Tag Archive for: offshore tax

How to Live Tax Free as an American

How to Live Tax Free as an American

Here’s how to live tax-free as an American. If you’re willing to live, work, and invest abroad, it’s possible to live tax-free as an American – legally and without watching over your shoulder for the tax man.

First, note that this article is for US persons willing to live and work outside of the United States. It’s definitely NOT for those living in the US that have offshore accounts. If you want to live tax free as an American, you must move you and your business out of the United States!

Second, this article is focused on US persons. That is, US citizens and green card holders. Only the United States taxes its citizens on our worldwide income. Thus, only US persons need to go to these extremes to live tax free.

For example, a Canadian citizen can move to Panama, establish residency there, and live tax free. Simple enough. No need for complex structures or advanced planning described here.

If a US citizen does the same, they will pay US tax on capital gains and business income. Unless that US person follows the suggestions of this article, they’ll be stuck paying US tax while living in Panama.

Third, this post is about how to legally live tax free as an American. To accomplish this will require a lot of work and commitment on your part. It will also require you to hire a CPA or an international tax expert to prepare a plethora of tax forms required to keep you, the US expat, in compliance. For more, see: Offshore Filing Requirements.

Finally, unlike most articles on the web, this post takes President Trump’s tax plan into account. Trump did away with retained earnings in a foreign corporation, which really hurts medium sized businesses operated by US citizens abroad. For more on this, see: Use of an offshore corporation in 2018.

So, with all of that said, here’s how to live tax free as an American.

The premise of the US tax code is that US persons (citizens and green card holders) pay US tax on their worldwide income. No matter where you live, Uncle Sam wants his cut.

The first exception to this is the Foreign Tax Credit. You get a dollar for dollar credit for tax payments to foreign countries.

If you’re living in France with a 45% rate, and your US rate is 35%, you won’t pay tax to the United States. The Foreign Tax Credit eliminates double tax on your income, and, because France’s personal income tax rate is higher than the US rate, you pay zero to Uncle Sam.

If you were living in Argentina rather than France, you would pay a 9% rate to your local government. Thus, the amount owed to the United States would be 35% – 9% = 26%. If no other exception applies, you’ll pay the US 26% of your ordinary income to Uncle Sam for the right to hold a US passport or green card.

The only remaining exception to this after Trump did away with retained earnings is the Foreign Earned Income Exclusion.

If you qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 of salary or business income from your US return in 2018. If a husband and wife are both working in the business, you can exclude a combined $208,200 from Federal income tax.

To qualify for the FEIE you must be 1) out of the United States for 330 out of any 365 day period, or 2) a legal resident of a foreign country for a calendar year.

Of these, the 330 day test is the easiest to qualify for but the most problematic in practice. Everyone tries to maximize their days in the US and the IRS loves to audit those using this version of the FEIE. Because the FEIE is all or nothing, if you miss the 330 days by even one day, you lose the entire exclusion.

Thus, I recommend the residency test whenever possible. Build a “home base” in a foreign country and get a residency visa to qualify for the FEIE without worrying about your US days so much. Of course, this means you must move to a country that will give you residency.

While selecting a country for residency is a very personal decision, I suggest you look for one with a zero tax rate and an eazy residency program. For example, Panama doesn’t tax foreign sourced income (income earned from abroad). Also, you can get residency in Panama with an investment of only $22,000. Finally, you can use your US IRA or other retirement account to get residency in Panama. For more on this, see: Best Panama Residency by Investment Program.

So, with the FEIE, you can earn $100,000 (single) or $200,000 (combined) from a business or in salary tax free. Capital gains are still taxable as earned with only the Foreign Tax Credit available to avoid double tax.

What if your business nets well over $200,000 and/or you have significant capital gains? What if your business nets $1 million? Then the only way to live tax free as an American is to move to the US territory of Puerto Rico.

If you move to Puerto Rico, spend at least 183 days a year on the island, and qualify for Act 20 and 22, you can live nearly tax free. Yes, you can net $1 million or more from a business operated from Puerto Rico, and pay very little in tax. To make it better, you’ll pay zero in capital gains.

Here’s how to live tax free as an American in Puerto Rico.

Because Puerto Rico is a US territory, it has unique tax laws. US tax laws apply to all US citizens living abroad. The ONLY exception to this are US citizens living in the US territories. Puerto Rico can create whatever tax laws it wants for its residents and these laws supersede US tax law.

A resident of Puerto Rico is a US citizen or green card holder that moves to the island, makes it their home base, and spends at least 183 days a year there. Only those legally allowed to live and work in the United States can move to Puerto Rico and qualify for these programs. All US immigration laws apply in the territories.

Under Act 22, a resident of Puerto Rico will pay zero tax on capital gains from assets purchased after you move to the island. If you buy and sell cryptocurrencies and stocks while a resident of Puerto Rico, you pay ZERO in tax to the United States.

Note that his tax holiday applies ONLY to assets acquired after you move to the island. No, you don’t get buy stocks and crypto while in the US, hold them for a few years, move to Puerto Rico for a few months, and sell them at zero tax. Those gains would be taxable in the United States and would not qualify for Act 22.

Then there’s Act 20. This is basically the inverse of the Foreign Earned Income Exclusion. Move to Puerto Rico and pay 4% corporate tax on business profits. Dividends from an Act 20 business to a resident of Puerto Rico are tax free… so, this 4% rate is all you will ever pay.

And you will never pay US tax on these capital gains or these business profits. Even if you move back to the United States in a few years, you will not pay US tax on the earnings taxed in Puerto Rico while you were a resident of the island. The only tax a resident of Puerto Rico pays on net business profits from an Act 20 business is 4% in Puerto Rico (and zero on capital gains and dividends).

Business profits is income after you take out a fair market salary. If you would ordinarily earn $100,000 for the work you’re doing, then you must take a salary of $100,000 from your Act 20 business. You’ll pay ordinary rates on this salary and then the excess will be taxed at 4%. This is why I call Puerto Rico’s Act 20 the inverse of the Foreign Earned Income Exclusion.

Let’s say your reasonable salary is $100,000 and your net profits are $1 million. You pay 30% on $100,000 in personal income tax to Puerto Rico and 4% on $900,000 under Act 20 for a total of $66,000 in tax. Of course, this is an oversimplification, but you get the idea.

Now consider the FEIE. Earn $1 million offshore while qualifying for the Foreign Earned Income Exclusion and pay zero US tax on your salary of $100,000. Then you’ll pay about 30% on $900,000 because Trump did away with the ability to retain earnings offshore. Total tax paid using the FEIE is about $270,000 on $1 million in net business profits.

For those earning in excess of the Foreign Earned Income Exclusion, or active traders with significant capital gains, Puerto Rico’s Act 20 and 22 are far better tax deals than the Foreign Earned Income Exclusion.

For those netting $100,000 (single) to $200,000 (joint) from a business, living abroad in a country like Panama is the best tax choice. You probably need to reach about $500,000 net before Puerto Rico makes sense.

I hope you’ve found this article on how to live tax-free as an American helpful. For more on setting up an offshore business or qualifying for Puerto Rico’s Act 20 and 22, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

The IRS to Seize 362,000 US Passports

The IRS to Seize 362,000 US Passports

The IRS plans to seize 362,000 US passports by refusing to renew passports of anyone with a substantial tax debt and now controls who is allowed to travel abroad. In this article, we’ll look at who is affected by this newfound authority and what you can do to protect yourself from the IRS.

Giving the IRS authority over your passport means that the taxman has the right to determine who travels outside of the country. Only those who have paid unto Caesar what he claims they owe shall be granted the privilege of international travel.

This represents a major change in how the United States government looks at the passports it issues. Americans have thought of a US passport as a birthright… or a right conveyed upon the select few who complete the immigration process. The passport tells the world that we are American citizens and gives us freedom of movement.

This all changed when the IRS asserted control over who is allowed a passport. As of today, a US passport is no longer a right, it’s a privilege. Only those whom the IRS deems worthy may travel. Only those who have paid their taxes are allowed to live and work outside of the country. Only those with clean tax accounts may visit family abroad.

Rest assured that the IRS will use your passport as a weapon to collect whatever taxes they believe you owe. If your passport is frozen because of a tax debt, there’s only one way to get it back. You must pay your debt in full.

Sure, you still have all the rights and protections you had before when battling the IRS. If you wish to dispute the amount owed, you’re free to do so. You can fight it out with the revenue officer, appeals, and finally the US Tax Court or in Federal Court.

But, this will take time. In my experience, an easy tax dispute case takes 6 months. A complex case, especially one involving a large amount of money, can drag on for years. Go to court and you’re looking at 3 to 4 years from the Notice of Deficiency to a resolution.

During this time, your passport will remain frozen. If you’re a US expat living and working abroad, can you really afford to return to the US for months or years to fight it out? Or will you be forced to pay up to get your passport back?

And what about us expats when the IRS begins revoking current passports? So far, the Service has only frozen passports, which means they refuse to renew a passport which has been lost or has expired. But the law also allows the IRS to revoke the passport of anyone who owes the IRS a substantial amount (more than $51,000).

If you’re an American abroad, and your only passport is revoked, you’ll be forced to return to the United States to settle your debt.

In most cases, expats learn of the loss of their passport when they attempt to enter a country and are refused. If this happens, you will be held in “airport jail” until the next flight to the United States. You will then be forcibly placed on a plane and sent home.

Yes, you will be the first fight to anywhere in the US. Whatever happens when you land, and how you pay your expenses once there, is your problem. If you have no family or friends to take you in, best of luck. When your only passport is revoked, the airline is required by law to return you to your home country for free, so they can give a damn where you’re dropped off.

You have no right to appeal or to an attorney. Because you were not allowed to “enter” the country, you have no legal rights. You are not being deported, you’re just being refused entry. The ONLY option at this point is the first flight back to your home country.

And I expect this to become standard practice by US agencies. Now that the government is treating your passport as a privilege rather than a right, I expect other agencies to take notice and get in on the money grab. What about expats with student loan debt, back child support, state taxes, or any number of other debts payable to government agencies?

Here’s How to Know if Your Passport’s Frozen

Basically, anyone who owes $51,000 or more to the IRS will have their passports frozen. This includes tax. interest and penalties. Thus, it’s very possible for a debt to have started out at $20,000 or so and to have grown to more than $51,000 with interest and penalties over a few years.

Also, any expat with a penalty for failing to report their foreign bank account (to file the FBAR form) or any of the offshore reporting forms (5471, 3520, etc.) is likely over the $50,000 limit. These penalties are often $50,000 not including taxes due.

Likewise, anyone who hasn’t filed their US returns should be worried. If the IRS computers have any information on you, they will create what is called a Substitute for Return on your behalf. These computer-generated returns create a tax debt in the system. This automated debt, plus interest and penalties, will then be used to freeze or rescind your passport and your travel privileges.

Quite a few expats end up in debt to the IRS computers because they don’t file their returns The biggest concern is with expats who have unfiled returns and a US brokerage account. The expat earned a small amount of money abroad or maybe was retired. He also had a small gain or loss in his US brokerage account.

The bottom line is that he didn’t think the gains were significant enough to bother filing a tax return… and he would be wrong, very wrong.

Your brokerage reports only sales to the IRS. That means IRS computers see only half of the transaction, the sale. They don’t know how much you paid for the stock and don’t know that you lost money unless you file a return.

You may have sold $1 million in stock for which you paid $1.2 million. You really lost $200,000, but the IRS computers calculate your tax due on a gain of $1 million! This happens all the time, especially with volume traders. A day trader could have used the same $100,000 in cash to generate millions in sales and still lost money at the end of the year.

In these cases, the expat doesn’t file a return and doesn’t receive any of the letters the IRS sends to his last known domestic address. Then the IRS computers take the sale data and create a wildly inaccurate Substitute for Return and a massive tax bill.

A few years pass and the expat mails in his US passport for renewal. Instead of getting a new passport back, he receives a letter saying is passport renewal is rejected and that he must resolve his tax debt in full before he applies again.

As I said above, 362,000 Americans have had their passports frozen and renewals rejected. So far, we’ve only seen renewal rejections. God help us expats when the IRS begins to revoke passports to force us home.

Per the IRS website, If you meet one of the following criteria, your passport won’t be revoked nor your passport renewal denied:

  • Being paid timely with an IRS-approved installment agreement
  • Being paid timely with an offer in compromise accepted by the IRS, or a settlement agreement entered with the Justice Department
  • For which a collection due process hearing is timely requested regarding a levy to collect the debt
  • For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made

Additionally, a passport won’t be at risk for anyone:

  • Who is in bankruptcy
  • Who is identified by the IRS as a victim of tax-related identity theft
  • Whose account the IRS has determined is currently not collectible due to hardship
  • Who is located within a federally declared disaster area
  • Who has a request pending with the IRS for an installment agreement
  • Who has a pending offer in compromise with the IRS
  • Who has an IRS accepted adjustment that will satisfy the debt in full

What Can You do to Protect Yourself

First, don’t lose your passport! If you owe money to the IRS. You won’t be receiving a new passport until your debt is paid in full. Be very careful with your travel document.

Second, move your investments and IRA accounts out of the United States to prevent them from being used to create an automated tax debt. Form offshore structures to hold accounts and maximize both privacy and asset protection. This also protects the accounts from being seized by the IRS.

Third, file your delinquent returns to get right with the IRS and continue filing each and every year going forward. Be sure to report the structures and accounts I suggested you create in #2 above. Even if your gains are small, all US expats should file their returns to prevent the IRS computers for doing it for them.

Fourth, take steps to protect your status as an expat while you have a valid passport. You can do this by a) securing a residency visa in the country where you live, and/or 2) by purchasing or otherwise acquiring a second passport.

A second passport gives you freedom of movement should you lose your US passport. With a second passport, you can leave the United States and travel to any country that grants you entry without a visa. Thus, the more visa-free countries you have, the more valuable the passport.

For example, you can purchase a passport from a country like Dominica for about $125,000. This will give you visa-free access to 122 countries. This second passport program can be completed in a few months

If you want an EU passport, consider Bulgaria. Purchase just over $1 million in government bonds and receive residency immediately and citizenship in about 18 months. This passport will give you visa-free access to 169 countries and territories.

In contrast, residency allows you to live in a particular country and to “earn” a second passport over a number of years. Once you have permanent residency, you won’t be forced out if you lose your passport. You won’t be able to travel, but you can’t be taken back to the US to pay up… you can negotiate from a stronger position and settle your tax debt from abroad on your terms.

The easiest country for a US citizen to obtain residency is Panama. Invest $20,000 in Panama’s reforestation visa program and get residency. You can apply for citizenship and a passport after you’ve been a resident for 5 years.

Keep in mind that you must have a valid US passport to apply for a second passport, citizenship or residency. Once your US passport has expired or has been revoked, you’re stuck. You will need to take action well in advance to protect your right to travel.

Fifth, the only country you can enter without a passport from the United States is Mexico. Any time you travel to a foreign country by air or sea, you must present a valid passport. So, if you fly into Mexico, you must have a passport.

The only exception is when you drive into Mexico. No passport is required and no checks are performed. Then, once you’re in Mexico, you can take a domestic flight to any city in the country using only your valid ID (such as a US driver’s license).

So, anyone who loses their passport can travel throughout Mexico so long as they enter at a land crossing.

The above on Mexico is based on years of personal experience and not a statement of the law. You should have a passport with you, valid or otherwise, but, once you’re in, you can travel throughout the country on your driver’s license.

I hope you’ve found this article to be helpful. For more information on a second residency or second passport, or to be connected with an expat tax expert, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

The IRS will end the Offshore Voluntary Disclosure Program

The IRS will end the Offshore Voluntary Disclosure Program

The IRS will end the Offshore Voluntary Disclosure Program on September 28, 2018. If you haven’t come forward by that time, you’re out of luck. In fact, the IRS has already begun to ramp down the 2014 Offshore Voluntary Disclosure Program and it’s becoming more difficult to get cases through.

From the IRS website, “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

And the Offshore Voluntary Disclosure Program has been a real cash cow for the Service. Since 2009, more than 56,000 Americans have used the program, paying $11.1 billion in back taxes, interest and penalties to keep the IRS from pressing criminal charges.

Of this number, about 18,000 people came forward in 2011. The number of taxpayers using the Offshore Voluntary Disclosure Program has steadily declined with only 600 applications in 2017.

What I call the Mini Offshore Voluntary Disclosure Program brought in another 65,000 Americans living abroad. Properly termed the Streamlined Filing Compliance Program was focused on American expats. Those who might not have known of their US filing obligations and want to get back into the US system.

It appears that most Americans have fallen in line and paid over to Caesar what he claims as his. This, and Foreign Account Tax Compliance Act (FATCA) have made the Offshore Voluntary Disclosure Program obsolete. The government has taken all it can from Americans and is now looking to new sources.

The Offshore Voluntary Disclosure Program, like the attack on crypto traders, was based on fear. The US IRS charged a few people in each big city and each state with crimes for having an unreported account. These criminal prosecutions got the Service all the free press they wanted and, as a result, thousands of people came forward voluntarily.

The Offshore Voluntary Disclosure Program was the most efficient and cost-effective marketing campaign in history. And it seems that the IRS is going to deploy the same army against crypto traders in 2018.

See Top two max privacy options to plant your flag offshore

The bottom line is, if you have an unreported offshore bank account or undisclosed assets, you must file for the Offshore Voluntary Disclosure Program now. Time’s up… no more delay and no more debate. It’s time to come clean or accept the risks.

From the IRS website: “Complete offshore voluntary disclosures conforming to the requirements of 2014 OVDP FAQ 24 must be received or postmarked by September 28, 2018, and may not be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the 2014 OVDP.”

Note that, US expats and citizens living abroad should probably use the Streamlined Program and not the Offshore Voluntary Disclosure Program. This article considers ONLY the Offshore Voluntary Disclosure Program.

The purpose of the Offshore Voluntary Disclosure Program is to allow US resident taxpayers to come forward, report their foreign accounts, avoid criminal penalties, and reduce civil fines. Those who come forward will pay the tax plus interest on unreported foreign income.

In addition, they’ll pay an accuracy penalty of 20% and a 27.5% offshore penalty. See IRS FAQ 8 for a detailed calculation. In the example, coming forward cost the taxpayer $553,000 vs being liable for well over $4 million had the IRS been forced to track him down.

These taxes and penalties are calculated on the last 8 tax years for which the filing date of the return has passed. For example, if you were to file an OVDP in July 2018, you would amend and pay taxes for 2017, 2016, 2015, 2014, 2013, 2012, 2011, and 2010.

This is to say, you are to amend your personal income tax returns for these years. You will add on to the return any foreign income, such as interest, rental, business, etc. You will also add on any missing foreign entity forms, such as the Form 5471 and 3520. Finally, you will prepare an FBAR form reporting ALL foreign accounts.

Once all of this is ready, your tax preparer and a representative will prepare an OVDP application that includes a letter of explanation of the facts and circumstances of your situation. Again, all of this must be mailed by September 28, 2018.

I hope you’ve found this article on the ending of the Offshore Voluntary Disclosure Program to be helpful. For more information and to be introduced to an expert who can assist you with an OVDP or Streamlined Program, please contact us at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation.

US Expats and Retained Earnings in Foreign Corporations for 2018

US Expats and Retained Earnings in Foreign Corporations for 2018

The days of retained earnings in offshore corporations are officially over. No longer can those of us living and working abroad hold profits in excess of the Foreign Earned Income Exclusion inside of our corporations tax-deferred. Here’s what you need to know about US expats and retained earnings in foreign corporations for 2018.

Please note that this article is focused on offshore corporations owned by US persons in 2018. A US person is a US citizen or green card holder no matter where they live or a US resident. For a more detailed and code focused article on this topic, see: Bloomberg on Controlled Foreign Corporations.

Also, there’s some speculation in this post and things are subject to change. The IRS has not issued guidance on how Trump’s tax plan affects US expats and retained earnings in foreign corporations in 2018. Though, every expert I’ve spoken with agrees that the days of retained earnings in excess of the FEIE are over.

A few short months ago, we expat entrepreneurs were all excited about Trump’s tax plan. He was going to eliminate worldwide taxation and move the United States to a territorial tax system. The US is the only major country on earth that taxes its citizens abroad, so this sounded great.

Well, the final bill fell far short of President Trump’s campaign promises. While multinationals were converted to a territorial tax system, and no longer pay US tax on foreign-sourced profits of their international divisions, the small to medium sized expat entrepreneur got the shaft.

If you’re an American expat operating a business abroad, you’ll want to sit down before reading this post. My buddy Gary said it best, “Trump has cut the legs out from under the American expat in favor of the Apples and Googles of the world.”

Let me start by defining a few terms.

For my purposes here, an American expat is a US citizen or green card holder living outside of the United States. They qualify for the Foreign Earned Income Exclusion by being out of the US for 330 out of 365 days or by becoming a legal resident of a foreign country over a calendar year. A resident of a foreign country might spend a couple of months in the US, but never more than 183 days in a year.

Those who qualify for the FEIE in 2018 get to exclude up to $104,100 in ordinary income from their US tax return. That means they get up to $104,100 in salary or business income tax-free because they’re living abroad. All capital gains and salary in excess of the FEIE is taxable in the United States (I’ll leave the Foreign Tax Credit for another day).

US expat business owners have traditionally held profits in excess of the FEIE inside their foreign corporations as retained earnings. This allowed them to defer US tax on these profits until they took them out as dividends. For more on this, see my 2013 article, How to Manage Retained Earnings in an Offshore Corporation.

Then Trump’s tax plan came along and smashed American expat entrepreneurs. As with any tax overhaul, there are winners and losers. We expats apparently didn’t donate as much as the multinationals, so we’re the big losers.

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with foreign corporations.  Some of these changes may have an impact on the tax structure of US expats.  

As a result of the new international tax provisions, the US owners of a foreign corporation, which are controlled by US persons, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income earned abroad in excess of the FEIE may be lost.

To put that into English, The Tax Cuts and Jobs Act hits expats on two fronts:

  1. We must repatriate foreign retained earnings from prior years and pay US tax at 15.5% on those profits. This tax can be spread over 8 years.
  2. The ability of expats to retain profits in a foreign corporation is eliminated. We must now pay US tax on our profits in excess of the Foreign Earned Income Exclusion. A business owner can earn $104,100 tax-free, or a husband and wife both working in the business can take out a combined $208,200 in 2018 free of Federal income tax.

So, an American expat that nets $1 million a year in his or her business will pay US tax on about $897,000, no matter where they live. The ONLY exception and the only place on the planet where Trump’s tax plan can’t reach is the US territory of Puerto Rico. More on that below,

The new tax law eliminated retained earnings in offshore corporations with a very small change to the law. It put just about every income category under the Subpart F of the tax code. Interestingly, oil revenue was the only item removed from Subpart F… I wonder how that happened.

Subpart F income in an offshore corporation is not eligible to be retained tax-deferred. It must be passed through to the shareholders and taxed. Shareholders pay tax on Subpart F income whether or not they actually receive it, much like income in a US LLC.

As a result, if your foreign corporation is a CFC, ordinary business income is now Subpart F income and taxable in the United States as earned.

For an article on the previous definition of Subpart F in a CFC, see: Subpart F Income Defined. If you’re a glutton for punishment, or just nostalgic for the good old days of 2017, see: How to Eliminate Subpart F Foreign Base Company Service Income.

I should also note here that US tax breaks for “pass-through entities,” such as domestic LLCs and S-Corporations are not available to expats. We got all of the bad and none of the good from Trump’s tax plan.

If you’re an American living and working abroad, you have a few options in dealing with Trump’s tax plan and the burden it puts on expats.

The most practical step is to form a US C corporation and start over with a new offshore corporation. Pay the repatriation tax on previous years in your old corporation and start fresh with a structure designed for 2018.

Building out a new structure that includes a US corporation might cut your US corporate tax by 50%. The current US rate is 21% and this can be reduced to 10.5% with a 50% credit in certain situations. In 2026 and beyond, the rate rises to 13.1%. For a detailed article from Harvard, see: Tax Reform Implications for U.S. Businesses and Foreign Investments and scroll down to the section on Low-Taxed Intangibles Income.

This US corporate strategy is much more complex than it sounds. Expat entrepreneurs need to watch out for double taxation. When you take out retained earnings from your US corporation as a divided, you’ll usually pay US tax on the distribution (on your personal return). Careful planning should go into building this structure and a long-term tax plan that minimizes double taxation must be developed.

Another option for businesses with partners abroad is to change their CFC status. The tax laws described here generally apply to Controlled Foreign Corporations. A CFC is a foreign corporation owned by US persons (residents, citizens and green card holders). If US persons own or control more than 50% of the business, it’s a CFC.

If you’re working with non-US persons abroad, you might restructure your business so it’s not a CFC. For example, a US company and a foreign company are working together on deals as separate entities. They might decide to join together in one corporation with each party owning 50% of the shares and having 50% control over the business.

Another option is to buy a second passport from a country like St. Lucia and renounce your US citizenship. Note that it’s not sufficient to buy a second passport to avoid US taxation. You must also renounce your US citizenship and go through the expatriation process. This will take many months and can have a tax cost (exit tax).

In my opinion, every US expat entrepreneur that wants to maintain their citizenship, and is netting $500,000 to $1 million a year in a portable business, should move to the US territory of Puerto Rico. Puerto Rico is the only safe haven on earth not affected by Trump’s tax plan.

If you’re willing to move to Puerto Rico, and spend 183 days a year on the island, you’ll cut your corporate tax rate to 4%. If that’s not enough, you’ll also cut your capital gains rate on assets acquired after you become a resident to 0% (yes, that’s zero, nada, nothing). This zero percent tax rate also applies to dividends from Act 20 companies. ‘

For information on Puerto Rico’s Act 20 and 22, see: Changes to Puerto Rico’s Act 20 and Act 22.

As you read through the many articles on my website about Puerto Rico, note the following changes for 2018:

  1. Act 20 no longer requires you hire 5 employees. You can move to Puerto Rico and be the only employee of your business.
  2. Just like offshore corporations, Puerto Rican corporations can no longer retain earnings. This means that US shareholders of Act 20 companies who are living in the US no longer get tax deferral. To put in another way, after Trump’s tax changes, Puerto Rico’s Act 20 is only available to US citizens and green card holders willing to relocate to the island and spend 183 days a year there.

For an article that compares Puerto Rico’s tax incentives to the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

I suggest that Puerto Rico is best for portable businesses netting $500,000 to $1 million a year. I get to this number because of the fact that you, the business owner, must pay yourself a fair market salary. This salary is taxed at ordinary income rates in Puerto Rico. Then your corporate profits, which are net business income after you pay yourself a “reasonable” salary, are taxed at 4%.

You then distribute these profits to yourself as a tax-free dividend. Even if you move back to the United States, you’ll never pay personal income tax on the dividend. To see this is the US tax code, go to IRC Section 933.

So, Puerto Rico’s tax deal is basically the inverse of the FEIE. With the Exclusion, you get $100,000 tax-free and pay US tax on any excess. With Puerto Rico, you pay tax on your first $100,000 in salary and 4% on any excess.

If you don’t move to Puerto Rico, and remain offshore, your international businesses should be operated through a foreign corporation in a low or zero tax country. Operating your business without a structure or through a US corporation means you’ll also be stuck paying Self Employment tax at 15%. No matter your tax situation, an offshore corporation will almost always reduce your net IRS payment.

All expat business owners should be operating inside an offshore corporation to eliminate Self Employment tax and to maximize the value of the Foreign Earned Income Exclusion. You then report your salary from this company on IRS Form 2555 attached to your personal return, Form 1040.

I hope you’ve found this article on US expats and retained earnings in foreign corporations for 2018 to be helpful. This is sure to be a very hectic and confusing tax year. It’s in your best interest to seek planning advice from an international expert early in the year to minimize the impact of Trump’s tax plan on your bottom line.

For more information on restructuring your business, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to work with you to build a new and compliant international structure.

Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program

Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program

It appears that Trump’s tax plan is bringing big changes to Puerto Rico’s Act 20 tax incentive program. These changes impact Puerto Rico because a PR corporation is treated as a foreign corporation for US purposes. Here are the changes coming to Puerto Rico’s Act 20 tax incentive program.

Note that this article is a compilation of my conversations with various tax experts in Puerto Rico. This is what they think will happen to Puerto Rico’s Act 20 under the Trump tax plan. This is not a statement of the law or tax advice… it’s pure speculation.

The IRS has not issued any guidance on these points. So, we’re left to conjecture and assumptions on how Trump’s tax plan will affect Act 20. We probably won’t have a clear understanding of these laws until November or December. By then, the 2018 tax year will be nearly over and you’ll be left holding the bag.

Here’s the guidance being put out by most of the major firms in Puerto Rico on the tax incentive programs:

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with operations through foreign corporations, including Puerto Rico Act 20 entities.  Some of these changes may have an impact on the tax structure of Act 20 entities operating in Puerto Rico, at least with respect to US owners that do not become PR bona fide residents.  

As a result of the new international tax provisions, US shareholders of Act 20 companies, which are controlled by US persons, who are not PR bona fide residents, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income derived in Puerto Rico may be lost.

This means that Puerto Rico’s Act 20 is still viable for those living in Puerto Rico. If you qualify for residency in the territory, your income is excluded from US taxation under IRC Section 933. Thus, changes to the US tax code make no difference to you. Your Puerto Rico sourced income, including Act 20 and 22 income, is taxed only in Puerto Rico.

If you’re a resident of Puerto Rico, you pay PR ordinary income tax on your salary. Then you pay corporate tax on your net profits at a rate of 4%. Finally, you take out those profits as a tax-free dividend.

Residents do not retain earnings in their Act 20 company. Residents of Puerto Rico take out their profits as earned as tax-free dividends.

Residents of the United States are in a different boat… and that boat appears to have sprung a leak.

When a US resident sets up an Act 20 company in Puerto Rico, they generate Puerto Rico sourced income based on the work done in PR by their employees. Any income generated from work performed in the United States is US source and taxed in the US. Any income generated by work done in Puerto Rico is PR sourced and taxable in Puerto Rico.

The Puerto Rico corporation pays corporate tax at 4% and retains the remainder within the company. The benefit to the US resident is tax deferral. They’re paying 4% to hold the profits in the corporation without US tax. They only pay the IRS when they distribute those retained earnings years in the future.

It appears that Trump has eliminated retained earnings in foreign corporations that are owned by US residents. If companies can no longer retain profits abroad, the benefit of tax deferral is lost to the US resident shareholder.

If this analysis of Puerto Rico’s Act 20 holds up after regulations are issued, Act 20 will only benefit those willing to relocate to the island. This is what we’re telling all new applicants… to receive the tax benefits of Act 20 you must become a resident and spend 183 days a year on the island.

This change in the ability to retain earnings offshore would also apply to all foreign corporations owned by US residents. If you live in the US, you may have lost the ability to retain earnings in an offshore corporation, even when you have a business abroad.

The offshore rules are even more muddled than Puerto Rico. Companies might be able to retain profits from sales to foreign countries and not sales to the United States. Offshore corporations owned by US shareholders that earn in excess of the Foreign Earned Income Exclusion appear to have also lost the ability to retain earnings abroad.  

Also, if the foreign corporation is owned by a US corporation, you might have more room to maneuver. This is one of the factors limiting Puerto Rico’s Act 20. Act 20 companies must be owned by an individual or individuals. Currently, you can’t own an Act 20 company inside a US corporation.

If Puerto Rico changes the rules for ownership and allows US shareholders to insert a US corporation in between themselves and their Act 20 business, they might cut corporate taxes in half. It appears the US corporation would pay 10.5% tax under Trump’s tax plan minus the 4% tax paid to Puerto Rico (using the foreign tax credit).

However, the value of this maneuver is dubious. The US shareholder would then pay US tax when he or she takes the money out of the US corporation as a dividend. In such a situation, many will decide to move their business back to the United States, as the law intended.

And, what about those who have been operating their Act 20 company for a few years and have accrued retained earnings? You’re screwed.

Retained earnings in foreign corporations must be repatriated to the United States. Retained earnings will be taxed at 15.5% and you have up to 8 years to pay this tax.

I hope you’ve found this article on big changes coming for Puerto Rico’s Act 20 tax incentive program to be helpful. If you already have an Act 20 company with retained earnings and require more information, please contact me at info@premieroffshore.com. I’ll refer you to an experienced attorney on the island who can research your particular situation.

If you wish to move to Puerto Rico under Act 20 and 22, we will be happy to help you set up under the new law.

President Trump’s Tax Plan and Expats

President Trump’s Tax Plan and Expats

You’ll find a lot of partisan bickering on the web about President Trump’s tax plan. Here’s my effort to give you the facts and just the facts (a la Joe Friday of Dragnet) on how President Trump’s tax plan affects expats and Americans living abroad.

Keep in mind that this article is focused on US citizens living and working abroad. US persons who qualify for the Foreign Earned Income Exclusion in 2018. I’ll leave State tax issues and changes to the code that don’t affect expats to others.

You’ll find that Trump’s tax plan made some cuts around the margins, but didn’t include expats in the corporate tax changes. Sure, we get the 2 to 4% reduction all Americans get, but we’re not affected by changes that will save multinationals billions.

Historically, US corporations have been taxed on their worldwide income. Double tax was eliminated with the Foreign Tax Credit and they could retain earnings offshore tax-deferred. But, when earnings were repatriated, they’d be taxed at ordinary rates.

President Trump changed all of this for big corporations. He moved corporations from a worldwide tax system to a residency-based tax system (also referred to as a territorial tax system). Businesses will pay US tax on their US sourced income and zero US tax on their foreign sourced profits. Trump also closed billion-dollar loopholes like the ability to move US source income offshore with payments for intellectual property.

We had hoped that American expats would get the same benefits. That individuals would move from a worldwide tax system to a residency based system. That we would pay US tax on US income and no tax on foreign sourced gains.

This didn’t happen. American citizens living abroad are still taxed on our worldwide income. I guess we expats weren’t a large enough voting block or that we didn’t donate as much to the campaigns as the multinational corporations.

As a result, we still must look to the Foreign Earned Income Exclusion and the Foreign Tax Credit to keep Uncle Sam away from our ordinary income (wages or business income). The FEIE for 2018 increased to $104,100, up from from $102,100 in 2017. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58. It does not come from Trump’s tax plan.

One aspect of Trump’s move to a residency based system affecting the FEIE is a focus on residency. That is to say, the IRS seems to be moving away from the 330-day test and towards the residency test.

The IRS has figured out that auditing expats who are using the 330-day test to qualify for the Foreign Earned Income Exclusion is very profitable. Thus, they’re putting a lot of resources into targeting this group.

As a result, I’m telling my clients to convert to the residency test and conform with how the IRS now views corporations. Become a resident of a low tax country, making that your home base, and stop using the 330-day test to qualify for the Exclusion.

From the IRS’s perspective, you can be a resident of any country you like and qualify for the Exclusion. So long as it’s your home base, where you plan to live for the foreseeable future, and you where have a residency visa, you’ll qualify for the FEIE using the residency test.

The last of those criteria, getting a residency visa, is usually the most challenging. In my experience, the easiest country to get legal residency in is Panama. Simply invest $20,000 in Panama’s Friendly Nations Reforestation Visa and you’re in.

Where most countries require you to buy real estate or invest a large amount of money to start a business, Panama allows you to invest a relatively low amount in their green initiative and receive residency. For more, see Best Panama Residency by Investment Program.

Most expats shield the majority of their ordinary income from the IRS using the FEIE or the Foreign Tax Credit. Thus, the fact that Trump lowered personal tax rates by 2% to 4% makes little difference. You don’t pay US tax on your ordinary income anyway. And, if you do, you should be operating your business through an offshore corporation.  

What does affect most expats is US tax on capital gains. This rate remains unchanged at 20% (assuming the Obamacare tax is repealed). As a result, US citizens pay US tax on all capital gains, no matter where they live and no matter where the property or asset is located. If a US citizen living in Belize sells real estate in Belize, he or she will owe 20% on long-term capital gains tax to Uncle Sam.

What will help expats is that the standard deduction doubled under Trump’s tax plan. A single filer’s deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.

The vast majority of US expats will save big on their US taxes because of this change. We expats rarely have a mortgage on our international properties. Therefore, we don’t deduct mortgage interest on Schedule A and thus don’t itemize. An increase in the standard deduction will go directly to our bottom line in a dollar for dollar decrease in US tax on our capital gains.

This tax break is balanced against the loss of the personal exemption.  You can no longer deduct $4,150 for each dependent. As a result, expats with large families will see an increase in tax, even considering the increase in the standard deduction.

A change that affects new expats is the loss of the moving expense deduction. When you move abroad for work, you can generally deduct all moving expenses. For most expats, this amounts to thousands of dollars in the year they leave the United States.

I hope you’ve found this article helpful. The most important takeaway for most expats using the Foreign Earned Income Exclusion is that you should spend 2018 working toward the residency test. Whether you chose Panama, Belize, Nicaragua, or elsewhere, you need to get started as soon as possible.

nonresident FEIE

How to become a nonresident of the United States

The 330 day test for the Foreign Earned Income Exclusion is being eliminated by President Trump. If you want to keep this tax break, you need to become a legal resident of a foreign country as soon as possible. Here’s what you need to do to become a nonresident of the United States for tax purposes.

Of course, the most important component of the residency test for the FEIE is residency. You must be a legal resident of a foreign country for a full calendar year to qualify for the FEIE using the residency test. Where the 330 day test was over any 12 month period, the residency test is January 1 to December 31.

It doesn’t matter where you get your residency visa for US tax purposes. So long as you have legal residency in a country which is your home base, you’re covered.

Of course, if you want to minimize your worldwide tax obligations, you should become a resident of a country that doesn’t tax foreign source income. For more on this, see: Which Countries Tax Worldwide Income?

For those that want to live in Europe, the most popular residency visa is Portugal. Buy a home for 500,000 euros, or deposit 1 million euros in a local bank, and you can qualify for residency. A resident of Portugal can live anywhere in the EU. You just need to spend a few weeks  a year in Portugal.

The most popular visa in the world is Panama. Invest $20,000 in their friendly nations reforestation program and become a permanent resident. This visa can also lead to citizenship and a second passport in 5 years. For more, see: Best Panama Residency by Investment Program

Once you have your residency visa, you need to cut as many ties with the US and create as many ties with your new home country as possible.  That is to say, a US citizen who wants to become a nonresident for US tax purposes must truly move and become a part of their new community, including:

  • Selling your US home;
  • Leaving US employment and becoming an employee of an offshore corporation reported on IRS Form 5471;
  • Establishing and spending time in a home located in your new country. This home should be of equal size, cost, and amenities as your US home;
  • Establishing business and social ties in the new country;
  • Discontinuing business and social ties in the United States;

Do not:

  • Keep your US home and let the children live there;
  • Have children in school in the United States;
  • Vote in State elections (Federal elections by mail, listing your foreign home as your residence is OK);
  • Have mail sent to your old address in the US. Establish a PMB address if necessary;
  • Continue to use US physicians, dentists, or other professionals who require the taxpayer’s physical presence to transact business.

Remember that you need to be a nonresident for Federal and State tax purposes. Sometimes these tests are different. Here is a list of ties a California court listed as indicating residency (In the Appeal of Stephen D. Bragg, May 28, 2003, 2003-SBE-002).

  • The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences;
  • The state wherein the taxpayer’s spouse and children reside;
  • The state wherein the taxpayer’s children attend school;
  • The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence;
  • The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls);
  • The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.);
  • The location where the taxpayer files tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns;
  • The location of the taxpayer’s bank and savings accounts;
  • The origination point of the taxpayer’s checking account transactions and credit card transactions;
  • The state wherein the taxpayer maintains memberships in social, religious, and professional organizations;
  • The state wherein the taxpayer registers automobiles;
  • The state wherein the taxpayer maintains a driver’s license;
  • The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history;
  • The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
  • The state wherein the taxpayer is employed;
  • The state wherein the taxpayer maintains or owns business interests;
  • The state wherein the taxpayer holds a professional license or licenses;
  • The state wherein the taxpayer owns investment real property; and
  • The indications in affidavits from various individuals discussing the taxpayer’s residency

The above is basically a list of why expats have relied on the 330 day test. It’s easy, you don’t need to invest or spend money to get a visa, and you don’t need to worry about your ties to the US. Just be out of the US for 330 out of 365 days and you’re good to go.

The problem is that expats often pushed their days in the US and the IRS loves to audit these returns. Many don’t realize that travel days and time in international waters can count as US days. Because the FEIE is all or nothing, the risk in these cases is significant.

More importantly, President Trump is moving the US from a global tax system to a territorial tax system. This likely means an end to the 330 day test and a move towards residency.

Because it takes time to become a legal resident of a foreign country, and time to break ties with the US, and you must qualify for a calendar year, I’m recommending clients begin this process as soon as possible.

I hope you’ve found this article on how to become a nonresident of the United States for tax purposes to be helpful. For information on residency visas, or to setup an offshore business, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Foreign Earned Income Exclusion for 2018

Foreign Earned Income Exclusion for 2018

On October 19, 2017, the IRS announced the Foreign Earned Income Exclusion for 2018. The FEIE for 2018 is a nice bump up from 2017. Here’s what you need to know about the Foreign Earned Income Exclusion for 2018 and how it might be affected by President Trump’s residency based tax proposal

Under Section 911 of the US tax code, the Foreign Earned Income Exclusion for 2018 increases from $102,100 in 2017 to $104,100 in 2018. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58.

However, the Foreign Earned Income Exclusion for 2018 is subject to change. President Trump is proposing major changes to the US tax code which could change the FEIE amount for 2018 (or, more likely 2019). He might also succeed in his effort to move the United States from a citizenship based tax system to a residency based tax system.

If President Trump is successful, and all of us expats are hoping he is, the FEIE will be eliminated and those who are residents of a foreign country will pay zero US tax on income earned abroad.

In order to understand the Foreign Earned Income Exclusion for 2018, and how it might change next year, allow me to summarize it here.

As I said above, the Foreign Earned Income Exclusion for 2018 is $104,100. If you’re living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 in salary or wages on your US Federal income tax return.

This salary can come from your US employer, a US corporation you own, a foreign employer, or an offshore corporation you own. If it comes from a US company, you and your employer are liable for payroll taxes. If you get paid from a foreign corporation, you are generally exempt from payroll taxes (which are about 15% combined on $100,000 in wages).

The Foreign Earned Income Exclusion for 2018 is to be reported on your 2018 personal income tax return using Form 1040 and Form 2555. Only income earned outside of the US qualifies for the FEIE. That is to say, US source income goes on Form 1040 and not Form 2555.

At the time of this writing, there are two ways to qualify for the Foreign Earned Income Exclusion in 2018. You can be out of the country for 330 days during any 365 day period or be a legal resident of a foreign country.

President Trump is saying he’ll convert the US from a citizenship based tax system to a residency based tax code. If that happens, the 330 day test would likely be eliminated and only those who are legal residents of a foreign country would qualify for the Foreign Earned Income Exclusion in 2018.

Under this tax system, the FEIE would eventually be eliminated and those who are legal residents of a foreign country would be allowed to exclude all of their foreign income. It seems likely that that the Foreign Earned Income Exclusion for 2018 will remain as described herein and that we will move to a residency based system in 2019.

Regardless of whether President Trump succeeds, we’re advising all of our clients using the FEIE’s 330 day test to convert to the residency test during 2018. You should be ready by January 1, 2019 to qualify for the residency test. Here’s why:

First, the residency test is lower risk than the 330 day test. Many of our clients have been caught missing their 330 days and have lost the FEIE. If you miss your 330 by even one day, you lose the Foreign Earned Income Exclusion entirely and 100% of your worldwide income becomes taxable in the United States.

Second, the residency test is easier to use in the long term. Sure, it’s simple to calculate how many days you were in the US and how many days you were in a foreign country. But, counting travel days year in and year out is a real headache.

When you use the residency test, you don’t need to keep track of your days to closely. You can be in the US on business for 2 or 3 months a year without an issue. Try not to exceed 4 months a year and never spend more than 183 days in the US, and you’ll qualify for the residency test.

Third, the residency test requires you to be a resident of a foreign country for a full calendar year. That means it must start on January 1 of 2019. I’m recommending that our clients spend 2018 getting their affairs in order and planning for the FEIE throughout 2018.

It takes a great deal of time and effort to qualify for the residency test. You need legal residency in a country you can call your home base. Plus, you need to cut as many ties to your home country as possible and create as many ties to your new country of residence as possible.

So, plan to use the Foreign Earned Income Exclusion for 2018 with the 330 day test and be ready with the residency test in 2019.

This means that you must secure legal residency in a country that will be your home base to maximize the value of the Foreign Earned Income Exclusion in 2019. It doesn’t matter for US tax purposes which country. So long as you’re a legal resident, you’ll qualify for the FEIE and Trump’s residency based tax system if it passes.

Of course you don’t want to exchange one high tax country for another. You want to secure residency in a country that won’t tax your foreign capital gains and your foreign sourced profits. For a list of these countries, see: Which Countries Tax Worldwide Income?

For example, I don’t recommend Mexico or Colombia because they tax residents on their worldwide income. I do recommend Panama because this country taxes residents on their local source income but not their foreign sourced profits.

If you’re living in Panama and selling to persons in the US, Panama won’t tax those gains. If you’re living in Panama and selling to Panamanians, you will owe tax on those sales.  

Next, you need a country with an efficient residency program that fits your budget… and there are a number of options here.

For example, if you have the cash, you can get residency in the European Union through Portugal’s golden visa program. Portugal requires you deposit € 1,000,000 in a local bank or purchase real estate for € 500,000 or more.

If you wish to live in Asia, you can get residency in Hong Kong by investing about $1.3 million in a local business. You can also gain residency in the Malaysia with a deposit of about $135,000 in a local bank or in the Philippines by investing $75,000 in a government approved business.

The easiest and lowest cost residency for US citizens is Panama’s Friendly Nations Reforestation Visa program. Invest $20,000 in one of the approved reforestation projects and get residency immediately. And this investment covers you, your spouse, and your dependent children 18 years of age and under. Government and legal fees apply to each applicant in addition to the investment.

If you can make Panama your home base, I guarantee that the Panama Reforestation Visa is the most efficient residency program and the best way to qualify for the Foreign Earned Income Exclusion in 2018 and beyond. For more information on this program, see: Best Panama Residency by Investment Program

I hope you’ve found this article on the Foreign Earned Income Exclusion for 2018 to be helpful. For more information, or for assistance with residency in Portugal or Panama, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with your international tax plan and support  you through the coming changes.

offshore corporation

Offshore Corporation and Trump’s Tax Plan

There are big changes coming from the Trump administration that will affect your offshore corporation. Republicans have made it clear that they must pass tax reform or they’ll be crushed in the next election cycle. Here’s how Trump’s tax plan is likely to affect offshore corporations and and international taxation.

There are three groups of small business owners that use offshore corporations. They are:

  1. those who live and work in the United States but operate through an offshore company,
  2. those who live abroad and run their business through an international corporation, and
  3. those who run an international division of their US business through an offshore corporation.

Each of these groups of business owners will see different results from Trump’s tax plan. I’ll review each in turn here.

First, keep in mind that this article is for those operating a business through an offshore corporation. Very different rules apply to American’s investing abroad using an offshore trust or an international LLC.

Likewise, not all aspects of this article apply to those operating a business through an international LLC. Nor does it apply to offshore IRA LLCs. Each of these is controlled a different section of the US tax code.

Keep in mind that all of these structures, including the offshore corporation, is governed first and foremost by the US tax code. Certain countries have written laws that help you maximize privacy, protection, and tax savings. However, these laws are intended to work together with US tax laws. Therefore, you should always have a US tax expert in your corner to quarterback your offshore structure.

With that said, here’s how the offshore corporation fits into Trump’s international tax plan.

Live and Work in the United States

If you’re living and working in the United States, and operating through an offshore corporation, you shouldn’t see much change from Trump’s tax plan. You’re already paying US tax on your foreign profits as earned.

In this section, I’m talking about those operating a business through an offshore company that have no office and no employees abroad. You’re operating through an offshore corporation for privacy or asset protection… or any number of other reasons. But, you get no tax benefit from this structure.

Of course, you will get a lower tax rate just like everyone else. If Trump reduces the tax rate on corporate income from 35% to 20%, you’ll receive the same benefit.

Living Abroad and Qualify for the FEIE

There’s some good news in Trump’s tax plan for those living abroad, operating through an offshore corporation, and qualifying for the Foreign Earned Income Exclusion.

Trump will not eliminate or change the Foreign Earned Income Exclusion. If you’re a resident of a foreign country, or out of the US for 330 out of 365 days, you can exclude up to $102,100 of income from your 2017 return.

The 2018 Foreign Earned Income Exclusion amount hasn’t been released yet. I expect it will be around $102,900. The FEIE goes up a few hundred each year to keep up with inflation.

By operating through an offshore corporation, you maximize the benefits of the FEIE, create a an asset protection and privacy barrier, and eliminate Self Employment Tax. SE tax will remain at 15% under Trump’s tax plan.

It will remain difficult to qualify for the FEIE using the 330 day test. In fact, the 330 day test will likely become more difficult, if not eliminated entirely, when Trump institutes his territorial tax plan.

For this reason, I’m recommending all my FEIE clients obtain residency somewhere within the next year. For US purposes, it doesn’t matter where, but you should have legal residency in some country… in the country you will call your “home base.”

Even perpetual travelers need to put down roots somewhere and sign up for residency. Because residency must cover an entire tax year, you should take steps now to be ready by January 1, 2019.

  • The 330 day test can be used over any 12 month period. To use the residency test, you must be a resident for a full calendar year.

Of course, you should try to become a resident of a country that won’t tax your income. For a list of countries that don’t tax foreign sourced profits, see: Which Countries Tax Worldwide Income?

The easiest residency program for US citizens is Panama. Invest $20,000 in Panama’s Friendly Nations Reforestation Visa Program and get residency for you and your family (husband, wife, and dependents 18 year of age and under). For more on this, see: Best Panama Residency by Investment Program.

Note that you can also get residency in Panama using your IRA. Purchase teak or one of the other reforestation programs with your IRA and get residency for free.

Operating a Division Offshore

There are two competing tax plans when it comes to those operating divisions offshore. First, Trump wants to incentevise businesses to bring back retained earnings to the United States. He’s offering a reduced rate (maybe 5%) and expects hundreds of billions of dollars to be repatriated.

One way to force companies to bring their cash hoards back now is to make it more difficult to retain earnings abroad in the future. This would have a long term impact on your ability to operate a foreign division through an offshore corporation.

Competing with this desire to force retained earnings back into the United States is Trump’s territorial tax plan. President Trump want’s to convert the United States from a worldwide tax system to a territorial one.

In a territorial tax system, businesses would be taxed in the United States on income earned in the US. They would not be taxed on income earned abroad in foreign divisions.

So, when it comes to how a foreign division will fair under Trump’s tax plan, there are many factors and moving parts. If the final version includes a change to a territorial system, US businesses may see significant tax savings going forward. If all we get is a repatriation and a tightening of the retained earnings rules, businesses might see an increase in US taxes going forward.

Conclusion

No matter how things shake out with the worldwide or territorial debate, the offshore corporation will remain one of the most important tools in the toolbox for reducing or deferring tax on international business profits.

As I said above, anyone living abroad should work towards residency in a zero tax country in 2018. Be ready for more changes in 2019 and the possibility of a territorial system.

I hope you’ve found this article on offshore corporation and Trump’s tax plan to be helpful. For more on how to setup an offshore company or residency in Panama, please drop me a line at info@premieroffshore.com or call us at (619) 483-1708. 

tax on bitcoin

Tax on Bitcoin Transactions

In this post I’ll talk about how the United States taxes bitcoin transactions and how you can reduce or eliminate those taxes by planning ahead. Bitcoin and cryptocurrencies are generating massive returns, but are very volatile. Proper tax planning must take both of these issues into account.

The US Internal Revenue Service declared Bitcoin and cryptocurrency capital assets back in 2014. This is significant because, by treating Bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-keeping and taxes on its use.

That is to say, from a federal tax perspective, Bitcoin and other cryptocurrency are not considered “currency.”  On March 25, 2014, the IRS issued Notice 2014-21, which stated that, “Virtual currency is treated as property for U.S. federal tax purposes.”  

The notice further reads, “General tax principles that apply to property transactions apply to transactions using virtual currency.”  

In other words, the IRS is treating the income or gains from the sale of a Bitcoin as a capital asset, subject to either short-term (ordinary income tax rates) or long term capital gains tax rates, (20% tax rate assuming Trump repeals the Obamacare tax).

Fyi… in July of 2017, the US Securities and Exchange Commission ruled that cryptocurrencies are a currency. As a result, ICOs are regulated by the SEC.

Tax Reporting for Bitcoin Transactions

When you sell a Bitcoin, you must report the purchase price, purchase date, sale date and sale price on Schedule D of your personal return. If you’re audited, you must provide documents to prove your basis in these Bitcoins.

For example, if you bought Bitcoins in 2015 and sell them in 2025, you must keep your purchase “documents” until at least 2029, when your audit statute expires. The IRS usually has 3 years to audit your return after it’s filed.

You also need to decide which coins you sold when you report the transaction. For example, you bought two bitcoins in 2015, two in 2016, two in 2017 and two in 2018. Then you sold one coin in 2018. Which coin did  you sell?

Since Bitcoin is taxed as personal property, you can chose from two accounting methods. You can select the coin sold using first-in-first-out (FIFO), last-in-first-out (LIFO), or to sell specific tax lots that are most efficient under the “specific share identification” method used for stocks. For more information, see: Bitcoin Tax Guide: Trading Gains And Losses – LIFO, FIFO, Offsetting Lots.

Under LIFO, you would have sold one of the coins you purchased in 2018 in that same year. Under FIFO, you would have sold one of the coins you purchased in 2015 in 2018.

Which accounting method you choose can make a major difference on your taxes. FIFO is the most common and spreads your tax obligations more evenly over the years assuming steady growth. LIFO can defer taxes, but can also result in major spikes in taxes owed.

Once you select a reporting method for your Bitcoin transactions, you must stick with it. If you go with FIFO, you must use that each and every year. You can’t switch methods year after year. For example, you can’t switch from LIFO to FIFO because you want to maximize your crypto gains because you have a large capital loss in a particular year.

Stop Paying Taxes on Your Bitcoin Transactions!

Because Bitcoin sales are taxed as a capital gain, there are three ways you can stop paying taxes on your bitcoin transactions. They are:

  1. Invest through your IRA,
  2. Invest through a life insurance policy, or
  3. Move to the US territory of Puerto Rico.

If you have a sizable IRA or retirement plan, you can buy Bitcoins through this account. Because Bitcoin is a capital asset, you’re allowed to hold coins inside your IRA. Most US IRA providers don’t allow Bitcoin, but you can take your IRA offshore and buy using an international wallet.

When you buy Bitcoin in a traditional IRA, you get tax deferral. You’ll pay tax on the gain when you take your distribution. When you invest through a ROTH IRA, you get tax free… you never pay tax on the gain.

Of course, buying Bitcoin in an IRA isn’t always possible or good practice. Most young investors don’t yet have significant cash in their retirement accounts. Also, Bitcoin is highly volatile and most investment advisors don’t recommend gambling with your retirement savings.

If you buy Bitcoin in an offshore IRA using leverage or a loan, you need to watch out for Unrelated Business Income Tax on the gains. For more on this, see: What is UBIT in an IRA.

Leverage on Bitcoin contracts is generally not available in the United States. The CFTC does not permit American retail customers to trade leveraged Bitcoin contracts on Bitcoin exchanges, thus investing through an offshore IRA LLC with a UBIT blocker can be a significant advantage to a sophisticated investor.

Another way to buy Bitcoin tax free is in an international life insurance policy. If you invest at least $1.5 to $2.5 million, you can get a US compliant life policy that allows you to control your investments.

Like the IRA, this policy gives you tax deferred growth if you cancel it during your lifetime. It also gives you tax free similar to a ROTH if you hold it until your death and transfer the assets to your heirs.

Offshore life insurance is a very powerful and complex tax planning tool. For more, see: Benefits of Private Placement Life Insurance.

The third way to stop paying tax on your Bitcoin transactions is to move to the US territory of Puerto Rico. If you move out of the United States, spend 183 days a year in Puerto Rico, and otherwise qualify for Act 22, you pay zero tax on gains on assets acquired after you move to the territory.

First, note that the United States taxes its citizens on our capital gains no matter where we live. If you move to Colombia, you still pay US tax on your crypto gains because the US taxes you on your worldwide income. So long as you have a US passport, you pay tax on your Bitcoin transactions.

The ONLY exception to this tax on worldwide income is the US territory of Puerto Rico. Section 933 of the US Tax Code excludes Puerto Rico source income from US tax, which allowed Puerto Rico to create it’s own tax rules.

Because the territory is in dire financial shape, they’re doing everything possible to attract high net worth investors. You can move to Puerto Rico, pay zero tax on your capital gains, and never pay US tax on those profits, even if you return to the States after a few years.

Puerto Rico’s tax incentives present a truly unique opportunity for US persons to benefit from the territory’s financial hardship. For more, see: How to benefit from Puerto Rico’s bankruptcy.

For example, you can set up a business on the island and cut your corporate tax rate by 90%. An internet business operating from Puerto Rico will pay only 4% in corporate tax on its PR sourced income. For more, see: Changes to Puerto Rico’s Act 20.

You might also like to read through: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

I hope you’ve found this article on how the US taxes Bitcoin, and how to eliminate that tax, has been helpful. For more information, please contact me at info@premieroffshore.com or (619) 483-1708. 

stop paying capital gains tax

3 Ways to Stop Paying Capital Gains Tax

Here’s how to stop paying capital gains on your stock transactions. You can legally stop paying capital gains tax tomorrow by following these simple steps. If you’re tired of the IRS taking 20% of your stock gains, here’s how to cut out Uncle Sam.

First, this article is not about how to reduce or defer capital gains tax. This is how to stop paying the IRS immediately and forever. You already know that you can defer gains by investing through your IRA or by taking losses against gains to reduce taxes.

Also, this post is not about the usual US tax tools that so many write about. If you want the same old boring ideas, read Forbes. If you want to pay zero capital gains tax, stick with me.

Since this website is Premier Offshore, let me remind you that we US citizens are taxed on our worldwide income no matter where we live. Moving offshore does not reduce your US capital gains tax. If you sell stocks or foreign real estate while you’re a resident of a foreign country, you must pay Uncle Sam 20% (less taxes paid to the foreign country).

Here are the 3 ways to legally stop paying capital gains tax:

  1. Give up your US citizenship (expatriation),
  2. Setup an offshore life insurance policy to hold your investments, or
  3. Move to the US territory of Puerto Rico.

I’ll go through each of these in turn and show you how to stop paying capital gains tax.

Expatriation

I won’t spend much time on giving up your US citizenship. This is one of those things that many talk about but few actually do. We love to hate the IRS, but not many of us (myself included) have the guts to burn our blue passports.

Giving up your US passport is expensive and time consuming. If you’re net worth is $2 million or more, you’ll need to pay capital gains tax on all of your appreciated property. This exit tax locks in most high net worth individuals.

And you’ll need a second passport in hand before you renounce your US citizenship. While this seems obvious, about 50% of the calls I get to expatriate don’t have a second passport. It’s impossible to give up your US citizenship and become “stateless.”

If you want to buy a second passport, you can get one from Dominica for about $120,000. If you prefer an investment, you can invest $500,000 to $550,000 in St. Lucia government bonds, and pay $50,000 in fees.

If you want to prepare an exit strategy, and have a few years, you can earn citizenship by becoming a resident of a foreign country. For example, if you’re from a top 50 country (such as the United States), you can invest $20,000 in Panama’s green initiative and receive legal residency. You can apply for citizenship and a passport after 5 years of residency.

The bottom line is that, if you give up your US citizenship, you can stop paying US capital gains taxes once that process is complete. Getting to that point will be a long road if you don’t already have a second passport.

Offshore Life Insurance

Any investment made inside a life insurance policy is either tax deferred or tax free. If you close out the policy during your life, you’ll pay tax on the distribution, therefore it’s tax deferred. If you hold the policy until your death, then the gains pass to your heirs tax free (considering the step-up in basis they receive).

An offshore private placement life insurance policy provides you with maximum asset protection and a nearly unlimited capacity for tax free or tax deferred growth. A life policy has no investment cap, income limitation, or distribution requirement. A private placement policy is basically an unlimited ROTH IRA or defined benefit plan that can pass to your heirs tax free.

You can invest millions of after tax dollars into a US compliant offshore life policy and pay zero capital gains on the appreciation. In fact, the minimum investment for these policies is often $1 to $2.5 million.

I also note that you can borrow against most offshore life insurance policies. This means you can access the cash in times of need without incurring a tax cost.

But, offshore life policies are expensive. If you can create a large enough policy, and you generate solid returns, they can be a very valuable tool.

Move to Puerto Rico

Moving to Puerto Rico is the easiest way to stop paying capital gains tax. Move to this US territory today and stop paying capital gains tax immediately! You don’t need to give up your US passport and you don’t need to buy an expensive life insurance policy.

Here’s what you need to do to stop paying capital gains tax by moving to Puerto Rico:

  1. Move to Puerto Rico,
  2. Break as many ties with your home state as possible,
  3. Spend 183 days a year in Puerto Rico,
  4. Sign up for and be approved for Act 22,
  5. Buy a home in Puerto Rico within 2 years of receiving your Act 22 decree, and
  6. Donate $5,000 a year to a charity in Puerto Rico (new as of July 11, 2017).

Do these things and you can stop paying capital gains tax to the United States immediately.  You pay zero capital gains tax on assets acquired after you move to Puerto Rico.

Note that this tax deal is available on passive gains that can be categorized as Puerto Rico sourced income. In most cases, this is gains on stocks. It does not apply to US real estate or US rental profits. These are always US source income.

And only Puerto Rico can make you this offer. As I said above, when you move to a foreign country, you pay US tax on your worldwide capital gains. You won’t be double taxed because of the foreign tax credit, but the IRS always wants it’s cut.

Because of its unique status as a territory, Puerto Rico sourced income is not taxed by the United States. That is, residents of Puerto Rico pay tax to their local government and not the IRS. See IRC Section 933.

This means that Puerto Rico is free to charge it’s residents whatever tax rates it wishes. Because of it’s pending bankruptcy, the government is making you an offer you can’t refuse: move to Puerto Rico and pay zero capital gains tax on assets acquired after you become a resident.

So, if you want to stop paying capital gains tax, and don’t want to give up your US citizenship or buy an expensive life insurance policy, consider moving to Puerto Rico.

And Puerto Rico’s offer doesn’t stop with Act 22. You can also move a business to Puerto Rico and cut your corporate rate to 4%. Under Act 20, you pay only 4% on Puerto Rico sourced business income. For more on Act 22 and 20, see: Changes to Puerto Rico’s Act 20 and Act 22.

To qualify for Act 20, your business should be providing a service from Puerto Rico to people or companies outside of the island. Act 20 companies are usually online businesses or other portable businesses that can be easily re-domiciled to Puerto Rico.

Just about any portable business can qualify for Puerto Rico’s Act 20. Even one man internet marketers or one woman sales sites can get the 4% rate. This is because the government just changed the law to allow for one person businesses. See: Puerto Rico Eliminates 5 Employee Requirement.

Conclusion

If you’re just done with the US and it’s tax laws, consider buying a passport and dumping Uncle Sam. If you don’t want to move out of your state, and you have a few million dollars to invest, set up an offshore life policy to eliminate capital gains tax.

If you’re willing to spend 183 days a year in Puerto Rico, moving to the island under Act 22 is the easiest and best way to stop paying capital gains tax immediately.

For more information on any of these options, please contact us at info@premieroffshore.com or call us at (619) 483-1708 for more information. 

Puerto Rico Act 20 no employees

Puerto Rico Eliminates 5 Employee Requirement

Puerto Rico has opened up its Act 20 program by eliminating the 5 employee requirement. Any US citizen can now move to Puerto Rico, set up a business under Act 20, and pay only 4% in corporate tax. By eliminating the 5 employee requirement for Act 20 businesses, Puerto Rico has opened the floodgates.

Note that this article on Puerto Rico eliminating the 5 employee requirement is based on a law change signed on July 11, 2017. For a detailed review of all the modifications, see Changes to Puerto Rico’s Act 20 and Act 22.

First, a quick review of Puerto Rico’s Act 20.  

If you move you and your business to Puerto Rico, you can exchange your US tax rate of 40% (including your state) for Puerto Rico’s Act 20 rate of 4%. To qualify, you must be moving a service business to the territory. One that can provide a service from Puerto Rico to persons and companies outside of Puerto Rico.

You’ll pay 4% tax on corporate profits earned on income generated from work done in Puerto Rico. That is to say, you pay 4% on Puerto Rico sourced income… on the earnings and profits from work performed in Puerto Rico.

4% is your corporate tax rate payable on net business income. Net income is after you pay yourself a reasonable salary. Most pay themselves $50,000 to $100,000, which is taxed at ordinary rates by Puerto Rico (not the United States). 

For this reason, Puerto Rico’s Act 20 is best for those earning $250,000 or more. If you’re netting $100,000 or less, you can use the Foreign Earned Income Exclusion to pay zero tax on your business income. The bottom line is that, the more you earn the more you save with Puerto Rico’s Act 20. For more, see Panama vs. Puerto Rico.

In order to qualify for Puerto Rico’s Act 20, you must spend 183 days a year on the island and become a resident. Moving to Puerto Rico is much easier than the FEIE which requires you spend 330 out of 365 days a year offshore, at least in the first year.

Puerto Rico Eliminates 5 Employee Requirement

When Puerto Rico’s Act 20 was first passed in 2012, it required a minimum of 3 employees. Then, in December of 2015, the minimum number of employees was increased from 3 to 5. As of July 2017, there is no employee requirement.

Remember that only Puerto Rico sourced income qualifies for the Act 20 4% tax rate. Puerto Rico sourced income is earnings and profits from work performed in Puerto Rico. Therefore, all Act 20 companies must have at least 1 employee… someone must be doing the work and generating the profits. This employee can be the business owner. 

Eliminating the 5 employee requirement opens the doors of Puerto Rico to any portable business. Even a one man affiliate marketer, or a one woman online publisher / SEO maven, can set up in PR and cut his or her taxes from 40% to 4% overnight. Grab your laptop and get your rear to Puerto Rico immediately!

New Risks of Act 20 in 2017

I should point out that eliminating the 5 employee requirement for Puerto Rico’s Act 20 can lead to abuse. Someone will try to work from the US and hire a secretary in Puerto Rico for $10 an hour as his 1 employee.

His Act 20 company might be approved, but he’ll get crushed by the IRS if and when he’s audited Again, for the third time, Puerto Rico sourced income is earnings and profits from work done in Puerto Rico. Likewise, US source income is earnings and profits from work performed in the United States.

In the above hypothetical, 99% of the effort to create the income will be done in the US with a very small amount attributable to the employee in Puerto Rico. The IRS is sure to look at these arrangements very closely and assess all kinds of interest and penalties.

Remember that, when you move to Puerto Rico, you must follow the tax laws of Puerto Rico and the United States.

For this reason, I suggest any business owner with less than 5 employees in Puerto Rico must move to the island. You should spend 183 days in the Territory and become the employee of your Puerto Rico Act 20 company.

If you move you and your business to Puerto Rico, it’s fine if you’re the only employee. If all work is done by you, a resident of Puerto Rico, all income is Act 20 eligible. If you live in the United States, and operate a division in Puerto Rico, a much more in depth analysis must be undertaken.

Getting Money Out of Puerto Rico Act 20 Company

Dividends from a Puerto Rico Act 20 company are tax free when paid to a PR resident. This means you’ll pay zero tax on these distributions. You’ll pay ordinary rates on your salary, 4% on your corporate profits, and zero on dividends from your Act 20 company.

And we’re not talking about tax deferral here. Puerto Rico’s Act 20 gets you tax free distributions. You’ll never pay US tax on this income. Even when you shut down the business and move back to the US, you pay zero to Uncle Sam.

Conclusion

I hope you’ve found this article on how Puerto Rico opened up its Act 20 program by eliminating the 5 employee requirement to be helpful. For more information on setting up a business in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Changes to Puerto Rico’s Act 20 and Act 22

Changes to Puerto Rico’s Act 20 and Act 22

On July 11, 2017, major changes to Puerto Rico’s Act 20 and 22 were approved. These changes make it much easier to qualify for Puerto Rico’s Act 20 tax holidays. Here’s everything you need to know about the changes to Puerto Rico’s Act 20 and Act 22.

As of July 2017, Puerto Rico has a tax deal that can’t be matched by any offshore jurisdiction. All the other tax havens might as well just close down…. Puerto Rico just hit it out of the park… did the best set ever and dropped the mic. Offshore tax havens are done.

The US territory of Puerto Rico is working hard to bring new business and high net worth persons to the island. As a territory, Puerto Rico can offer tax deals to US citizens that can’t be matched by any foreign country.  

This is because US Tax Code Section 933 excludes Puerto Rico sourced income from US tax. When a US citizen moves to a foreign country, we pay US Federal tax on our business profits (less the FEIE) and US capital gains tax on our investment profits. 

Residents of Puerto Rico don’t pay US Federal tax on their Puerto Rico sourced income. They pay only Puerto Rico tax on these profits and capital gains. And Puerto Rico is free to charge whatever tax rate they want, which is why Act 20 and Act 22 are possible.

To qualify for Puerto Rico’s Act 20 and 22 tax holidays, you must be a resident of Puerto Rico and spend a minimum of 183 days a year on the island.

Puerto Rico’s Act 22 gives you a zero percent tax rate on capital gains on assets acquired after you move to Puerto Rico.

Puerto Rico’s Act 20 gives you a 4% corporate tax rate on any Puerto Rico sourced business income earned inside an Act 20 company. Puerto Rico sourced business income is earnings and profits from work performed in the territory. 

This post will focus on changes to the law which were approved on July 11, 2017. You might also take a read through my article comparing Puerto Rico’s Act 20 with Panama (or any offshore jurisdiction). Just remember that this article does not include the changes described below.

For more on Act 20, see: Puerto Rico Eliminates 5 Employee Requirement

The primary changes to Puerto Rico’s Act 20 and Act 22 are:

  1. Adding eligible services of
    1. Hospital services and laboratories including medical tourism and telemedicine services
    2. Trading companies with no less than 80% of business in PR exporting business.This means Act 20 is no longer limited to online and service businesses. 
  2. No minimum number of employees required for most Act 20 businesses. Some exceptions will apply based on regulations yet to be written by the Secretary of DDEC. It seems these regs will focus on call centers and telemedicine. We believe all service and tech businesses can operate with only one employee (the business owner).
  3. 30% of doctors at medical tourism and telemedicine facilities should be Puerto Rican residents.
  4. Annual filings and reports shall be be required.

Amendments to Act 22 include an annual donation of $5,000.00 per decree holder to a recognized Puerto Rican non profit organization.

Here is a loose translation of Puerto Rico’s Act 43, approved July 11, 2017, which modifies Puerto Rico’s Act 20 and 22. This is not meant as a legal translation and you should consult an expert before acting upon this summary.

We translated the full memo because I love the way it’s written. The current government is the blue party, which is the party that was in power in 2012. They couldn’t help but take a shot at the red party which was in power in 2015.

As you read this, you’ll see that the focus of Puerto Rico’s Act 20 is to bring business and employment to an island. You might also want to take a read through my article, How to benefit from Puerto Rico’s bankruptcy.

I’ll be happy to assist you to set up a business in Puerto Rico under Act 20 or qualify for Act 22 to eliminate capital gains tax on assets acquired after you become a resident and receive your decree. Please contact us at info@premieroffshore.com or call us at (619) 550-2743 with any questions.

Explanatory Memorandum on Changes to Puerto Rico’s Act 20 and Act 22

Beginning in the 1970s, the economic development of Puerto Rico has focused on the promotion of foreign industries through granting Federal and state tax incentives. Since that time, the Puerto Rican economy has fallen upon hard times, as federal incentives were removed, over which the local government of Puerto Rico had no control resulting in conflict with the strengthening and development of new local companies.

The deterioration of the Puerto Rican economy became more defined when the government incurred expenses that exceeded over receivable income, which in turn led to more taxes and high fees for local businesses, as well as the whole island, later lead to a reduction in local economic activity. With the exception of fiscal year 2012, since fiscal year 2007, there has been an economic contraction of fifteen percent (15%). Since then, the Gross National Product of the Commonwealth of Puerto Rico has been in negative numbers.

Puerto Rico looks to become more competitive  in achieving their economic development goals in a globalized and interconnected economy. According to the Global Competitiveness Report 2016-2017 World Economic Forum, competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of an economy, which in turn, marks the level of prosperity that a country can attain.

It is imperative to revert, as a matter of urgency, the negative of our economy and return to the path of prosperity. For this, we need to make a paradigmatic change in the way we conceive the function of our public institutions and our model of development economic. Precisely, the Plan for Puerto Rico that the People endorsed on November 2016, includes measures to achieve fiscal responsibility and economical development of the island. This administration has been active and, in less than 50 days, has passed more laws than on any previous occasion. At the beginning of a four-year term, more than a dozen laws that seek to promote development of our economy and to tackle the fiscal crisis. See Laws Number 1-11 of 2017.

In order to achieve the development and growth of our economy, during the administration of  ex-governor, Hon. Luis Fortuño, the Government of Puerto Rico identified the need to encourage the export of services. He approved Law No. 20-2012 (Act 20) to find ways to encourage the development of local companies, also for those that want to move to the Island to expand their capacity to export services and help insert Puerto Rico, in better conditions, into the global economy.

A study carried out by the company “Estudios Técnicos”, published in December 2015, revealed that by November of that year 360 decrees had been issued under Act No. 20-2012; That companies operating under the law created about 3,350 direct jobs, 2,160 indirect jobs and more than 1,500 achieved, for a total of 7,000. This shows that Act 20 has been essential in fostering the economic development of Puerto Rico.

In fact, this Law was endorsed by the Garcia Padilla Administration, through former secretary of Economic Development and Commerce, Alberto Bacó Bagué, who became its main promoter. He stated that Law No. 20-2012 has been an economic stimulus tool that has generated thousands of opportunities for well-paid jobs and has avoided a greater exodus of professional Puerto Ricans.

However, during the last four years, Act No. 20-2012 was amended by the past administration to establish restrictions which, instead of stimulating the service industry, discouraged growth. It is time to put aside “not my problem” politics and take into our hands the course of economic development started by the Fortuño Administration, which was depleted by the lack of interest of García Padilla Administration.

Certainly, Puerto Rico’s greatest asset is its human resource. We count with a high level of quality of professionals, technicians, advisers, consultants and service providers, who have the talent to offer from Puerto Rico their services to other jurisdictions with the greatest guarantee of success. It is a commitment of this Administration to help push our workers forward and all those that see Puerto Rico as an economic investment destination.

In order to promote the export of services, the public policy that Puerto Rico must be focused on developing the growth of the services sector in its economy. At the same time, these incentives should promote sustainable economic development and creation of employment in the island. We have a bicultural and bilingual population and a strategic relationship that serves as a bridge between Latin America and the continental United States.

To achieve the objectives described here, this Administration believes it necessary to promote amendments to the “Law to Encourage the Export of Services.” For this reason, it is included as part of the services eligible under Law No. 20-2012, medical tourism services and telemedicine facilities. This broadens the range of eligible services to allow foreign or local investment to have an incentive to develop in Puerto Rico an economic component predicated on the export of medical services. This, in turn, together with the medical incentives approved under Act No. 14-2017, will help our doctors to expand their services in this area, and decide to remain in Puerto Rico.

It is a principle of this administration, included in the Plan for Puerto Rico, that the role of government must be based on encouraging and facilitating economic development, developing the financial capital to attract service companies and large institutions to Puerto Rico, and to encourage local companies to export services outside the island.

This commitment contemplates the implementation of a development model based on the global principles of competitiveness and sustainability that allows the private sector to be a protagonist and leader of our economic development. This Government is committed to eliminate any obstacle so that Puerto Rico can compete favorably with other jurisdictions.

Amendments to Act 20: articles 3, 10, 12 and 13:

Section 1.- Amendment are made to subsection (k) Article 3 of Act 20-2012 as follows:

Article 3: Definitions;

(k) Eligible services include the following:
(xvi) Hospital services and laboratories including medical tourism and telemedicine facilities;
(xxi) Companies dedicated to international trading (known as trading companies) – Trading companies will mean any entity that produces no less than 80% of gross income from the following:
(a) sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
(b) from commissions derived from sales of goods for consumption and use outside of Puerto Rico; stipulating that none of the income derived from selling and reselling of products be used or consumed in Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree;and
(c) Other eligible exportation services as described under this law

Section 2.- Eliminating subsection (a), amending subsection (b) and renumbering as (a) as well as renumbering subsections (c) to (f)  and (b) to (e) of Article 10 of Act 20-2012 as follows:

Article 10: Procedures-
(a) Ordinary procedure:
(i) Tax Decree applications. –  

Any person that has established or proposes to establish an eligible business in Puerto Rico can apply for all the benefits provided by law through a sworn application before the Exemption Office.

The secretary will establish through administrative orders or regulation the criteria to be used in the evaluation process of applications, including as part of the evaluation criteria benefits that the business will generate to Puerto Rico’s economic development.

Criteria includes but is not limited to:

(i) job creation;

(ii) investment of capital;

(iii) direct or indirect contributions to the economy.

The secretary may require in the decree, that if a business requires employees or independent contractors to operate, a certain number of those employees must be Puerto Rican residents or performed by local entities in the industry or business in Puerto Rico.

However, in case of telemedicine services, the Secretary will require that 30% of doctors contracted must be Puerto Rican residents. If there are no qualified professionals to provide such services, then doctors can be outsourced from any other jurisdiction. All businesses that have an approved Act 20 Tax Decree or has submitted applications pending approval, that had direct employees under contract, cannot dismiss employment contracts hereafter of the amendments established under this act which eliminates the employee requirement.

Section 3.- Amendments for subsection (f) of Article 12 of Act 20-2012 as follow:

Article 12. – Periodical reports to Governor and Legislative Assembly.-

(f) The Secretary, along with the support of the Industrial Development Office and Treasury Department will establish an electronic database that will provide information on the businesses with approved tax decrees and will allow access to pertinent government agencies to review information, with the precautions of safeguarding confidentiality of all information provided.

The information will be used for compliance purposes for all businesses that have been granted tax decree and will be used to develop an intelligence promotional program by Department of Economic Development to identify and help eligible businesses that are in precarious situations.

Section 4.- Amendment to subsection (d) in Article 14 of Act 20 are as follows:

Article 13. –  Reports required for exempt business and stockholders or shareholders:

(d) All eligible businesses which has been granted an Act 20 tax decree will file an annual reports at the exemption office, with copies to the Secretary, Treasury Department Secretary and Executive Director, no more than 30 days after income tax returns have been filed. This report will include an authenticated statement from either the President, administrator or authorized agent, that business has complied with all terms and conditions provided in tax decree. The report will include, but is not limited to the following areas: average employment, services provided as per decree and any other information that is required by regulations. This report will include filing fee established under regulation and payable to Secretary of Treasury. Information provided in this report will be used for statistical purposes and economic study. The Secretary of Economic Development Department will be auditing every two (2) years compliance of terms and conditions stipulated and granted under tax decree.

Act 45 Approved July 11, 2017

Amendments to Act 22: articles 3, 5, and 6:

Section 1.- Subsection (a) of Article 3 is eliminated and substituted by new subsection (a) in the Act 22 as follows:

Article 3. – Procedures.

a) In order to benefit from incentives provided by law, all individual resident investor that requests an Act 22 tax decree will be required to file a sworn application before the tax exemption office.

At the time of filing, the Director will collect the rights for the corresponding procedure that is provided by regulation. They will be paid in the manner and manner established by the Secretary. After the Exemption Office issues a favorable recommendation, the Secretary will issue a tax exemption decree, which will detail all the tax treatment provided in this Law. Decrees under this Act will be considered a contract between the concessionaire and the Government of Puerto Rico, and said contract will be considered law between the parties. The decree shall be effective during the period of effectiveness of the benefits granted in this Law, but never after December 31, 2035, unless prior to the expiration of said period the decree is revoked pursuant to section (b) of this Article. The decree shall not be transferable.

Section 2.- Subsection (a) of Article 5 of Law 22-2012, is amended, to read as follows:

“Article 5.- Special Contribution to Individual Resident Investor on Net Capital Gain.
(A) Assessments before becoming a resident of Puerto Rico.- The portion of net long-term capital gain generated by a Resident Individual Investor that is attributable to any valuation that had securities owned by them before becoming a resident of Puerto Rico, to be recognized after ten (10) years of becoming a resident of Puerto Rico, and before January 1, 2036, Shall be subject to the payment of a five percent (5%) contribution, in lieu of any other contributions imposed by the Code, and shall not be subject to the alternate basic tax provided by Subtitle A of the Code. If such appreciation is recognized at any other time, net long-term capital gain in relation to such securities will be subject to the payment of income taxes in accordance with the contributory treatment provided in the Code. The amount of this net long-term capital gain will be limited to the portion of the gain that relates to the appreciation of the securities while the Resident Investor Individual lived outside Puerto Rico. Provided that, for taxable years beginning after December 31, 2016, said capital gain shall be considered income from sources outside Puerto Rico for purposes of the income tax provided in the Code.

Section 3.- Article 6 of Law 22-2012, as amended, is hereby amended to read as follows:

“Article 6.- Reports Required to the Resident Investor Individual. – Any Resident Investor Individual who has a decree granted under this Law, will file an annual report in the Exemption Office, with a copy to the Secretary of the Treasury, thirty (30) days after filing the income tax return before the Department of the Treasury, including any extension. The Director of the Exemption Office may grant an extension of thirty (30) days in cases where it is requested in writing before the expiration of the period for filing the Report, provided that there is just cause for it and expressed in the request. In the case of the Report for the first year as a bona fide resident of Puerto Rico with a tax exemption decree under this Law, said report shall contain a list of data that reflect compliance with the conditions established in the decree for the immediately preceding taxable year At the date of filing, including, in the case of Resident Investing Individuals who were previously residents of other jurisdictions in the United States, evidence of filing Form 8898 with the United States Internal Revenue Service (IRS), or its equivalent in the case of Resident Investing Individuals who were previously residents of any foreign jurisdiction, giving notice of their intention to become a bona fide resident of Puerto Rico and, together with the reports to be filed annually, submitting evidence Of having made an annual contribution of at least five thousand dollars ($ 5,000.00) to non-profit entities operating in Puerto Rico and duly certified under Section 1101.01 (a) (2) of the Internal Revenue Code of Puerto Rico 2011, as amended, that is not controlled by the same person, as well as any other information that may be required by regulation, including the payment of annual fees. The rights will be paid in the form established by the Secretary. The information provided in this annual report will be used for statistical purposes and economic studies. Likewise, the Exemption Office must carry out a compliance audit every two (2) years with respect to the terms and conditions of the decree granted under this Law. “

Click here to read the law in Spanish (downloadable PDF on the government website)

tax free as an affiliate marketer

How to live tax free as an affiliate marketer in 5 steps

Here’s how to live and work as an affiliate marketer and pay zero in US taxes. If you market other people’s products online, you can easily structure your business to be tax free and fully compliant with US laws. If you’re living and working outside of the United States, this post on how to live tax free as an affiliate marketer in 5 steps is a must read.

This article is specifically tailored to affiliate marketers – those who market other people’s products or services online. You might use PPC, PPA, SEO, or whatever… the point is that you are marketing other people’s products and not selling a physical good into the United States.

If you’re white labeling products, or selling your own products online, the tax analysis is much more complex. If you’re selling other people’s products, the tax picture is simple. It’s easy to live tax free as an affiliate marketer if you know the rules.

And these same techniques can be used by anyone selling a service online. At the end of the day, affiliate marketing is categorized as a service by the IRS. You’re performing the service of marketing. And services are taxable wherever the work is performed. So, affiliate marketing performed outside of the United States is foreign source income.

The same goes for any other service business or business where labor / work is what generates the money. If you’re writing blog posts, selling subscriptions, putting on conferences outside of the US, or marketing other people’s products or services, you’re in the service business.

The difference with a physical product sold into the US market is that products create some level of US source income. Some value must be assigned to the product itself, and that value is taxable in the United States no matter where the work is done to create, pack, ship, support, and market the product.

I should also point out that I’m focused on internet businesses and affiliate marketing in this article. If you are providing a professional service, one that requires you to go to the client’s location to work, more complex rules apply. For more on professional service income, see How to Eliminate Subpart F Foreign Base Company Service Income.

With all of that backstory, here’s how to live tax free as an affiliate marketer in 5 steps.

  1. Setup an offshore corporation and run your business through that entity,
  2. Open an offshore bank account and have your clients pay into that account,
  3. If you must have a US corporation and account, move your income out of the US and over to the offshore company each month or quarter,
  4. Live outside of the United States and qualify for the Foreign Earned Income Exclusion, and
  5. Hold profits in excess of the FEIE in the offshore corporation as retained earnings.

The first step in living tax free as an affiliate marketer is to setup your offshore company. The most efficient structure is usually a corporation formed in a zero tax jurisdiction. We’ve found Belize, Nevis, Cook Islands and Panama are the best options for internet businesses.

If you want an added layer of asset protection, you can setup an offshore trust or Panama foundation as the holding company. This will provide maximum protection from future civil creditors. For more, see: Panama Foundation vs Cook Island Trust.

One word of caution on Panama. The officers and directors of Panama corporations are public record and listed in a searchable database. The same goes for founders (settlors) and council members (trustees) of a Panama foundation.

Affiliate marketers often want privacy to minimize the probability of a lawsuit. So, you might add an LLC from Belize or Nevis to the mix. You are the owner of the LLC and the LLC is the officer, director, or founder of your structure. In this way, only you and your banker know who the ultimate beneficial owner of the business is. For more information see: The Bearer Share Company Hack.

The second step is to open an offshore bank account (and possibly a merchant account) for your internet business. Your clients or affiliate networks should be paying by wire transfer into this account.

Clients often look to St. Vincent, Belize, Cook Islands or Panama for this account. The most popular offshore jurisdiction with affiliate networks are Panama and Hong Kong. The problem with this is that both of these jurisdictions now require you have legal residency before opening a business bank account.

If you can’t get paid into an offshore bank account, then you’ll need a US corporation. You want this company to bill the customer and then transfer the profit to your offshore account. The US company bills the client and you bill the US company such that it breaks even at the end of the year.

Note that this is only permitted if you’re living abroad, qualify for the Foreign Earned Income Exclusion, and have no employees or other business ties to the United States. Basically, all profits must be foreign sourced and not taxable to your US corporation.

That’s all pretty simple. The next part is the hard one… the one that takes real commitment if you want to keep Uncle Sam out of your pocket and live tax free as an affiliate marketer. You must live abroad and qualify for the Foreign Earned Income Exclusion (FEIE).

In order to qualify for the FEIE, you must be a legal resident of another country for a calendar year or out of the United States for 330 days during any 12 month period. The legal residency option is referred to as the residency test and the 330 days option is referred to as the physical presence test.

If you qualify for the FEIE, you can exclude up to $102,100 in salary from your internet business in 2017. That is to say, you can take a salary of up to this amount from your offshore corporation and pay zero Federal income tax on the amount. If both a husband and wife are working in the business, you can take out just over $200,000 tax free.

The physical presence test is easy enough to understand. Simply be out of the United States for 330 out of 365 days and you’re golden.

The problem with this test is that everyone tries to push the boundaries. They plan to spend exactly 36 days in the United States, but something always goes wrong. Maybe a delayed flight, extra business meeting, or family emergency. Many people who attempt to use the FEIE physical presence test get it wrong or incorrectly report their days, which is why the IRS loves to audit Americans who claim the FEIE using the 330 day rule.

If you do lose the Exclusion, you lose it entirely. If you spend 37 days in the US because a flight was delayed, you loose the entire exclusion for that tax year. This means that 100% of your income earned abroad will be taxable in the US. One missed flight could cost you $40,000… if it’s a husband and wife both living and working abroad, the bill might be $80,000.

The residency test is easier to qualify for but harder to setup. You first need to become a legal resident in the country you want to call your home base. Then you need to file taxes in that country, move there with the intention of making it your home for the foreseeable future, and break as many ties with the US as possible.

The physical presence test is fact based while the residency test looks to your intentions and your legal status in a country.  But, if you can jump through all these hoops, you can spend 3 or 4 months a year in the United States (never more than 183 days a year), and stop worrying about losing the exclusion.

In order to use the residency test, you must become a legal resident of your home base country. Finding a country that will grant you legal residency can be hard. Finding a tax haven that will give you residency is darned near impossible these days.

For example, Hong Kong requires an investment in a business of about $850,000. To become a resident of Singapore, you must invest $2.5 million in a business. BVI expects you to setup a business and issues only 25 residency visas a year.

The lowest cost tax haven is Panama. If you’re from a top 50 country, you can get residency in Panama by investing in their reforestation program. Invest $20,000 in a licensed teak plantation and you’ll become a resident of Panama. For more information, see: Best Panama Residency by Investment Program.

The final step is living tax free as an affiliate marketer is to plan for your success. If you earn more than $100,000 (single) to $200,000 (joint) in the business, you need to hold the excess in the corporation. If you take a salary in excess of the FEIE, you will pay US tax on the amount over the exclusion. If you leave that money in the corporation, you only pay US tax on it when you take it out as a distribution.

If you’re business will net $500,000+, and you can benefit from 5 employees, you might think about setting up in Puerto Rico. This island has a unique tax deal which is basically the inverse of the FEIE. For more see: Panama vs. Puerto Rico, which is right for my business.

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

I hope you’ve found this article on how to live tax free as an affiliate marketer to be helpful. For assistance in forming the offshore company and planning the business please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to set up the structure business and keep it in compliance.

perpetual traveler

How to Escape the Perpetual Traveler Tax Trap

Under the US tax code, a perpetual traveler is a US citizen or green card holder living outside the United States who doesn’t becomes a tax resident of another country. Being labeled as a perpetual traveler limits how many days you can spend in the US and can cause all kinds of problems for expats. Here’s how to escape the perpetual traveler tax trap.

A perpetual traveler is someone who travels from place to place never putting down roots. A perpetual traveler doesn’t have a residency visa, doesn’t file taxes in any country other than the United States, and never spends 183+ days in any one country.

The problem being labeled a perpetual traveler is that you can only spend 35 days a year in the United States. Spend one day more and you lose 100% of the tax benefits of living abroad. The international tax benefits that come from living abroad are no prorated over the time you spend abroad… you either qualify for the exclusion and get to take the full deduction or you don’t and get the joy of paying US tax on 100% of your income.

Let’s take a step back… We US citizens and green card holders are taxed on our worldwide income no matter where we live. Also, there’s no benefit to living offshore when it comes to capital gains. We always pay US tax on our passive income and dividends no matter where we live.

  • The only exception for capital gains on the planet is the US territory of Puerto Rico.

Business income and your salary from an active business conducted outside of the United States is eligible for significant international tax breaks. The tax benefits of operating a business offshore are:

  1. The Foreign Earned Income Exclusion allows you to exclude up to $102,100 in salary from Federal income taxes in 2017. A husband and wife working in this offshore business can exclude over $200,000 combined.
  2. You can hold / retain foreign sourced business income in an offshore corporation tax deferred.

To qualify for the FEIE, you must meet the physical presence test or the residency test. The physical presence test is, in theory, very simple: be out of the United States for 330 days during any 12 month period. That’s all there is… easy enough, right?

I say the physical presence test is simple in theory because everyone tries to push the boundaries and spend more time in the United States. Family emergencies, vacations, business meetings, flight delays, I’ve heard it all.

Unfortunately, the FEIE physical presence test is very rigid. If you’re off by even one day, and spend only 329 days abroad, you lose the entire exclusion. Because most Americans try to push the boundaries, the IRS loves to audit expats who take use the physical presence test.

The second and more reliable way to qualify for the FEIE is through the residency test. You can exclude up to $102,100 in salary from work performed outside of the United States if you’re a tax resident of another country.

A “resident” is someone who makes a foreign country their home and their home base. It’s where they return when they travel, where they have residency, and where they intend to be for the foreseeable future. A resident also breaks as many ties to the United States as possible.

The benefit of being a tax resident is that you don’t need to watch your days in the US so closely. You can spend 3 or 4 months a year in the US without issue. You’ll only have trouble if you spend more than 6 months or 183 days in the United States.

As I said above, the FEIE physical presence / 330 day test is easy to calculate and difficult to implement. The residency test takes work and commitment to qualify for but allows you to spend as much time as you need in the US and greatly reduces your probability of an IRS audit.

With all of that said, in order for a perpetual traveler to qualify for the Foreign Earned Income Exclusion, they must be out of the United States for 330 days a year. This is a challenge and increases your risk of an audit.

The solution to the perpetual traveler tax trap is to gain legal residency in a country that won’t tax your business profits. Find a country that you can make your home base and won’t tax your business. For a list of possibilities, see: Which Countries Tax Worldwide Income?

In my experience, the easiest tax free country for a US citizen to gain residency in Panama. Panama won’t tax your foreign sourced business profits. That is, they won’t tax sales to people and companies outside of Panama. Of course, if you sell to locals, you’ll pay tax in Panama.

And the most efficient residency visa in Panama is the friendly nations reforestation visa. Invest $20,000 into Panama’s green initiative (which means to buy $20,000 worth of teak trees) and get residency. This is by far the lowest cost and lowest investment required in any developed country.

The key to escaping the perpetual traveler tax trap is residency in a zero tax country. Do your research and you’ll find that Panama is the most efficient choice for a home base.

I hope you’ve found this article on how to escape the perpetual traveler tax trap to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to set up offshore and connect you with local experts for the friendly nations reforestation visa.

Foreign Base Company Service Income

How to Eliminate Subpart F Foreign Base Company Service Income

In this article I’ll explain how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation.  Subpart F issues are the most common tax planning hurdles to overcome when you have a division of a US company operating abroad. Subpart F applies to income of a Controlled Foreign Corporation (CFC).

This article is focused on service income of a foreign division. Service income is earnings and profits generated by work done in a foreign country or a US territory. Service income is not profits from the sale of a physical good into the United States market.

This analysis applies to a business setup in a low tax country, such as Panama, or in the US territory of Puerto Rico under Act 20. For a basic summary of offshore and Puerto Rico, see: Panama vs. Puerto Rico, which is right for your business?

Sub F foreign base company service income is defined under Section 954(e) of the Internal Revenue Code as income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that are performed for, or on behalf of, a related person, and are performed outside the country under the laws of which the CFC is incorporated. Under this definition, income earned by a CFC will constitute foreign base company services income only if it satisfies all three of the following tests:

  1. The income is derived in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person or company; and
  3. The services are performed outside of the country in which the CFC is organized (IRC Section 954(e)(1) and Treasury Reg 1954-4(a)).

Thus, where a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income.”

Income that is deemed to be foreign base company services income is not eligible to be retained offshore tax deferred and not eligible to be tax free in Puerto Rico under Act 20. That is to say, Subpart F income must be included in the parent company’s US tax return and is taxable in the United States as earned.

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

There is no US tax benefit when Sub F income, including foreign base company services income, is generated in an offshore or Puerto Rican corporation. Thus, all service businesses must strive to eliminate Sub F income and must be prepared to deal with the issue in an audit.

The easiest way to avoid Sub F base company service income issues is to ensure that the services are performed where your offshore business is incorporated. This means that your business should be operated from a low cost and zero tax jurisdiction such as Panama or Puerto Rico.

Where US businesses often run into problems is in setting up a Cayman Islands corporation (in a high cost offshore jurisdiction where they won’t have any employees) and then hiring independent contractors in Latin America and India. You should be hiring employees and building a real division offshore… not just using a shell company to manage independent contractors.

I see the same issue when US companies set up divisions in low cost but high tax countries like Mexico. The Mexican corporate tax rate is 28.5% compared to the US rate of 35%, so not much savings there. Also, Mexico taxes the worldwide income of its corporations.

So, companies incorporate in Panama (which taxes local sourced income but not foreign sourced profits) and put the employees in Mexico, hoping to get the best of both worlds.

If your employees are providing a service from Mexico, and the business operates through a Panama corporation, you’re opening yourself up to Sup F foreign base company service income issues.

The other way to avoid Sub F foreign base company service income issues is for the offshore corporation to contract directly with the customer. The foreign company should contract with the customer and the customer should be paying the foreign company, not the US parent.

Basically, if the US parent is obligated to perform the services which are performed by the CFC, the income earned is attributable to the US company. This can be avoided by having the customer contract directly with the client such that the parent is not responsible for the service.

Also, the “related party” rules can apply if the foreign division receives “substantial assistance” from the US parent. To avoid this part of the test, the foreign division should be operating independently such that the work, as well as the mind and management of the business, is performed in the offshore jurisdiction (the country of incorporation). IRC Section 954(e)(1) and Treasury Reg 1.954-4(a). See also IRC Notice 2007-13.

When it comes to avoiding Subpart F of the US tax code, the US territory of Puerto Rico can provide significantly more cover to a CFC than any offshore jurisdiction. A corporation in Puerto Rico is a US entity for contract purposes and can open a bank account anywhere in the United States.

That is to say, a corporation from Puerto Rico can open a bank account at Wells Fargo in California, Bank of America in New York, or wherever it’s owners have a relationship. While an offshore company can only bank outside of the United States, a Puerto Rican company can bank where it likes.

These facts make doing business through a Puerto Rican company much easier than a foreign entity. This is especially true in high volume low dollar transactions. No one is going to send an international wire for a $200 product.

I hope you’ve found this article on how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation helpful. For more information, or for assistance in planning or forming a division in Puerto Rico or offshore, please contact me at info@premieroffshore.com

tax free income the legal way

Pay Zero Income Tax the Legal Way

The internet is filled with Idiots selling scam programs that will teach you how to pay zero income tax. They’re all full of BS and infuriate those of us who try to write about legal ways to protect your assets and minimize your income taxes. In this article I’ll talk about the only legal ways to pay zero income tax on your business and capital gains offshore.

This post is meant for US citizens or green card holders willing to do what it takes to reduce or eliminate their US taxes.

I’ll tell you upfront that paying zero income tax the legal way is VERY difficult. It takes a lot of work and commitment on your part. There are no tricks or easy solutions. To pay zero income tax requires moving you and your business out of your comfort zone… not necessarily out of the United States… but, I’ll get to that in a bit.

And I’m not talking about retirement accounts or other US methods for reducing or deferring US tax. I’ll assume you’re making too much money to benefit from those accounts or that you already have your IRA and 401-k plans setup.

As I said, the web is filled with scam artists pitching all kinds of ways avoid US taxes. Tax lawyers call these guys tax protestors (and morons) and they refer to themselves as sovereign citizens. They’re using straw man companies and sham trusts to claim they earn no “income.”

I won’t get into these bogus arguments because they’ve been debunked time and time again. At this point, tax protestors are just a sad commentary on how gullible some people are. These cases are so cut and dry that lawyers can be sanctioned for wasting the court’s time.

Another issue to watch out for when searching the web are claims that you can operate tax free in a foreign country. These are true statements by providers in the country where you will incorporate… but meaningless to US citizens.

For example, you call a lawyer in Panama to set up a corporation there. You ask them if your structure will pay any tax… and they say no, it does not. It’s totally tax free! They’re talking about the tax laws of Panama. That’s great but, as a US citizen, you’re focused on US tax laws because that’s your real risk.

The provider in Panama is not trying to mislead you. He’s simply telling you the law of his country. He’s an expert in Panamanian law, thus his comments are limited to that country. This is why you always need a quarterback in the US who can show you how US tax laws interact with those of the foreign jurisdictions you’re setting up in.

There are basically four legal ways to eliminate US tax by going offshore. They are:

  1. Offshore captive insurance,
  2. Offshore life insurance,
  3. Set up a division of your business offshore, and
  4. Move to Puerto Rico to eliminate capital gains tax.

Offshore Captive Insurance Company

An offshore captive insurance company allows you to provide insurance to your active business. You form an offshore captive insurance company in Bermuda, Cayman or Belize, and insure against risks not covered by your traditional policies.

As of 2017, the US IRS will allow you to deduct up to $2.2 million of insurance premiums paid to an offshore captive insurance company owned by you. For previous years, the amount was $1.2 million.

By insuring against risks with a low probability of occurring, you effectively move $2.2 million of pre-tax income off of your corporate books in the US and onto an offshore captive insurance company. These transfers then accumulate offshore tax deferred until you close down the structure.

For more, see: The Mini Offshore Captive Insurance Company. This article was written before the deductible amount was increased from $1.2 to $2.2 million.

Offshore Life Insurance

Offshore life insurance, typically offshore private placement life insurance basically allows you to create an “offshore ROTH” without any of the contribution limits or distribution requirements.

You can put as much after tax money into an offshore life policy as you like and it will remain in the plan tax deferred. That is to say, you will pay zero tax on capital gains inside the life policy so long as the plan is active.

If you decide to shut it down and take a distribution, you will pay US tax on the increase in value. If you leave the policy in place until your death, the value will pass to your heirs tax free. Neither you nor they will ever pay US tax on the gains because of the step-up in basis they receive.

You also have the choice of borrowing against the policy. If you need access to the cash, you can take out a loan.

The minimum investment for these offshore life policies is usually between $1.2 to $2.5 million depending on the provider and other factors. For more, see: Benefits of Private Placement Life Insurance.

Offshore Business

If you move you and your business offshore, you can earn up to $200,000 a year tax free. If you move a division of your business offshore, you can get tax deferral on any foreign sourced profits that business generates.

If you move abroad and qualify for the Foreign Earned Income Exclusion, you can earn $102,100 per year free of Federal income tax from your offshore business. If a husband and wife are both working in the business, and both qualify for the Exclusion, you can take out over $200,000 combined.

To qualify for the Exclusion, you need to 1) be a resident of a foreign country and out of the US for about 5 months a year, or 2) out of the US for 330 out of 365 days. It’s much easier to qualify for the FEIE as a resident, so I strongly recommend you consider one of the easy and low cost second residency programs.

For example, you can become a resident of Panama with an investment of $20,000 and Nicaragua for $35,000. Panama is the easiest because this one doesn’t have a physical presence requirement. For more, see: Best Panama Residency by Investment Program.

If you’re not ready to move you and your family offshore, but can setup a division of your business offshore, then you can defer US tax on income attributable to that division.

Assuming your offshore team can operate independently, income they generate should be eligible to be held in the offshore corporation tax deferred. When you take it out as a dividend, either personally or as a transfer to the parent company in the US, you will pay US tax. For more, see: Step by Step Guide to Taking Your Business Offshore

Move to Puerto Rico

Even if you go offshore, you’re still going to pay US tax on your capital gains. So long as you hold a US passport, the IRS wants it’s cut of your investment profits. The only exceptions are investments inside a US compliant life insurance policy (described above) and capital gains for residents of Puerto Rico.

When an American moves to a foreign country, they’re subject to US Federal Income Tax laws. All US citizens and green card holders must pay unto the IRS.

The only individuals exempted from this rule are residents of the US territory of Puerto Rico. US Tax Code Section 933 excludes residents of Puerto Rico from US Federal tax laws.  This means that Puerto Rico is free to create it’s own tax system, which it has done.

If you set up a service business in Puerto Rico, one with at least 5 employees on the island, you can qualify for a 4% tax rate on your Puerto Rico sourced income. To see how this compares to the FEIE, see: Panama vs 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

Even better, if you move to Puerto Rico, spend a minimum of 183 days a year on the island, and otherwise qualify for their Act 22, you’ll pay zero tax on your capital gains. That’s right, without any of the costs or limitations associated with a private placement life insurance policy, those willing to live in an island paradise can pay zero income tax on their capital gains.

For more on how to pay zero tax in Puerto Rico, see: How to stop paying capital gains tax.

Conclusion

I hope you’ve found this article on how to pay zero income tax legally to be helpful. For more information, and a consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to structure your affairs offshore in a tax compliant manner.

Foreign Base Company Income

Foreign Base Company Income

When a foreign company is owned by a US person or persons, it’s a Controlled Foreign Corporation (CFC) for US tax purposes. Even if a CFC is operated abroad, some types of income will be taxable in the US as earned. The most common category of taxable income in a CFC is Foreign Base Company Income.

A company with Foreign Base Company Income is owned by “US persons” if residents, green card holders, or citizens of the United States own more than 50% of the company. US persons also includes domestic partnerships, domestic corporations, and certain estates and trusts (IRC § 951).

For purposes of determining who is a US shareholder and CFC status, stock owned directly, indirectly, and constructively is taken into account (IRC § 957). These are called the “look through” rules and prevent you from avoiding CFC status by giving shares to family or putting them in offshore structures and trusts.

Being a CFC means that your foreign company needs to consider Subpart F of the US tax code. As a result, certain types of income of this corporation may be taxable as earned in the United States. Conversely, most income that is not Subpart F income can be retained tax deferred in the corporation.

The most common type of Subpart F income is referred to as Foreign Base Company Income. This category includes 4 subcategories:

  1. Foreign personal holding company income;
  2. Foreign Base company sales income;
  3. Foreign base company service income;
  4. Foreign base company oil-related income.

Foreign base company taxable income consists of the sum of these 4 types of profits earned in a foreign corporation which is owned or controlled by US persons.

I will consider foreign personal holding company income and foreign base company services income here, as those are the categories relevant to my clients. For sales income, you might review IRC § 954(a)(2). For oil-related income, see IRC § 954(a)(5) or contact Secretary of State Rex Tillerson, ℅ US State Department.

Foreign Personal Holding Company Income

Foreign personal holding company income is basically your net passive income earned in a CFC. It’s “net” after foreign taxes paid (subject to treaties), your basis, and allowed expenses. Foreign personal holding company income typically includes the following:

  1. Dividends, interest, royalties, rents, and annuities;
  2. Net gains from certain property transactions;
  3. Net gains from certain commodities transactions;
  4. Certain foreign currency gains;
  5. Income equivalent to interest;
  6. Income from notional principal contracts;
  7. Certain payments in lieu of dividends; and
  8. Amounts received under certain personal service contracts.

The  purpose of the personal holding company income rules as to prevent US persons from deferring tax on passive income on portfolio type investments. An active business can defer foreign source income, but an individual can’t typically structure their passive investments offshore and receive the same benefit.

Foreign Base Company Service Income

Foreign base company service rules target service income earned abroad from related companies in the United States. This is usually income earned from the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or other services.

Income earned by a CFC is considered foreign base company service income only if it meets all three of the following criteria:

  1. The income is earned in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person; and
  3. The services are performed outside of the country in which the CFC is incorporated.

This all means that, when a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income” that may be currently included in its US shareholder’s gross income under Section 951.

Services will be considered performed wherever the worker performs their duties. If you’re a consultant flying from country to country performing a technical task, you probably have foreign base company service income.

Likewise, if you’re a technical professional working in Mexico and operating your business through a Panama corporation to save on Mexican taxes, you probably have foreign base company service income issues.

The solution to this for those who do not travel is to incorporate in the country where you’re working. If you want the benefits of a low tax country such as Panama, you need to be living in and working from Panama.

If you do travel, or don’t wish to incorporate in your country of operation, then a foreign corporation owned by US persons may only provide services to unrelated persons. That is, the company should be performing services for customers on behalf of itself and enter into contracts with those customers directly, not through a related party.

As stated above, only services performed for related parties, and services performed outside of your country of incorporation, generates foreign base company service income. Services are performed for or on behalf of a related party in the following situations:

  1. The related person pays the controlled foreign corporation for the services;
  2. The related person is or was obligated to perform the services performed by the controlled foreign corporation,
  3. The performance of the services that were performed by the controlled foreign corporation was a condition or material term of a sale of property by a related person, or
  4. The related person contributed “substantial assistance” in the performance of the services by the controlled foreign corporation.

If you wish to retain earnings offshore, you must avoid Subpart F, the foreign base company service income and foreign personal holding company issues. The key to a successful offshore plan is to maximize tax deferral in a compliant manner.

I will end by pointing out that foreign base company service income issues are not a concern for small businesses, only those looking to hold retained income offshore. If you’re a small business owner, you live and work abroad, net $100,000 or less, and qualify for the Foreign Earned Income Exclusion, then you don’t need to worry about Base Company isuses.

This is because a small business owner can take out up to $102,100 as salary tax free using the Foreign Earned Income Exclusion. You never want to retain earnings when you can distribute them as earned tax free using the FEIE.

I hope this article on foreign base company income has been helpful. For more information on structuring an active business abroad, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

EB-5 Investor Visa

Changes to the EB-5 Investor Visa in 2017

The US EB-5 investor visa is one of the lowest cost residency to citizenship programs on the planet. Yes, you heard me right… you can buy US citizenship for a fraction of the cost of other top countries. Here’s how the EB-5 investor visa is going to change in 2017 and why it will still be a great bargain.

As of today, March 25, 2017, you can get US residency by starting a business in the United States with a $1 million investment and employing 10 people. If you set up that business ins a “distressed” area, your investment goes down to $500,000.

Compare that to Austria. The government of Austria will grant you citizenship with an investment of EUR 3 to 10 million in a business which will employ a “substantial number of people.” The investment amount is negotiated on a case by case basis. Most end up investing about EUR 5 million… 5 times more than the United States.

For reference, Australia, the UK, and Canada also have comparable investment programs at $1 million to $5 million. Malta is about $1.2 million, but it’s a very different offer. For more on this EU passport, see: Second Passport from Malta

Here’s how the US EB-5 investor visa works. You setup your own business which will employ 10 people, or invest in someone else’s business which will employ that number.  Many very large projects, including hotels, resorts, call centers, etc. qualify for EB-5 status. Really, any for profit business that needs a lot of employees is a good EB-5 investor visa opportunity.

Once that business is up and running, you apply for your EB-5 investor visa. This gets you and your family (spouse and dependent children) into the United States. You enter on a residency visa and receive your green card shortly thereafter.

So long as the business is active, and employees at least 10 people, you will maintain this residency. After 5 years of residency, you can apply for citizenship.

Those using the EB-5 investor visa are guaranteed citizenship at the end of 5 years of residency. There are no quotas or limits… stick to the terms of your agreement and you and your family will receive US passport(s).

The US EB-5 program is the most popular residency program in the world. It’s raised at least $8.7 billion and created 35,150 jobs since 2012. The program issues a maximum of 10,000 green cards a year and 90% of the applications come from China.

That’s the US investor visa today. Here’s how the EB-5 investor visa is likely to change in 2017.

Expect the $500,000 distressed option to go up to $1.35 million. Bottom line, this program was supposed to help poor areas with high unemployment. In practice, all the cash went to fancy hotels and resorts. Thus, the investment amount is going up, way up.

For those starting businesses that are not in designated low income areas, the minimum investment is going from $1 million to $1.8 million.

When might these changes come into effect? The EB-5 investor visa program is up for renewal on April 28, 2017. I expect changes to the program shortly thereafter.

Two items of note:

First, remember you must keep your business going throughout your residency period. Once you have your passport, you can shut it down. This means you must keep 10 employees working for 5 to 6 years. If the business makes a profit, great – you can take out your earnings. If you lose money, you’ll need to invest more to reach break-even or profitability.

I can’t see starting a business that will employee 10 people from day one with less than $2 million. The original investment amount was set in 1990, when $500,000 to $1 million was real money. Today, it would be difficult to reach ramen profitability with that capital and 10 employees.

Second, the investment requirement is NOT the highest cost associated with the EB-5 investor visa for a high net worth person. The real cost is in taxes, taxes and taxes.

Only the United States taxes its citizens and green card holders on their worldwide income. Once you have that residency visa, you’ll pay US taxes on 100% of your income, no matter where you live and no matter where it’s earned.

None of the other countries mentioned here, such as the UK, Austria, Australia, and Malta, tax nonresidents on income earned abroad. You only pay tax in Austria if you are living in Austria. Get your passport and live elsewhere and you pay zero.

So, someone living abroad might be paying zero tax on $3 million a year in business income with an Austrian passport. If they sign up for the US EB-5 investor visa, they’ll pay 35% to the United States, plus another 10% to their state. This means you’re paying $1,350,000 in taxes on $3 million of income each and every year for the right to a US passport.

There is one way to get your US passport and cut your tax rate from 40% to 4% on business income and 0% on capital gains. Set up in the US territory of Puerto Rico. For more on this topic, see:

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

Where to start an EB-5 business

I hope you’ve found this article on the United States EB-5 investor visa helpful. For more information on this, or setting up a business in Puerto Rico, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

tax planning for payday lenders

International Tax Planning for Payday Lenders

The US tax costs for Payday lenders in the United States is harsh. The interest component of your income is taxed where the borrower is located. This means you get to file returns is every state and deal with a web of complex tax laws.

Then, the portion of your income which is not considered interest, is taxable where you and your business is located. This must be in the United States, so you’re paying 35% corporate tax plus up to 12% in state tax on net profits.

What if I tell you that you can operate in the United States and pay only 4% on the majority of your net profits? That you can get a banking license and operate the business through this entity while still maintaining your 4% corporate tax rate?

That’s exactly what I’m saying. You can setup a fully licensed credit union in US territory Puerto Rico and make loans throughout the United States. Then you structure an Act 20 company in Puerto Rico to service the loans, which is taxed at 4%. The credit union breaks-even or makes a small profit for its members, but the bulk of the income moves to the Act 20 company.

This structure will allow a large payday lender to exchange their 40% US tax rate on corporate profits for a 4% tax rate in Puerto Rico.

Puerto Rico is the ONLY jurisdiction such a tax deal can be had. If you set up offshore, US Federal tax laws apply to your US owned business. Plus, it’s nearly impossible to make loans into the United States from abroad.

Puerto Rico is unique. It’s a US territory, so US Federal laws apply. This means that forming a payday loan company in Puerto Rico is equivalent to forming the company in any US state… with one major exception… taxes.

Section 933 of the US tax code exempts any income earned in Puerto Rico from US taxes. A business operating from Puerto Rico pays only Puerto Rican taxes, not US Federal income taxes.

For this reason, Puerto Rico can offer payday lenders a deal. Setup your company here, negotiate an Act 20 business license, hire at least 5 employees on the island, and your Puerto Rico sourced income will be taxed at 4%.

To clarify: You will still pay US income tax on the interest component. It’s the business component of your corporate profits that are taxable in Puerto Rico at 4%. To qualify for this 4% rate, the work to generate those corporate profits must be done from Puerto Rico.  

Here’s how you might allocate income between interest income / US source income and corporate income / Puerto Rico sourced income taxable at 4%:

Some tax experts take the position that the interest component of payday loans should be about the same as that of a junk bond. That’s a rate of around 6% to 10% per year.

However, payday loans often have an effective cost to the borrower of 200% to 600% per year. The average cost of a payday loan that rolls over a few times is 400%.

Thus it can be argued that US source income taxable where the borrower is located is 10% while the balance, 390% is Puerto Rico sourced income.

In very rough numbers, a payday lender might be able to move 98% of their income out of the Federal tax system and into the more favorable Puerto Rico tax regime. This will reduce your tax rate from 40% to 4% on any Puerto Rico sourced income.

Now for the kicker: if you’re willing to move to Puerto Rico, and qualify under Act 22, you can withdraw the profits of your Act 20 company tax free.

Also, any capital gains earned on personal investments you make after becoming a resident of Puerto Rico are taxed at zero. That’s right, your personal income tax rate on capital gains is 0% as a resident of Puerto Rico.

To be considered a resident of Puerto Rico, you must spend at least 183 days a year on the island and buy a home there. Basically, you must give up your home base in the United States and move your life to Puerto Rico.

I’ll conclude with a quick note on Act 273 banks.

Those who follow my blog know that I’m a big proponent of Puerto Rico’s offshore bank license, referred to as an Act 273 bank license. This is an excellent option for those looking to setup an offshore bank that doesn’t accept US clients or doesn’t make loans.

The reason Act 273 doesn’t fit the payday loan model is because such a bank would require FDIC insurance and all manner of Federal regulations would apply. Any US bank, even a 273 bank in Puerto Rico, that takes deposits, makes loans, and accepts US clients, must apply for FDIC. This is impossible for most payday lending banks.

A credit union in Puerto Rico is not obligated to apply for FDIC. This is why I recommend the credit union combined with an Act 20 management company for a payday lender looking to redomicile their business to a low tax jurisdiction.

I hope you’ve found this post on international tax planning for payday lenders to be helpful. For more information, please contact us at info@premieroffshore.com or call us at (619) 483-17083. 

You might also find this article interesting: How to operate an investment fund tax free from Puerto Rico

The above is a very general summation of complex tax issue and the related sourcing rules. Each payday loan company will have a different taxable rate. I strongly recommend you research this matter carefully and secure an opinion letter from a top firm before making any decisions.