deferred at 4%.
If you live offshore and qualify for the FEIE, your first $101,300 is tax free in 2016 and the rest is taxable in the US as earned.

The FEIE is intended for those living abroad and operating a business that earns $100,000 to $200,000 max. The Puerto Rico deal is intended for those who live in the US or PR and net $400,000 or more.

This article will compare and contrast the Foreign Earned Income Exclusion with the Puerto Rico Tax Deal. There are still deals out there for Americans if you know how to work the system.

Here’s how the Foreign Earned Income Exclusion works:

If you live abroad and work for someone else, or have your own business, the Foreign Earned Income Exclusion is the best tool in your expat toolbox. The FEIE allows you to exclude up to $101,300 in salary in 2016 from your US taxes.

This salary can come from your own offshore corporation or from your employer. So long as the company is located outside of the US, and you qualify for the Exclusion, you’re golden.

If a husband and wife are both working in the business, they can each earn $101,300 in salary tax free for a total of $202,600. Take out more, and the excess is taxable in the US at about 40%.

Likewise, if you work for someone else, the amount you earn over the FEIE is taxable in the United States. If you work for yourself, and hold earnings in an offshore corporation, you can usually defer tax on these retained earnings.

To qualify for the Foreign Earned Income Exclusion, you must be 1) outside of the US for 330 out of any 365 days, or 2) be a legal resident of a foreign country, file taxes in that country, and travel to the US only occasionally for work or vacation.

What qualifies you a resident of a foreign country is a complex matter. For a more detailed article on the FEIE, see: Foreign Earned Income Exclusion Basics
The above assumes you are living in a low or no tax country and does not consider the Foreign Tax Credit.

The Foreign Earned Income Exclusion is an excellent tax tool for those willing to live and work outside of the US. If you wish to spend more than a couple months a year in the US, or to take out a salary of more than $101,300, the FEIE might not be your best bet.

Here’s how the Puerto Rico Act 20 tax deal works:

If you incorporate your business in Puerto Rico, you can qualify for an 4% corporate tax rate. That is to say, you can live in the US, operate your business through a Puerto Rico company, and get tax deferral at 4%.

In order to qualify, you must hire at least 5 full time employees in Puerto Rico and provide a service from the island to businesses or individuals outside of PR. Popular examples are affiliate marketers, website developers, investment funds, phone and online support providers, and any other business that is portable or operates via the internet. Really, any company that can put a division in Puerto Rico can benefit from Act 20.

If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

If you, the business owner and operator, live in the US, you must take a “fair market” salary that’s taxable and reported on Form W-2. This might be around $100,000, but the exact amount will depend on many factors. The remaining net profits of the income attributable to the Puerto Rican company will be taxed at 4%.

This is basically the inverse of the Foreign Earned Income Exclusion. With a Puerto Rico contract, you pay tax on your fair market salary and defer the balance at 4%. With the FEIE, the first $100,000 (or $200,000 if married and both are working in the business) is tax free and the excess is taxable at ordinary rates.

I note that the Act 20 offer is a better deal than the multinationals have in Europe. Most of them are paying about 12.5% for tax deferral. Even at 12.5%, their tax contracts are under constant attack by the US and the EU. If you want to out maneuver Apple, and get an offshore tax deal blessed by the US government, move your business to Puerto Rico!

So, what’s different about Puerto Rico? As a US territory, it’s tax code trumps the Federal Code… or, more properly put, PR’s tax code is on equal footing with the US Federal code.

This is not the case in a foreign jurisdiction. So long as you hold a US passport, you’re subject to US taxation. The IRS doesn’t give a damn about the laws of your new country. They want their cut.

The US code is clear when it comes to Puerto Rico: Income earned in a Puerto Rican corporation, or as a resident of Puerto Rico, is exempt from US taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.

The code as applied to foreign jurisdictions is incredibly complex. Try reading up Controlled Foreign Corporations, Passive Foreign Investment Company rules, and Sub Part F of the code.

I suggest a Puerto Rico tax contract is best suited to firms with at least $400,000 in net profits that can benefit from (or, at least, break-even on) three employees in Puerto Rico.

For more information on how to live in the US and pay 4% on corporate earnings in Puerto Rico, see: Blood in the Streets Offshore Tax Planning.

In contrast, the FEIE is great for those who wish to live outside of the United States and earn a profit of of $100,000 to $200,000 from a business. Additional tax deferral is available to business owners who live abroad operate through an offshore corporation.

I hope you have found this article on the Foreign Earned Income Exclusion vs. the Puerto Rico Tax Deal helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708.

Blood in the Streets Offshore Tax Planning

12/04/2015/0 Comments/in Articles, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

You’ve heard the adage of investing when there’s blood in the streets… to buy when all hell is breaking loose and the market is at bottom. Well, now is your opportunity for some offshore tax planning while there’s blood in the streets. An offshore tax planning opportunity that will cut your corporate rate to 4%!

Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, “The time to buy is when there is blood in the streets.” Those words are so true today in Puerto Rico and their offshore tax planning deal.

If you have not been reading the papers lately, PR is broke and the Federal Govt doesn’t want to bail them out. Specifically, the GOP says no way to a Puerto Rico bailout.

So the Feds have allowed Puerto Rico to create a Tax Incentive Strategy to try and bail out PR by offering a 20 year deal where companies only pay 4% on their retained earnings.

Yes you read that correctly only 4% – that is lower than what many very large corporations are presently paying to Ireland 12.5%. It’s the best offshore tax planning deal available to US citizens.

If you’re a small to medium sized internet business, or one that can spin off a division like marketing, call center, or similar group, here’s your chance to pay only 4% on your profits. Here’s how to make an offshore tax planning deal with a desperate government to defer tax offshore like the Apples and Googles of the world.

In fact, you can negotiate a offshore tax planning deal far better than the big guys. Most of their tax contracts in Ireland and Luxembourg are at around 12.5%.

The US government is offering you an offshore tax planning contract that allows you to live in the United States and cut your corporate tax to 4%. No need to move abroad, uproot your family, etc. It’s akin to the offshore tax planning tool generally referred to as a corporate inversion. These inversions have become all the rage where the business operations are outside of the U.S. but the headquarters and business executives remain here.

Here’s how this unique offshore tax planning opportunity works:

The U.S. territory of Puerto Rico is broke. The island is essentially bankrupt – owing creditors over $70 billion with no chance of repayment and a US bailout seems unlikely. But, as territory, PR is prohibited from declaring bankruptcy. As of December 1, 2015, they are out of cash.

Puerto Rico’s laws are a mixture of US Federal statutes and local ordinances. And that is where your opportunity exist: Income earned in a Puerto Rican corporation or as a resident of Puerto Rico is exempt from U.S. taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.

In order increase employment, motivate investment, and benefit from it’s unique position in the US code, the island offers two tax deals:

1. Start a business in Puerto Rico with at least 5 employees, apply for an Act 20 tax contract, and receive a 20 year agreement with a corporate tax rate of 4%.

2. Move to Puerto Rico, be approved for an Act 22 contract, and pay $0 capital gains tax on assets purchased after you become a resident and sold during your time on the island.

Act 22 requires you to live in Puerto Rico for at least 6 months of the year. Act 20 does not. In this article I’ll focus on the Act 20 offshore tax planning contract for business owners.

If you don’t require 5 employees, we can create a joint venture company that will share costs and benefit the group. For example, if 2 partners come together in a “captive” internet marketing firm, they could license one business under Act 20. Different classes of stock and separate bank accounts could protect each partner’s interests.

To qualify under Act 20, your business should be providing a service in Puerto Rico to corporations or individuals outside of Puerto Rico. Internet marketers, website developers, investment advisors, hedge funds, call centers, and any other type of “portable” business are good candidates.

No matter your industry, if you can spin-off a division into a Puerto Rico corporation, you can benefit from an Act 20 contract. For example, I recently assisted a manufacturing company setup a web marketing group on the island.

Next, you need to hire at least 3 full time employees in Puerto Rico. These workers must be earning the minimum wage (currently $7.25) or better, be W-2 employees and not independent contractors, come into the office each day, and work at least 40 hours per week (full time).

Then, you, as the owner and operator of the business, must draw a fair market salary from the Puerto Rican company. This salary is taxable in the U.S. because it’s earned from work you did while living in the States.

The remainder of the income you earn in Puerto Rico is taxed at 4%. In other words, net profits in excess of your salary are taxed at 4%. You may retain these profits in your Puerto Rican corporation indefinitely tax deferred… an absolutely amazing offshore tax planning deal!

This gets you to a similar place as the Microsofts of the world… low cost offshore tax deferral. In fact, you’ve out maneuvered these giants by securing a deal at 4% rather than the typical 12.5%.

Puerto Rican profits must be left in the corporation, or can be moved to an offshore subsidiary. They can be used to grow the business and generally managed as corporate capital. You may not borrow against them or otherwise personally benefit from these retained earnings. They belong to the corporation until taken out as a distribution or dividend.

Now, here’s where things get really interesting in the Puerto Rico offshore tax plan:

With a typical offshore tax plan, profits are locked in the corporation. When taken as a dividend or distribution, they come out at ordinary income rates. Lower qualified dividend rates do not apply to distributions from a foreign corporation.

Puerto Rico provides a path to tax free dividends not available in other offshore tax plans. If you decide to move to Puerto Rico after a few years of operating the business, and qualify as a resident under Act 22, dividends from your Puerto Rican corporation will be tax free.

Of course, you’re not required to move to Puerto Rico to cut your corporate tax rate to 4%. You may leave the money in the company tax deferred, take it out years or decades later and pay the tax, or continue to use it to grow the business.You can hold the Act 22 card in your back pocket should you decide to play it.

We can assist you to implement the Puerto Rico offshore tax plan in two ways.

We can setup your corporate entity, negotiate an Act 20 contract in Puerto Rico, and write a custom a game plan / opinion letter on how to operate your Puerto Rican business in compliance with PR and US tax laws.

Provide a turnkey solution in Puerto Rico with office space, employees, etc. to maximize the benefits of your offshore tax plan.

Our turnkey solution includes analysis, tax and business planning, tax opinion letter with “action plan,” Act 20 application and negotiation, Act 20 license, and opening a PR bank account. It also includes sourcing and negotiating an office lease, hiring 3 qualified employees, 12 months of employee management, and 12 months of tax and business consulting service.

We will locate and hire 5 employees to your specifications. You can interview them by Skype or in person. We will also replace these employees if they resign or are not pulling their weight, manage their time, and handle all office and employment matters.

Our turnkey solution is intended to cover all first year costs related to setting up shop in Puerto Rico except salary, payroll taxes, and office rent.

I hope you have found this article on the offshore tax planning benefits of Puerto Rico helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708.

For more information, you might read my post comparing the Puerto Rico tax deal with the Foreign Earned Income Exclusion.

The Foreign Earned Income Exclusion 2015

10/30/2014/0 Comments/in Articles, Offshore Company Taxation/by Christian Reeves

The Foreign Earned Income Exclusion 2015 has finally hit six figures. The FEIE for 2015 is $100,800, up from $99,200 for 2014. The FEIE is the best way to minimize your US taxes as an Expat and the most important tool in your tax kit.

This means that each American living and working abroad, who qualifies for the Foreign Earned Income Exclusion in 2015, can earn up to $100,800 in salary without paying personal income tax. If that salary comes from a US employer, then you still pay social and employment taxes (7% deducted from your check and 7% paid by your employer). If you are self employed and don’t have a corporation, then you pay self employment tax at 15%.

Basically, if you have a US structure, or are self employed without a foreign corporation, you pay 15% tax + Obamacare and other charges on your 2015 salary. The FEIE only cuts out your personal income taxes.

If you work for a foreign employer, or you operate your business through an offshore corporation, then you can avoid this 15%+ tax. It is possible to use the Foreign Earned Income Exclusion 2015 with an offshore corporation and pay zero to Uncle Sam on income of $100,800. If a husband and wife both operate the business and qualify for the FEIE, you can take out $201,600 in salaries tax free!

Next, if your profit exceeds $100,000 or $200,000, you can retain earnings in the offshore company and defer US taxes on that income. This tax deferal is a major benefit of living and working abroad for high net worth business owners.

Let’s say your net profit is $300,000 in 2015. You and your wife take out $200,000 in salary using the FEIE. This leaves $100,000 in untaxed profits. If you hold this money in the offshore corporation, you can defer US tax until you take a distribution. If you draw it out as salary, commissions, dividends, or in any other form in 2015, you will pay US taxes at about 32% (Federal).

For a 100+ page book on expat tax issues and how to maximize the FEIE 2015, please join my mailing list.

My posts on the Foreign Earned Income Exclusion for entrepreneurs include:

Finally, if you’re a glutton for punishment, I recorded a 3 hour dissertation on the Foreign Earned Income Exclusion for the Overseas Radio Network. See my ORN page.

I hope this post has been helpful. Please send an email to info@premieroffshore.com if you have questions about forming an offshore corporation or maximizing the FEIE as an entrepreneur.

A Cheap Offshore Company Cost Me $100K

06/16/2014/in Articles, Offshore Company Taxation/by Christian Reeves

Are you considering forming a cheap offshore company? Has some scammer in Nevis promised you tax freedom and privacy? Forming a cheap offshore company that does not include U.S. tax compliance is a roadmap to disaster for the American living, working or investing abroad.

How much would you be looking at in penalties for using a cheap offshore company formation mill? The most common error is failing to Ale the Foreign Bank Account Report or FBAR. Most get a penalty of $100K per year and are happy to avoid jail time.

Others get in to even more trouble for failing to file an offshore corporation return on Form 547 or one of the various LLC reporting forms. Those of you with complex asset protection trusts have even more risks. You may need to file a form when you fund the structure and Forms 3520 and 3520-A each year to report transactions in your trust. Add to this the requirement to report foreign assets in a variety of situations, and in improperly structured and reported cheap offshore company can cost you a fortune.

When asked how much a cheap offshore company will cost, I like to say about $100K. This is because the FBAR is the IRS’s first line of attack and other forms base their penalties on the amount of unreported tax or as a percentage of assets (i.e. an offshore trust). For the trust, the usual penalty is 25% of assets under management per year!

Back when I was defending cheap offshore company users, I commonly saw people who were out of compliance for multiple years and who owed more in taxes and penalties that they had taken offshore. In one case, a client put $75,000 offshore for a few years and ended up paying $225,000 in taxes, fines and penalties. . .and happy to pay up rather than sit in jail.

Some were not as lucky. U.S. jails are full of people who had a cheap offshore company and found themselves in theirs crosshairs – to eventually spend time

behind bars. How much does a cheap offshore company cost? If the IRS wants to make an example of you, about 3 to 5 years of your life.

The U.S. is one of the very few nations on earth that locks away its citizens for not paying taxes. In fact, America has put people away for failing to file a form when no tax was due (lawyers calls this a zero tax loss case). I personally know people in jail for 10 months for failing to file a form in a zero tax loss case. I know of another person who got 2 years home confinement on a zero tax loss case.

This is all to say, stay away from cheap offshore company formation mills unless you are an international tax expert, you are heading for trouble using such a provider because you can’t tell puffery and salesmanship from fact.

When you form an offshore company with Premier, we include 12 months of tax and business consulting services at no cost. Our U.S. tax experts are here to answer any questions from you or your tax preparer, explain what forms to use and when to file and make sure you in compliance with the IRS. We also assist with any business or banking questions – including opening additional bank or brokerage accounts in the first 12 months. We are always her to answer your questions.

While advice and consulting services are free, we also offer tax compliance packages for corporations, LLCs, trusts and asset protection structures that we have created. We do not prepare complex returns for structures we have not formed . . .this is just too much liability for us to assume from others’ mistakes.

We also prepare personal returns, Form 1040 and 2555, for anyone living and working abroad.

So, how much does a cheap offshore company formation cost? Too much! If you don’t select Premier to structure your international affairs, please use a U.S. attorney or firm that can keep you out of trouble. The cheap offshore company formation is not worth the risk.

For a confidential consultation, please call us anytime or send an email to info@premieroffshore.com. All discussions are private and there is no obligation.