Should I use an Offshore Corporation or Offshore LLC?

03/31/2014/0 Comments/in Asset Protection, Offshore Company/by Christian Reeves

Which is better, an offshore corporation or offshore LLC? Does an offshore corporation provide more protection than an offshore LLC? What are the benefits of an offshore LLC compared to the benefits of an offshore corporation?

These are the questions I get every day, and the answer is not as simple as you might think. There are a number of important differences between an offshore corporation and an offshore LLC that you should take in to consideration when setting up your offshore structure.

First, there is no difference in the level of protection offered by an offshore corporation or an offshore LLC. They are equal in the eyes of the law. Offshore jurisdictions have always afforded them the same high levels of deference, and U.S. courts have generally maintained that a corporation is equivalent to an LLC for asset protection purposes.

When thinking about how to best use an offshore corporation or offshore LLC, your first instinct should be to put an active business in a corporation and passive investments in an LLC. Here is why:

Benefits of an Offshore Corporation

When you operate an active business in an offshore corporation, you maximize the value of the Foreign Earned Income Exclusion and can retain earnings in excess of the FEIE. This allows you to eliminate or defer U.S. tax on your offshore earnings. You accomplish this by:

1. Drawing a salary from the offshore corporation of up to the FEIE, about $98,000 for 2014, and reporting that salary on your personal return, Form 1040 and Form 2555. If a husband and wife operate the business, they can each draw out the FEIE amount in salary, and thus earn up to about $196,000 free of Federal income tax.

– The FEIE is actually $99,200 for tax year 2014 and 2015 has not yet been released. I usually round down to $98,000 to make the math easier to follow.

2. If your corporate profits exceed the FEIE amount, then you leave (retain) those funds in the corporation. If you take them out in salary, they will be taxable in the U.S. By leaving them in the corporation, you defer U.S. tax until they are distributed as dividends…or possibly as salary in future years.

3. Using an offshore corporation allows you to eliminate Self Employment or social taxes (FICA, Medicare, etc.), which are about 15% on your net profits and not covered by the FEIE.

These tax breaks come at a compliance cost: you must file a detailed offshore corporation return on IRS Form 5471 each year. Because this form includes a profit and loss statement, balance sheet, and many sub forms, the cost to pay someone to prepare it for you should be at least $1,250 per year.

Benefits of an Offshore LLC

The primary benefit of an offshore LLC over an offshore corporation is the lower cost of compliance. An offshore LLC owned by one person, or a husband and wife, will usually files IRS Form 8858, which is much easier to prepare and Form 5471.

Because of this lower (and simpler) filing obligation, offshore LLCs are the best option for passive investments. Whether you are living in the U.S. or abroad, there is no tax break for passive investments in a corporation (these breaks apply only to active businesses income). Passive income is taxed as earned, reduced only by the Foreign Tax Credit, so you might as well make it as easy as possible to report.

The Foreign Tax Credit allows you to deduct any money paid in taxes to other countries on your foreign investments. It generally means you will not be double taxed on offshore transactions.

The tax rules around foreign real estate and other passive investments can be complex. For a detailed article, please see my U.S. Tax Breaks for Offshore Real Estate.

An offshore LLC can’t retain earnings, so it is usually not the best entity for an offshore business. However, if the business will never earn more than the FEIE, then an offshore LLC might do just as well as an offshore corporation.

If you were to operate a business through an offshore LLC, you would report your total net profits on Form 2555, and if those profits exceeded the FEIE amount the excess would be taxable.

To put it another way, if your net profits are $200,000 and you are operating through an offshore LLC while qualifying for the FEIE, then you would get $98,000 in salary tax free and pay U.S. tax on the remaining $102,000. If those same profits were earned in an offshore corporation, you would draw out a salary of $98,000 and leave the balance in the corporation, deferring U.S. tax indefinitely.

If your business earns $50,000, then the full amount would be covered by the FEIE and no tax would be due. Likewise, if a husband and wife both operated the business which earned $200,000, each could draw out $98,000 tax free, leaving only $4,000 for the IRS to take a cut from. So, if your business will always earn less than $98,000 or $200,000, you might as well use an offshore LLC.

I estimate that the cost to have a professional prepare Form 8858 to be $690.00, and that, if you usually prepare your own personal return, then you can prepare 8858 yourself. In other words, if you are experienced in advanced personal return forms like Schedules C, D, or E, or you are used to dealing with complex K-1s, then you will have no problem with Form 8858.

So, when deciding between an offshore corporation or an an offshore LLC, if the structure will hold passive investments or a small business, then you might save a few dollars and simplify your life with an offshore LLC. If you will operate an active business that might someday earn more than $98,000 in profits, you should form an offshore corporation.

How to Open an Offshore Bank Account

03/28/2014/0 Comments/in Offshore Banking, Offshore Company/by Christian Reeves

Want to open an offshore bank account? Here is our guide on how to open an offshore bank account quickly and easily. Do you want to know how to open an offshore bank account? Are you thinking about moving some of your assets out of the United States? Want to protect yourself from issues within the American economy? In this article, I will tell you how to select an offshore bank and give you step by step directions on how to open an offshore bank account. More importantly, I will tell you how to keep that offshore bank account in compliance and your most important “asset” out of jail.

As the U.S. government attacks its own citizens in a grab for tax revenue, the number of offshore banks willing to deal with the pressure and hassle is dwindling. These days, it is very difficult to open an offshore bank account…and, keeping that account open can be even more challenging.

Before we talk about how to open an offshore bank account, let’s review where to open that account. When you open an offshore bank account, you have two choices: size and security or privacy and asset protection. This is because, the U.S. government can levy any bank account, anywhere in the world, if that bank has a branch in the U.S. and most large banks have branches in America.

So, if you have money in HSBC Panama, the IRS can send a letter to HSBC N.Y. and demand they grab your cash and pay it over. No legal or court proceedings are required and no special effort need be made. The person assigned to your case simply enters a few keystrokes in his or her computer and your cash in Panama is gone.

Note that this is not unique to Panama. Any bank, anywhere in the world, that has a branch in the U.S., is subject to Uncle Sam’s whims. Are you hording cash at Royal Bank of Canada, Cayman Islands? This seems safe enough…a Canadian Bank in the Cayman Islands. RBC has a branch in Georgia, USA.

I also note that Canada is especially troubling to those seeking security. Any asset, including bank accounts and real estate, in Canada, France, or the UK can be seized by the US IRS. While taking and selling real estate in these countries does require a manager’s approval, it is a relatively simple process that most IRS revenue officers are familiar with.

Therefore, if asset protection and privacy are important to you, I suggest opening an account at an offshore bank that does not have a branch in the United States.

You, my well informed reader, might be thinking to yourself, with the Foreign Account Tax Compliance Act (FATCA) coming in only a few months, does it matter if your offshore bank has a U.S. branch? Do I still need to know how to open an offshore bank account? Yes it does.

FATCA requires banks to report your account and transactions to the U.S. IRS. If you are in compliance, this information gathering is not a major issue. However, information exchange is quite different from the right to seize your property.

In other words, FATCA means the government will know where your money is. If that cash is in a bank with a U.S. branch, or in Canada, England, or France, then it is subject to levy. Otherwise, you are at least free from that worry for now.

HOW TO OPEN AN OFFSHORE BANK ACCOUNT

Now that you have a general idea of where to open an account, let’s talk about how to open an offshore bank account.

You can forget about the easy and relatively painless experience of opening an account in the United States. Offshore banks are much more cautious and require quite a bit of supporting documentation.

First, some banks require, and all recommend, that you open an account under an offshore company. This will provide you a level of asset protection and allows the bank to put you in their business group.

Next, the bank will need your name, date of birth, address, citizenship and occupation. With this, they look you up in a database called WorldCheck. If you have a criminal history, or ended up in this database for another reason, your application will be denied.

After this first check, the offshore bank will put you in one of two categories: American or Other. If you are a gringo, more due diligence will be required, you will probably pay more in fees (as much as $500 to open the account and $300 per year in compliance costs), and all of your transactions will be reported to the IRS.

Along with your application, you will need to provide a notarized copy of your passport, a utility bill that reflects your name and home address, a reference letter from your bank (all US banks have form letters they use, which will be fine), and a personal or professional reference letter.

Finally, some banks will require a copy of your last year or two of tax returns and a résumé. The intent here is to demonstrate the source of funds…that you are a legitimate business person and not a drug dealer.

Some countries allow you to open an offshore bank account by FedEx, and others require you to be present in the bank. For example, the banks I work with (listed below) in Belize accept applications by courier while the banks in Panama require you to be present.

A note of caution: the number of banks that are kicking out Americans with offshore bank accounts is growing quickly. If you want to ensure your banking relationship, you should consider obtaining residency in countries like Panama and Belize. Once you are a resident, your account is no longer tagged as offshore and you should be protected from future purges.

The best residency program available now is the friendly nations program in Panama. When combined with an investment in teak of about $15,000, you can obtain residency quickly and efficiently. For more information, please contact me at info@premieroffshore.com

Offshore Bank Account and Brokerage Suggestions

The bank selected will depend on the size of your account. For accounts of less than $500,000, I recommend Caye Bank (www.cayebank.bz) or Atlantic Bank (www.atlanticibl.com) in Belize.

Because Caye Bank does not have a branch in the U.S., they have a good handle on FATCA, focus on U.S. clients, and offer a wide range of investment options, I often suggest clients plant their first flag offshore with Caye Bank and then open brokerage accounts or diversify from there.

For accounts over $2m, I recommend Andbanc in Androa or their branch in Panama (http://www.andbanc.com/).

In the Cook Islands, I recommend Capital Security Bank or a managed investment account at First NZ Capital (https://www.firstnzcapital.co.nz/). These bank may require a Cook Islands structure.

In Panama, I recommend Uni Bank (https://www.unibank.com.pa/en/index.html). For accounts over $2M, I recommend Andbanc (http://www.andbanc.com/).

For online currency trading, I recommend Saxo Bank in Denmark. Their website is http://www.saxobank.com. Though, there have been rumors that this bank will dump Americans this year.

Finally, I recommend Panama Wall Street (http://www.panamawallstreet.com/) and Titan in Belize (http://titanbelize.com/index.html?agree=0) as online trading platforms.

If you prefer a financial advisor and bank in Europe, I recommend PIC in Luxembourg. Their website is http://pic-europe.com/.

I hope this article on how to open an offshore bank account has been helpful. Feel free to ask any questions or list your favorite offshore bank with a link to its site in the comments below. The list of offshore banks who accept American’s is always shrinking, so your suggestions are appreciated.

Offshore Bank Account Reporting Requirements

Now that you know how to open an offshore bank account, let’s make sure you don’t shoot yourself in the foot with this knowledge. Be careful, because your offshore bank account comes with many new and exciting U.S. filing obligations.

Most importantly, if you have more than $10,000 offshore, you must file the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account must file this form.

The law imposes a civil penalty for failing to disclose an offshore bank account of up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation, whichever is higher. Criminal penalties for willful failure to file an FBAR can also apply in certain situations.

The penalties can be imposed for each year. So, fines can add up quickly and will exceed the total value of the account if you have not reported for just a few years.

In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

If your offshore bank account is under a foreign corporation, you will be required to file IRS Form 5471. This is a U.S. tax return, similar to IRS Form 1120 for domestic companies, and includes a profit and loss statement as well as a balance sheet. An offshore corporation is always the best structure, and 5471 the best form, to use with an offshore business.

If you elected to form a single member LLC, rather than an offshore corporation, then you will file IRS Form 8858 for a Foreign Disregarded Entity. This is a simplified return, so your costs to hire someone to prepare it for you should be less than Form 5471. However, it is not efficient to operate an offshore business through an LLC…holding investments in an LLC is just fine and often preferred.

If you have significant investments offshore you will need to file IRS Form 8938, which is a report of foreign assets. The filing requirements for this form are detailed, so check out the instructions before completing the form. There are a number of articles on PremierOffshore.com describing Form 8938. For example, reporting requirements for gold transactions, and reporting requirements for real estate transactions.

I hope you have found this information helpful. If you would like to learn more about how to open an offshore bank account, or to form an offshore company, please contact me at info@premieroffshore.com for a confidential consultation.

New FBAR Filing Requirements for 2014

03/28/2014/0 Comments/in Taxation/by Christian Reeves

As you, the American with investments abroad, get ready to prepare your 2014 tax return, there are important new FBAR filing requirements for 2014. Some of these FBAR filing requirements are cosmetic and others could get the misinformed in hot water.

Note: If you have no idea what an FBAR is, you might check out my general article on filing requirements for those living, working, or investing abroad. If you want to learn how to legally avoid the FBAR, click here.

First, let me tell you how your accountant or CPA thinks. The foundation of tax preparation for professions is SALY…prepare the return the Same As Last Year to reduce the risk of an audit.

So, when your preparer pulls out your file, he or she will be thinking SALY and will reach for the same old forms to file. When new FBAR filing requirements for 2014 are announced, but don’t get much press, tax preparers without many Expat clients can get caught unprepared.

It may be up to you to educate your preparer on the FBAR and these New FBAR filing requirements for 2014. Here they are:

Not one to bury the lead: IRA owners don’t need to file an FBAR in 2014!

For those of you with Offshore IRA accounts, the IRS has finally come out and said that IRA owners and beneficiaries do not need to file an FBAR. Whether an offshore IRA needed to file an FBAR was never clear, so we all aired on the side of caution and filed it year after year. Well, that burden has been lifted (see below).

The cosmetic change is that the name of the form has changed. The official name of the FBAR changed from Treasury Form TD F 90-22.1 to FinCEN Form 114. I’ll bet not many people even noticed, as we all refer to it as the FBAR.

The big change to the FBAR for 2014 is that it must now be filed online. No more paper allowed. So, when your preparer pulls out your file and grabs the same old forms, you may be in for penalties.

That’s right, if you or your preparer are unaware of the change and mail in SALY, you could face significant penalties for filing late…or not filing at all. So, be sure to talk to your tax man or woman!

Note: the deadline for the electronic FBAR filing did not change and remains June 30. If you file your FBAR with your personal return on April 15, all is well. If you procrastinate and get an extension for your personal return until October 15, your FBAR is still due on June 30. That’s right, the extension of time to file your personal return does not apply to the FBAR.

Do you prepare your own returns? Do you want to sound cool when you explain things to your preparer? Then here is how to file an electronic FBAR in excruciating detail.

To file an electronic FBAR:

Go to http://bsaefiling.fincen.treas.gov/main.html.

Click “File an Individual FBAR” on the left side of the page.

You will then be brought to the screen below, where you can download a PDF version the FBAR (FinCen Form 114). This PDF allows you to type information into the form and save the results (wow, a fillable PDF form – modern technology fresh from 2001!)

Fill in FinCen Form 114 PDF. You will need your information, including social security number and date of birth, as well as your bank name, address, account number, and highest balance for the year. Be sure to save the document when you are finished. If you are unsure what information you need to enter in a certain field, you can move the mouse cursor over that field, hold it for a moment, and a box of text will pop up explaining what you need to enter. See the picture below for an example.

Once everything is filled out correctly, go back to the first page digitally sign the document, save and validate it, and then finalize it for submission.

When you’re ready to submit the form, go back to the page from Step 3 and click the link to “Submit FBAR.” This will take you to the submission page, where you’ll need to enter some contact information and then upload the finalized PDF. The process is not complete until you submit the form.

As you can see, the government has taken a simple form, which could be filled out a a 5th grader and mailed in, and turned it in to a computer nightmare for some. How many of those preparing their own returns will be confused and confounded by this new fangled technology? It will be an interesting year.

New FBAR Filing Requirements for 2014 – Who Must File?

Anyone who is a “U.S. person” must file an FBAR and enjoys the honor of paying U.S. tax on their worldwide income. Basically, this is anyone with a U.S. passport, green card, or someone who lives in America for 6+ months in the year.

If you are not sure you qualify as a U.S. person, please read: Who is a US Person?

The list of those exempt from filing an FBAR has also been updated and codified. For many of you, the most important statement is that IRA owners and beneficiaries are not required to file an FBAR.

Here is the complete list:

Certain foreign financial accounts jointly owned by spouses;
United States persons included in a consolidated FBAR;
Correspondent/nostro accounts;
Foreign financial accounts owned by a governmental entity;
Foreign financial accounts owned by an international financial institution;
IRA owners and beneficiaries;
Participants in and beneficiaries of tax-qualified retirement plans;
Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
Foreign financial accounts maintained on a United States military banking facility.

To be clear, the above list is not necessarily new FBAR filing requirements for 2014. I am saying that the IRS finally listed the exceptions on their website and ended the debate, especially in regard to IRA owners and beneficiaries. For more information, see IRS.gov.

I hope you have found this article helpful. Please post any questions or suggestions in the comments below. I will personally respond to every inquiry.

Americans Give Up US Citizenship in Record Numbers

03/26/2014/0 Comments/in /by Christian Reeves

Record numbers of Americans gave up US citizenship in 2013. As the IRS mafia becomes ever more hostile to its citizenry, Americans give up US citizenship in record numbers. In 2013, 3,000 Americans lined up at embassies around the world to renounce their citizenship and get Uncle Sam out of their pockets for good. This is an increase of well over 200% in the last year, up from 933 renunciations in 2012, 1,780 in 2011 and 235 in 2008.

Why did so many Americans give up US citizenship? The three most common reasons given were 1) the IRS, 2) the IRS, and 3) the IRS.

Let’s take a step back: America is about the only country in the world that taxes its citizens on their worldwide income, regardless of where they live. So long as you hold a U.S. passport, the IRS wants its cut. And the IRS has become very hostile in attacking American’s abroad and those offshore accounts, putting a number of them in prison over the last few years. Of course, these attacks are limited to average people and not big corporations, who have record amounts of cash offshore.

This attitude has resulted in some very unreasonable tax assessments. For example, I have met many people who have never set foot in the U.S., but whose parents wanted them to have a U.S. passport at birth, who have been caught in the IRS mill. Once in the government’s sites, they were forced to pay enormous fines and penalties, in addition to the tax due. Adding insult to injury, some of these people had their bank accounts seized and real estate sold at auction to pay in to the Obamanation.

Then there are the laws targeting offshore banks. If you are a U.S. citizen, you are not wanted at most financial intuitions. Of those banks that will do business with you, most will hit you with extra fees, such as $500 to open the account and a $300 per year special assessment to cover compliance costs.

Finally, there is the invasion of privacy. As an American, you have zero right to privacy in your financial dealings. In fact, nearly all offshore banks will report your transactions to the IRS.

If an offshore bank fails to report your transactions, they are on the hook for major fines or being locked out of the banking system all together. Considering this risk, and the high cost of compliance, it’s no wonder that Americans are persona non grata.

HOW TO GIVE UP US CITIZENSHIP

If you are thinking of giving up your US citizenship, there are several hoops you must jump through. First, you don’t just show up at the embassy, burn your passport, give the ambassador the finger, and go along your way. You must complete a complex process and receive a renunciation letter before you are free. This might include an audit of your last 3 to 5 years of tax returns and an in-depth review of your finances to ensure you are paid-up.

Before you open a new account as a free man or woman, the bank will want proof that you have renounced your U.S. citizenship. Even if you have a second passport, you must prove that you gave up your US citizenship. Therefore, getting this renunciation letter from the consulate is of the utmost importance. It also ensures the IRS will not come after you years later looking for more cash.

Second, you might need to pay an exit tax. If your worldwide assets exceed $2 million, or your average tax bill over the past five years has been more than $151,000, a tax may be due on unrealized capital gains.

Basically, you will be required to file a final U.S. return as if you have sold all of your assets for fair market value and you will be taxed on that gain the year you give up US citizenship. Calculating this cost to escape is simple for those who hold major stocks. If your assets include private investments, real estate that has not easily appraised, or you have other issues in determining fair market value, you could be in for a battle with the IRS.

Third, you must have a second passport in hand before you give up your US citizenship. If you give up your US passport and don’t have another ready and waiting, you will be a person without a country and it will become impossible to travel or immigrate.

If you don’t already have a second passport, there are three ways to get one.

By nationality or family history: If your parents or grandparents were born outside of the U.S., you might be able to get naturalized in their home country. For more information on this option, I suggest you read up at Live and Invest Overseas.

Earn your second passport through residency: If you move to a country like Ireland, Panama, Chile, New Zealand, or Singapore, you should be able to gain citizenship within 3 to 9 years (assuming the rules don’t change while you are waiting).

Of the residency programs that I have investigated, I believe the best is the favored nation’s residency permit linked to a teak investment in Panama. This requires a minimal investment of $15,000 and allows you to gain residency immediately. Citizenship should be processed in 4 to 5 years. For more information on this program, please contact me at info@premieroffshore.com.

Pay for it: You can purchase citizenship and a second passport from St. Kitts and Nevis, Dominica, and a few other nations. Most of the available programs require you to have no criminal history and cost anywhere from $165,000 to $300,000, depending on family size and other factors.

For a detailed description of the available economic citizenship programs, please see my Second Passports page. You will find the requirements and costs for Dominica and St. Kitts on this page. If you have issues in your past and need a more lenient jurisdiction, please contact me for a consultation.

I hope this information has been helpful. As the IRS becomes ever more hostile to its populace, I believe we Americans will have fewer and fewer escape and banking options. I also predict it will become very challenging to move assets out of the United States. If you would like to know more about how to give up US citizenship, please contact me at info@premieroffshore.com for a confidential consultation.

Benefits of an Offshore Company

03/24/2014/0 Comments/in Asset Protection, Offshore Company, Taxation/by Christian Reeves

One of the most confusing areas of going offshore are the benefits of the offshore company. Will going offshore reduce your taxes? The answer is a qualified maybe. Will an international corporation or LLC structure protect you from creditors? The answer is a resounding yes.

In this article I will attempt to describe the benefits of an offshore company for those living in the United States and for those living and working abroad.

Offshore Company for Those Living in the U.S.

The benefits of an offshore company for those living in the United States are simple: it provides some of the best asset protection available and allows you to diversify your investments internationally. Moving your assets in to an offshore company should not increase or decrease your U.S. tax bill.

This is the say that there should be no tax benefit to going offshore if you are living in the United States. Offshore asset protection should be tax neutral.

So, your offshore company might invest in gold bullion held in Panama or Switzerland, real estate in Belize or Colombia, and hold a brokerage account at any number of quality firms. It will allow your assets to escape from America and plant that first flag offshore.

Protecting yourself with an offshore company will require you file a corporate tax return, IRS Form 5471, or a disregarded entity return, IRS Form 8858, and, if you move more than $10,000 out of the US, to report your international bank accounts on the FBAR form. For additional information on tax reporting, click here.

Offshore Company for Those Living and Working Abroad

Let me begin by noting that U.S. citizens are taxed on their worldwide income no matter where they live. Operating a business through an offshore company may significantly reduce the amount you must hand over to Uncle Sam…so long as you file all of the necessary forms each year.

If you are living and working outside of the United States, the benefits of an offshore company can be significant. First, it allows you to protect your business assets, increases privacy, and offers an unparalleled level of asset protection.

Next, an offshore company allows you to maximize the Foreign Earned Income Exclusion. If you were to operate a business without a corporation, or with a US corporation, then you must pay Self Employment tax or FICA, Medicare, ObamaCare, etc. This basically amounts to a 15% tax on your net profits.

If you were to roll the dice and operate a business offshore without an offshore company, unprotected from litigation, you would report your income on Schedule C of your personal return. When this happens, expenses on Schedule C reduce the value of your Foreign Earned Income Exclusion.

For example, if your international business grosses $400,000, and your expenses are $200,000, your expenses are (obviously) 50% of your gross. When this is reported on Schedule C and Form 2555, your FEIE is reduced by 50% and you only get $49,000 tax free…not the full FEIE amount of $98,000.

– The FEIE is actually $99,200 for tax year 2014 and 2015 has not yet been released. I usually round down to $98,000 to make the math easier to follow.

If this same $400,000 in gross profit and 50% expense is reported in an offshore company, on IRS Form 5471 and 2555, then you get the full $98,000 FEIE. If the business is run by a husband and wife, each may take the exclusion, and you will get $196,000 tax free.

Finally, by operating your business through an offshore company, you may retain earnings that are in excess of the FEIE. So, if your net profit is $200,000, you might draw a salary of $98,000 and leave the rest of the money in the business. Thereby, you will pay zero US tax on your offshore business.

So, the tax benefits of an offshore company can be major. When planned and structured properly, your offshore company may pay zero U.S. tax…while remaining in compliance and following all of the applicable laws.

For more detailed information on the benefits of an offshore company, please check out my Expat Tax and Business Guide.

Why So Much Confusion on the Benefits of an Offshore Company?

So, why is there so much confusion about the benefit of an offshore company? Why do I receive calls nearly every day from people who are mixed up on the tax benefits? I think there are two answers:

First, promoters located offshore, and out of the reach of the IRS, often give false information to make sales. If you call an incorporator in Nevis and ask about taxes, they will say something like, “no, you don’t need to pay tax on your profits. You can leave them offshore as long as you like and no one will know about them until you bring them in to the U.S.”

Well, this is true from the perspective of someone in Nevis. That island will not attempt to tax your Nevis IBC, nor will they require you to file any tax returns or report your business. But that is not what is important here…as a U.S. citizen, you are concerned with the IRS knocking down your door and not what Nevis thinks.

This is why all U.S. persons must use a U.S. firm that offers tax and business consulting services to incorporate offshore. The risks and costs associated with failing to keep in compliance will certainly outweigh any premium you pay for quality representation. If you don’t choose Premier to create your offshore company, make sure you use another U.S. tax expert!

Second, you read all the time how big companies like Google and Apple have billions of tax free dollars offshore. Why can’t you, the average guy or gal, setup an offshore company and do the same thing?

These big guys have business units with employees and other assets that are working and producing sales outside of the U.S. They don’t just form an offshore company and run revenue through it. They build an offshore division that makes money…and it is these profits generated by their offshore units that retain earnings offshore.

Want to learn more about how big corporations operate? Read up on terms like “transfer pricing.” This is the foundation of the offshore corporate tax break for large firms.

Because small businesses can’t usually hire a bunch of employees in Panama and Ireland, and pay big money to tax lawyers to structure their worldwide affairs, we are left with the basics: the only way to emulate Apple and Google is to move you and your business offshore and qualify for the FEIE.

I hope you have enjoyed this article on the benefits of an offshore company. Feel free to contact me at info@premieroffshore.com for a confidential consultation, or post a question to this page in the comments.

Where to Incorporate Your Offshore Company

03/18/2014/0 Comments/in Asset Protection, Offshore Company/by Christian Reeves

Before forming an offshore company, give some thought to where you will incorporate that entity and where you will operate the business. Of course, these don’t need to be the same country…you may do better to incorporate in one jurisdiction and operate from another. The following article will help you select the best jurisdiction for your offshore company.

Offshore Company Tax Tip: If you are an American living and working abroad, the country where you form your company does not make difference. It should be somewhere that will not tax your business and will not require you to file any tax forms. To put it another way: your only reporting requirements should be to your home country of the United States and not to the country where you form your offshore company.

I have developed the following offshore company formation checklist based on my own experiences through the years of operating a number of businesses in five countries, as well as in structuring the affairs of a wide variety of clients around the world.

The first list are business reasons to select your country of operation:

Offshore Company Tax Issues – Start your business in a country that will not tax your income. Of course, if you open a bar selling beer to the locals in Belize, they will tax you. I am referring to a business that sells a product or service to people outside of your country of operation…usually an internet based business. There are a number of countries that will not tax offshore company foreign sourced income in that case.

Time Zone – One of the most overlooked issues is the time zone. You should operate your business from the same time zone as your clients. If you are selling to the US, then you should be in South or Central America. I can’t tell you how many clients started up an internet business from Asia, only to give up the night shift and move to Panama after a few months.

Banking – Your offshore company can open an account at any number of international banks around the world. The account need not be in your country of incorporation. Of course, you will need a business account in your country of operation. To open that account, you may be able to use your offshore corporation from another jurisdiction, or you may be required to form a local corporation. Never put business income in a personal account…you must use an offshore company!

Tax Tip: I suggest that your offshore company bill your clients and receive payment outside of your country of operation. Then, you should only bring in funds necessary to operate your business, leaving the balance as retained earnings in the offshore structure.

For example, if you operate your business in Panama, bill your customers from a Belize corporation and send only the minimum necessary from Belize to Panama to avoid tax in Panama.

World Image – The way your country of incorporation is perceived by perspective clients might be relevant to some entrepreneurs. This is the country listed in contracts and other documents, so customers will see it. Your country of operation can be kept private, but your country of incorporation will be public knowledge.

Cost of Labor and Office Space – Of course, you will expect labor to be significantly cheaper offshore, but you might be surprised that office space is quite costly. Quality office space in Panama City costs about the same as in my home city of San Diego, California.

Availability of Labor – While cost of labor is low, the demand for English speakers is high. You may find it challenging to hire good people in certain countries. I also note that labor is rather transient in many countries. English speakers are in demand and often move from job to job in search of a dollar more an hour.

Availability of Professionals (CPAs & Lawyers) – One of the most overlooked aspects of starting a business offshore is the need for quality LOCAL counsel. You must have someone nearby who can advise you on leases, employment law, local taxation, and any number of issues. Going in blind, or expecting things to work as they do in the US, is a very common gringo mistake. Don’t be that guy or gal…find a few local experts on which you can rely. We at PremierOffshore.com can get you started, but there is no substitute for local knowledge.

Quality of Telecom and internet – Be sure your office has excellent internet and telecom facilities. You never want to sound like you are in a banana republic!

Availability of Computer Equipment – You might be surprised how expensive it is to import quality computer equipment in to some counties. I have had desktop systems, including monitors, stashed in my large checked cases on many occasions.

In addition to the business checklist above, careful consideration should be given to the quality of life offered in your country of operation. The following are the personal considerations of forming an offshore company and operating a business outside of the United States.

Can you learn the language?
Is there a community you will fit in to?
Can you adapt to the culture / speed of life?
Can you adapt to the weather?
Is the country accessible by air in 1 day?
Can you live with the security concerns?

Now, let’s apply these offshore company criterion to doing business in Panama City, Panama.

For myself and PremierOffshore.com, we decided to form an offshore company in Panama, operate from Panama, and form our offshore corporate billing entity in Belize. While the heat and humidity in Panama City is challenging for a San Diegan, the quality internet and low cost of labor won out. Also, escaping the heat to Medellin, Colombia is only a 30 minute flight!

I hope this article has been helpful and given you some ideas on how to select the jurisdiction for your offshore company and your offshore business. Please contact me at info@premieroffshore.com with any questions or to arrange for a confidential consultation.

Swiss Bank Secrecy is Dead – Again!

03/17/2014/in My Thoughts, Offshore Banking/by Christian Reeves

Swiss bank secrecy, and banking privacy the world over, are dead and gone!

The banks of Switzerland are bowing down to the United States yet again…Swiss bank secrecy is dead and gone again. The difference this time is that basically all Swiss banks are paying up, not just those with branches in the United States.

Back in 2009, UBS paid a record $780m fine and agreed to provide US tax authorities with the names of about 4,450 American clients with accounts at the bank. As a result, U.S. persons haven’t been able to open secret accounts in Switzerland for a several years. Most thought that was the end of it…they were wrong.

The United States has been on the attack since then looking for a major payday from other Swiss Banks and to put as many Americans behind bars as possible in order to scare everyone in to compliance. And, finally, most Swiss banks have agreed to take the deal offered by the U.S. government and participate in a crackdown on wealthy Americans evading taxes.

Following is a list of banks which have said they will bend over for U.S. examiners:

Category 2

Swiss banks in this group have a reason to believe they may have committed tax offenses, and are eligible for a non-prosecution agreement if they come clean and pay fines. Banks which have said they will do so include:

EFG International
Banque Privee Edmond de Rothschild
St. Galler Kantonalbank
Banque cantonale de Geneve
Berner Kantonalbank
Banque Cantonale Vaudoise
Graubuendner Kantonalbank
Banque cantonale du Jura
Zuger Kantonalbank
Luzerner Kantonalbank
Valiant
Linth Bank
Coop Bank
Walliser Kantonalbank
Hypothekarbank Lenzburg
Unlisted banks in category 2
Union Bancaire Privee (UBP)
Rothschild Bank
Lombard Odier

Categories 3 and 4

Only three Swiss banks have been cleared by U.S. examiners and deemed “compliant” under U.S. tax rules. They agree to cooperate in any future investigation of their books, report any future U.S. clients, and do not face fines. They are:

Vontobel
Bank am Bellevue
Basellandschaftliche Kantonalbank

Valartis said it will decide at a later time whether to register for Category 3 or not to participate in the program at all.

This has always been a story which amazes me. Switzerland’s national pride was protecting the clients of its banks. It is how so many Swiss grew up identifying themselves. Ask any Swiss banker just five years ago if they would ever divulge client secrets and they would be offended at the question. It would be unconscionable to breach account privacy.

Even during the extreme circumstances of World War II, the Swiss were hiding money and gold from both sides. If they could stand up to (or with) Hitler and Stalin, they certainly could stand up to the IRS, right? (click here and here for articles on hiding gold during WWII)

Well, apparently not. Here’s what happened:

A few Swiss banks, most notably Credit Suisse, Julius Baer and Pictet & Cie, opened offices in the United States and around the globe. These branches became very profitable and soon these banks were major players on the word stage.

These ties to the U.S., and America’s ability to exert influence in a number of other countries, made the large Swiss banks susceptible to attack. Personal and national pride were no longer the priority. Net worth and stock price took precedent.

As you know, these big banks turned over client data and agreed to pay some major fines without putting up much of a fight. Well, that was not good enough for Uncle Sam. The U.S. saw a bigger payday in going after nearly all of the Swiss banks, not just those who were tied in through their U.S. licensed branches.

So, the U.S. “Justice” Department froze negotiations with Credit Suisse, Julius Baer and Pictet & Cie unless and until these big fish could bring in the other Swiss banks to the deal. Because the larger banks provide correspondent, wire transfer, and back office services to the smaller banks, they were able to pressure them in to cooperating.

Because the smaller banks were resisting, the U.S. decided to ratchet up the pressure…cooperate and pay or we will put you in jail!

An example was made of UBS banker Raoul Weil who was charged with hiding money from US authorities on behalf of his clients. He was arrested in Mid-October in Italy and was extradited to the United States. He plead not guilty on January 19, 2014 and was released on a $10 million dollar bond (presumably put up by his bank). He sat in a jail cell for nearly three months without being convicted of a crime. Had his bank not come to his rescue, he probably would have been in jail for a year or two awaiting trial. For more information on this case, see the U.K. Telegraph.

Now that U.S. authorities have all of the fish in the preverbal barrel, they are ready to cash in. The agreement requires the banks to hand over all records of any current or previous American clients, allow U.S. auditors to review their books, and pay penalties equivalent to up to 50 percent of the assets they managed on behalf of Americans. Only after payment are their employees safe from rendition and imprisonment.

These agreements signal the end of the war on banking privacy. The battle took years to complete, many Americans lost their savings, their jobs, and their freedom, but money was made and the beast was fed. Swiss banking privacy is dead and gone and the U.S. has turned its sights on the likes of Singapore and Australia.

Spanish Tax Guide: Tax Implications of Living, Working and Investing in Spain

03/13/2014/0 Comments/in Taxation/by Christian Reeves

Spanish Tax Guide – this is the first in our country tax guide series.

Spain emerged from five years of recession in mid-2013, and now is one of the hottest investment options around. Real estate and investment markets are still priced near the bottom, but are on the upswing, employment is improving, and the government’s austerity measures are growing the economy.

Spain’s economy, the fourth-largest in the EU after Germany, France and Italy, crashed in 2008 when a real-estate boom went bust, taking down much of its banking system and raising doubts about the country’s solvency. The gross domestic product, which briefly rebounded in 2010 and 2011, has shrunk 7.5% in the past five years.

Investing in Spain is still not for the faint of heart. Its tax system is one of the most complex in the world, still boasts one of the highest rates in Europe, faces staggering budget deficits which have resulting in “wealth taxes” for residents and nonresidents alike, and the economic rebuilding has just begun. In an interview with The Wall Street Journal, Spain’s Prime Minister Mariano Rajoy said “Spain is out of recession but not out of the crisis,” cautiously touting the effects of budgetary and structural overhauls that have been among the deepest in the euro zone. “The task now is to achieve a vigorous recovery that allows us to create jobs.”

There are strong signs of recovery, and thus opportunity for international investors. Labor costs have been reduced, exports are on the rise, and the current-account deficit, once 10% of GDP as cheap money poured in to fuel the building boom, has turned to surplus. However, GDP growth is expected to increase by .5% to 1% in 2014.

High corporate and personal taxes on your worldwide income, and possibly your worldwide assets, are a major issues for anyone moving to Spain. Unwilling to cut government spending, Mr. Rajoy’s right-leaning government chose to raise taxes. According to the Cato Institute, “Following the tax increase, Spanish individuals will be paying one of the highest personal income tax rates in Europe. For instance, from 2012 onwards, only Sweden and Belgium, with 56.4% and 53.7%, respectively, will have a higher top marginal income tax rate than Spain, which stands at 52%. However, if one takes into account local surcharges imposed by some Spanish regional governments, the top marginal rates rise further. In Catalonia, for example, the top tax rate is 56%.”

For just about any income, Spanish tax rates are higher than in France, Britain, Italy and Germany, they say, adding:

“All of those countries enjoy a considerably higher income per capita than Spain and thus can more easily withstand higher taxes than a poorer country. With Rajoy’s tax hike, Spain suffers from the worst of both worlds: very high taxes combined with decreasing income and employment levels. At 23%, Spain has the highest unemployment rate in the European Union.”

Spain’s immensely complex tax regime means that the well organized and researched resident entrepreneur might take advantage of a number of planning opportunities. While Spain has one of the highest tax rates in the EU, it has one of the lowest effective tax rates. The official corporate tax rate, for example, is 30% but large Spanish companies pay about 8% on average. This compares favorably to the US effective corporate rate of 12.6% for 2013.

There are few planning options available to non-residents…who basically pay a 21% flat tax without deductions.

Spanish Tax Primer

A resident of Spain is liable for tax on their worldwide income at scale rates after any available allowances and deductions. A non-resident of Spain is liable for Spanish income tax only on Spanish income, and possibly Spanish assets, generally at fixed rates with no allowances for deductions.

If you spend more than 183 days in Spain during the calendar year, or your “center of economic or vital interest” is in Spain, you are a resident for tax purposes. Depending on where you live, personal income tax on wage and business income will range from 24.35% to 56%.

“Vital interests” usually refers to someone whose spouse lives in Spain and they are not legally separated, and/or their dependent minor children live in Spain.

If you are a tax resident of Spain, income “derived from savings,” such as interest income and capital gains, are taxed at 21% to 27%. Specifically:

Up to €6,000: 21%
Excess from €6,000 up to €24,000: 25%
Excess from €24,000: 27%

By comparison, non-residents pay 21% on capital gains and 24.75% on investment income earned in Spain. Where residents are taxed on their worldwide income, nonresidents are taxed only on income earned in country.

As a tax resident, you might also get the joy of paying a wealth tax on your worldwide assets. This levy varies from year to year and has come and gone in various forms since 2008. In 2014, each person is generally allowed assets of €700,000 and a personal residence of €300,000, so a husband and wife might be able to hold up to €2 million before paying the wealth tax. If you are caught up in this toll, you will be required to pay a tax equal to 0.2% to 2.5% of your total assets.

Spain’s wealth tax is quite complicated, varies from region to region, has been repealed and brought back from the dead more than once, and might finally be eliminated in 2015. In some areas, allowances are reduced and, if you are fortunate enough to live in Madrid, you pay no wealth tax at all…I guess that’s where the politicians call home. If you are at risk of the wealth tax, you should contact a local expert.

Taxation of Real Estate for Residents and Non Residents

If you are a tax resident and own a rental property in Spain, net income earned is taxed at ordinary rates, which are 24.35% to 56% rate. You are allowed to deduct ordinary and necessary expenses, which include interest on loans used to acquire the property, repairs and maintenance, leasing fees, etc. Spain allows you to depreciate the value of the home or structure on the land at up to 2 – 3% of the purchase price, but you may not depreciate the value of the land. 3% results in a depreciation rate similar to the United States (33.3 years in Spain compared to 27.5 years in the US) and more “generous” that the 40 year depreciation schedule Americans are allowed for foreign property.

If you are not a tax resident and own rental properties in Spain, net income is taxed at a rate of 24.75%. If you are not a resident of the EU nor a resident of Spain (ie. you are a US resident for tax purposes), you may not deduct any expenses against your rental income.

If you are not a resident of Spain, you pay 21% in capital gains tax on the profits from the sale of your real estate and 24.75% on other types of investment income. But, be careful because local capital gains tax (which is levied by the town hall where the property is located and depends on local values) may also apply. This should be considered before making a purchase.

3% of the gross sale price is held back by the buyer and paid over to the Spanish tax authorities. If 3% of the gross is more than 21% of the net (more than the total tax due), you can file a claim for refund.

In addition to the tax on net rental income, you will pay property tax at 1% to 2% per year based on the value of the property. This rate varies by municipality and you should take it in to account when considering properties from different areas. You should also look in to whether you must pay cantonal property tax in addition to the general property tax described above.

There is also a special assessment on real estate owned by non-residents. If you are not a tax resident of Spain, you will pay 3% per year on the value of the property for the right to own property in Spain.

When you go to sell the property, you will pay capital gains tax as described above. Because Spain’s capital gains rate is equal to or higher than the United States, you will probably not owe capital gains tax to Uncle Sam on the transaction. This is because, in most situations, the Foreign Tax Credit will come in and eliminate a double tax.

For information on how to report foreign real estate on your U.S. tax return, please see my article, US Tax Breaks for Foreign Real Estate.

Spain will also hit you with a Stamp Duty on the transfer. In most cases, this is 0.5% rising to 1% in some autonomous regions and can reach up to 6%! It is paid by the buyer, but you should take it in to account when valuing your property. A property with a small duty might garner a higher price than one with a 6% toll.

Finally, if you own significant real estate in Spain, and you are not a tax resident, you may still get to pay the wealth tax on your assets in Spain. That’s right, if you own rental properties worth more than €700,000 in 2014, you are required to pay a tax based on their value. The levy starts at 0.2% and jumps to 2.5% quickly. It is uncertain whether this tax will apply after 2014.

Taxation of Rural Land

Many of these taxes do not apply to rural land (land primarily dedicated to farming). For example, transfers of rural land and used buildings on that land are exempt from the 21% tax described above. Used for this purpose means that the building is transferred for the second or subsequent time, except when the building is acquired for rehabilitation, and the property is classified as rural by the taxing authorizes.

In many cases, the transfer of rural land will be taxed at around 7% and property taxes will apply at 2% per year. Though, this is an estimate and can vary by region. You should seek the advice of a local attorney before purchasing rural land…and be aware that is extremely difficult to obtain a permit to build in land zoned as rural.

Tax Summary

As a resident living and working in Spain, you are facing personal income rates that cap at an astounding 57% and capital gains taxed at 21% to 27%. However, you can make use of a number of deductions and exclusions that may get your effective rate down to that of the UK and France…now, there’s something to aspire to in tax planning!

If you are a non-resident, you will enjoy a 21% to 24.75% flat tax with very few deductions (unless you are an EU resident). When you consider that owning rental properties in the US generally reduce your taxes (mortgage interest, expenses and accelerated depreciation often exceed rental income), rather than increasing them as is the case in Spain for a nonresident, one should think long and hard before buying a Spanish rental.

As a non-resident, you will also pay a special 3% tax per year, and a property tax of 1% to 2%. Therefore, a non-resident’s carrying costs may be as high as 5% of the assessed value each year.

When you purchase real estate in Spain, the buyer is responsible for a scaled transfer tax of 8 – 10%, and this usually jumps to 12% for new builds (property acquired from the builder / developer). When you sell the property, you pay 21% on the net gain plus an average stamp duty of 1.5%. Local and municipal taxes may also apply.

Finally, when a non-resident sells their property, a special 3% withholding on the total sale price must be held back by the buyer.

I hope you have found this tax review helpful. I’d like to end with an interesting caveat in the Spanish tax code:

Because of the extremely high transfer taxes, buyers and sellers might be incentivized to misreport the sale price, with the buyer giving cash on the side to the seller to make up the difference. Well, if the tax authority can prove that the transfer was reported at less than 50% of its fair market value, the government has the right to buy that property for the value reported in the sale.

I hope you find this article helpful. Please contact me at info@premieroffshore.com with any questions or article requests.

Who is a U.S. Person for Tax Purposes?

03/10/2014/0 Comments/in Taxation/by Christian Reeves

Who must pay US taxes you ask? Who is a US person for tax purposes? Who is in the crosshairs of the IRS? The answer is not quite as simple as you may think…and something that confuses many people living and operating a business in the US.

Who is a U.S person for tax reporting purposes? Who are these unfortunate soles who must file an FBAR, report their foreign assets on IRS Form 8938, and pay tax on their worldwide income?

As those of you know who have met me at conferences or read my articles, I often ramble on about the many filing requirements for those living and working abroad. I won’t go in to them again here, but you can see my taxation page for more information.

First, a U.S. person is ANYONE with a U.S. passport. It doesn’t matter if you currently live in the United States, nor does it make a difference that you have never lived in the U.S. So long as you hold a passport from the U. S. of A., you are required to pay up and report everything.

That is the easy answer. But, what about those who were not blessed at birth with a blue passport and the honor of giving half of what they earn to the American machine?

For example, I recently had someone in my office that had been living in the United States for the five years on a Green Card. He had been filing his U.S. tax returns, and paying tax on his U.S. income, but had done nothing about his international obligations.

He was considering obtaining U.S. citizenship and was wondering what that would do to his tax situation. He had no idea that he was already screwed and a U.S. person for tax purposes.

A U.S. person for tax purpose includes any of the following: (see the IRS website):

A U.S. Citizen, which is anyone with a U.S. passport,
A green card holder (see: http://www.irs.gov/Individuals/International-Taxpayers/Alien-Residency—Green-Card-Test), or
A U.S. resident for tax purposes – most commonly defined as someone who spends more than 183 days in the US under the Substantial Presence Test. A U.S. resident for tax purposes is commonly referred to as a resident alien.

Therefore, if you have a U.S. passport or green card, or are a resident alien for tax purposes, you must report income from all sources within and outside of the U.S. For more information, see Publication 525, Taxable and Nontaxable Income.

Also, if you are a U.S. citizen, green card holder, or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or abroad. See the IRS website for information on how to file as a resident alien abroad.

So, a U.S. person for tax purposes is just about anyone with immigration ties to the U.S., or spends most of their time here. If you want to enjoy the benefits of America, it’s going to cost you…and if you are unaware of these obligations, it can cost you big time!

I hope you find this brief article helpful. For additional information, or questions on your tax filing

Do I Need to Report Gold to the IRS? FBAR and Form 8938

03/10/2014/0 Comments/in Taxation/by Christian Reeves

Are you required to report gold to the IRS? Surprisingly, the answer is no. Gold you hold directly is not reportable on the FBAR or IRS Form 8938. But be careful…when you sell the gold, you have a reportable transaction.So, in most cases, you are not required to report gold to the IRS!

You hold gold directly if you own gold bars, gold bullion or coins and keep them in a vault. It doesn’t matter whether that vault is inside the U.S. or somewhere secure like Panama. You do not hold gold directly if you own a gold certificate, gold stocks, or a gold future contract. Only physical gold that you have direct access to is allowed to be private. For additional information, see the IRS website.

I note that your IRA can hold gold bullion directly, and that gold can be held in a foreign vault. Many of our clients form offshore IRA LLCs to hold this type of asset. In that case, your administrator must report the appreciation in the IRA account, but are not required to file an FBAR or IRS Form 8938.

The same holds true for tangible assets that you buy as investments. Examples of tangible assets include art, antiques, jewelry, cars and other collectibles. If you hold these assets outside of the United States, you are not required to report them on your FBAR or IRS Form 8938. Note that an IRA may not own art, antiques, jewelry, cars or any type of collectible

Finally, you are not required to report the existence of a safe deposit box at a foreign bank. A safe deposit box is not a foreign account and is thus not covered by these forms. If your safe deposit box has only gold and jewelry, then you have nothing to report.

Now, here’s the rub: If you sell your gold or tangible property to a foreign person, that sales contract is a reportable asset. According to the IRS, “The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.”

Therefore, if you sell your gold and collectables to a U.S. person, no reporting is required. If you sell these same assets to a foreign person, and the total value is significant, you must report the transaction on IRS Form 8938.

I hope this helps. For a similar article on foreign real estate, see: Do I Need to Report my Offshore Real Estate on IRS Form 8938?

Can I Invest in a Business with my IRA?

11/29/2013/0 Comments/in Offshore IRA/by Christian Reeves

Surprisingly, yes you can invest in an active business with your retirement account. There are a many caveats and limitations, but you can usually lend money to a business, purchase shares in a corporation or LLC, or buy in as a partner receiving a share of the profits (flow-through structures).

Now, let’s talk about those limitations:

First, if you are investing in a business in the United States, your IRA can’t own shares of an S-Corporation. This is not an IRA rule, but rather a U.S. corporate statute which requires owners of S-Corps to be U.S. persons. In other words, no foreign person (for tax purposes), entity, or tax exempt /preferred structure may invest in a business structured as an S-Corp.

Next, you can’t invest in a business of which you are a highly compensated employee. Basically, the IRS wants to make it difficult for you to take money out of your retirement account as salary and thereby circumvent the distribution rules.

A highly compensated employee is an individual who:

Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2012 or 2013), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

I note that, if you draw a salary from a business you invest in using your IRA, you open yourself up to audit on that issue. This is especially true if you also take expense reimbursements and other payments that could be categorized as salary. I always recommend clients not take a salary when investing through a retirement account. And, if you do take a salary, to keep very good accounting records on all transactions to ensure they are below the threshold.

Next, your retirement account is prohibited from investing in a business of which you own or control more than 50%, or which is owned or controlled by any “disqualified person.” The first part of this rule is simple enough: you may own up to 50% of a business or corporation through your retirement account. To put it another way, you can’t invest in an entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by you…straightforward enough.

Now, let’s talk about who else (other than you, the owner of the account) is a disqualified person. In this section, the IRS is attempting to limit any conflicts of interest involving your IRA and related parties and to ensure all transactions benefit the retirement account and not the IRA owner.

A “disqualified person” (IRC Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA owner, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

A disqualified person is defined as follows:

A fiduciary, which includes the IRA holder, participant, or person having authority over making IRA investments,
A person providing services to the plan such as the trustee or custodian,
The employer who created the plan or an employee organization any of whose members are covered by the plan,
A spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren of a disqualified person,
An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by a disqualified person, and
A 10 percent owner, officer, director, partner, joint venture, or highly compensated employee of a disqualified person.

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

What will happen if you (whether by accident or intentionally) break one of these many rules? If the IRS finds out, the consequences will be swift and severe. Specifically, if an IRA owner or his or her beneficiaries engage in a prohibited transaction at any time during the year, the account stops being an IRA as of the first day of that year and major penalties apply.

This means that the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is includible in his or her income.

In addition, the IRA holder or beneficiary would be subject to a 15% penalty, as well as a 10% early distribution penalty, if the you are under the age of 59 1/2.

The prohibited transaction rules are extremely broad and the penalties harsh (immediate disqualification of entire IRA plus penalty). Thus, if you invest in an active business, you must be cautious when engaging in transactions that could be considered self-dealing or result in a direct or indirect personal benefit. Whenever you consider a complex transaction, it is important you consult with a qualified expert.

Let’s conclude with a few comments on the tax consequences of investing in an active business. If you purchase shares, and sell them for a capital gain, the profit flows in to your retirement account as any other investment – tax free to a ROTH or tax deferred in a traditional IRA. Likewise, if you lend money to a business, the interest earned passes up to your retirement account tax preferred.

If you invest in a joint venture, mutual fund, or partnership, such that you receive distributions of profits or income, rather than capital gains, your tax picture becomes more complex. Obviously, the IRS won’t let these profits go in to your retirement completely untaxed.

In other words, when you invest in a business by purchasing shares, the value of those shares go up or down based on the net income of the business. The business is earning money, paying corporate tax on its net profits, and then distributing out any after tax gains as dividends or stock appreciation. Thus, the IRS gets its cut first, then the investors benefit.

When a business operates as a partnership, untaxed net profits flow through to its members on Form K-1 to be taxed on the partner level rather than the partnership / entity level. If a retirement account were allowed to receive flow-through profits, then it would be possible to defer or eliminate tax on those profits all together.

Note: It is not possible to operate a business in the U.S. untaxed, but it is possible offshore.

To prevent this, the IRS invented “Unrelated Business Income Tax” or UBIT. In essence, UBIT is a tax at the corporate rate of 35% on profits in a retirement account on income which is not related to the accounts primary purpose of investing. Income from an active business that is not capital gains, but ordinary income, mean the IRA is operating a business and are thus these profits are UBI and taxed at 35%.

So long as you can live with the tax consequences, your IRA may invest in partnerships, LLCs, and mutual funds (but not S-Corps). To prevent a reporting mess at the IRA level, you should form a U.S. UBIT Blocker corporation, make the investment and pay the tax from that entity, and pass through “related” income or investment returns to the retirement account.

If you invest in an offshore business, which is not taxable in the United States, then you can eliminate UBIT entirely by forming an offshore UBIT Blocker. This is where IRA tax law gets really interesting.

Let’s say you want to invest in a business partnership in Panama, will own 30% of that structure, and operating profits will be passed to you without being taxed by that country. If you form an offshore IRA LLC, an offshore UBIT Blocker corporation, and make the investment from this corporation, you can eliminate UBIT.

This is because the active business profits are earned by an offshore UBIT Blocker are free from corporate level tax. If that entity were a U.S. corporation, its profits would be taxed at 35%. Because it is an offshore corporation, formed in a country with no corporate tax (such as Belize or Nevis), no tax is due.

The UBIT Blocker now passes up these profits to the LLC as dividends. Because dividends are not unrelated income, but rather investment returns, they are not taxable…and UBIT has been effectively blocked.

To be clear, I am referring to an IRA making an investment in to a business that is outside of the United States, has no US source income, and is generating active business returns with an office and staff based in Panama. I am not taking about an offshore structure investing in a business or partnership located in the United States, or a business based in America that is utilizing a foreign holding company.

I hope you have found this article interesting. If you have questions on forming U.S. or offshore IRA LLCs and/or UBIT Blocker structures, please contact me at info@premieroffshore.com. I will be happy to work with you to design a structure that maximizes privacy and protection while still in compliance with IRS retirement account regulations.

Eliminate Tax on Leverage in your IRA with UBIT Blocker

11/25/2013/0 Comments/in Offshore IRA/by Christian Reeves

If you want to use leverage / margin to increase your IRA’s investing power, then you need an offshore UBIT Blocker Corporation. There are major benefits available for the sophisticated investor offshore, and the most important is the ability to use leverage and avoiding US tax on that leverage.

Without a blocker, you will pay US tax on the profits generated by the loans in your retirement account. This is called Unrelated Business Income Tax, or UBIT for short, and can be a real killer at 35%. UBIT is taxed at the corporate rate and the United States has the highest nominal corporate tax in any of the world’s developed economies. There is no (long term) capital gains treatment available for UBI.

For example, if you want use your IRA to purchase a rental property in Belize, a local bank will give you a non-recourse loan for up to 50% of the value. So, your $50,000 IRA can purchase a $100,000 property…which sounds great. Well, if you are not structured properly, 50% of the net profits from the rental, and 50% of the gains when the property is sold, are attributed to leverage and thus UBIT. This means that half of your profits are taxable in the United States at 35%.

The same is true with leveraged brokerage accounts. Sophisticated investors might wish to trade their IRAs with 10 times leverage in the FX or commodities markets, but UBIT tax is so high that it makes the leverage worthless.

These investors can form an offshore IRA LLC, an offshore corporation as a UBIT Blocker, open a trading account onshore or offshore, and eliminate UBIT on leverage. A properly structured UBIT Blocker corporation will completely eliminate US tax on leverage!

For more information on UBIT and blocker corporations, please check out my Self Directed page. For further reading, here are a couple outside links:

Please contact me directly at info@premieroffshore.com for a confidential consultation on the use and benefits of offshore UBIT structures. I will be happy to answer your questions and assist you in taking your retirement account offshore.

Do I Need to Report my Offshore Real Estate on IRS Form 8938?

11/22/2013/0 Comments/in Taxation/by Christian Reeves

The general rule is that foreign real estate is not reportable to the IRS on Form 8938. Good news and an asset category that has been ignored by the IRS hawks trying to swoop in on as many international resources as possible.

But, read on! While the default rule is that foreign real estate is not reportable, about 95% of my clients do need to report their real estate holdings on IRS Form 8938. This is because foreign property is usually held in an offshore trust or foreign corporation and your shares in entity must be reported on Form 8938 and elsewhere.

Let’s take a step back: Form 8938 – Statement of Foreign Financial Assets was created in 2011 and must be filed by anyone with significant assets outside of the United States. If you qualify to file Form 8938, you are to report financial accounts maintained by a foreign financial institution. Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

Also, you are to report stock or securities issued by a foreign corporation (like the one that holds your foreign real estate), trust or other entity (such as an offshore LLC), and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. Examples of these assets include:

Stock or securities issued by a foreign corporation;
Stock or membership interests issued by a foreign limited liability company;
A note, bond or debenture issued by a foreign person;
An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
A partnership interest in a foreign partnership;
An interest in a foreign retirement plan or deferred compensation plan;
An interest in a foreign trust or estate;
Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

Foreign real estate is not a foreign financial asset required to be reported on Form 8938. So, a personal residence or a rental property outside of the United States does not need to be reported on this form.

However, if the real estate is held through a foreign entity, such as a corporation, partnership, or trust, then your interest in the entity is a specified foreign financial asset that might be reportable on Form 8938. The value of the real estate held by the entity is used to determining the value of the shares to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.

All of this is to say that, if you purchase foreign real estate in your name, without an entity, you do not need to include that asset on Form 8938…but be careful, there are a number of traps for the uninitiated.

First all rental income must be reported on your personal return (Form 1040 and Schedule E), regardless of amount and regardless of whether you are required to file Form 8938. In most cases, reporting your rental property on Schedule E will create a loss, and thereby reduce your US taxes. For more information on this and taking depreciation on international real estate, check out my article US Tax Breaks for Foreign Real Estate.

Second, if you open a foreign bank account to facilitate the purchase of the property, or the receipt of rental income, and that account has more than $10,000 in it on any one day of the year, then you must report the bank account on US Treasury Form TD F 90-22.1, commonly referred to as the FBAR or Foreign Bank Account Report. I will discuss this form in more detail below.

Want to avoid filing the FBAR?

When you purchase the property, wire funds from your US account in to escrow. Don’t allow the purchase price to go through an offshore account.

Keep less than $10,000 in the operating account. You might need a foreign account to pay local expenses and receive rent, but you can avoid this form by maintaining a minimum balance.

What if you do not want to hold foreign real estate in your name? What if you, like most investing abroad, prefer the privacy, security and protection of a corporation?

Even if you purchase foreign real estate in a corporation, you might not need to file Form 8938. Remember that Form 8938 applies to those with “significant” assets outside of the United States. Here is how it works:

If you are living in the United States, are a married couple filing a joint tax return, and your reportable foreign assets on the last day of the year do not exceed $100,000, and are not more $150,000 on any day of the year, you don’t need to file Form 8938.

If you living in the United States, are single or married filing separate, and your reportable non-US assets on the last day of the year do not exceed $50,000, and are less than or equal to $75,000 on any day of the year, you don’t need to file Form 8938. For additional information, see the instructions to Form 8938.

If you are living abroad, are a married couple filing a joint tax return, and your reportable non-US assets on the last day of the year are not more than $400,000, and do not exceed $600,000 on any day of the year, you don’t need to file Form 8938.

If you living abroad, are single or married filing separate, and your reportable non-US assets on the last day of the year do not exceed $200,000, and are not more than $300,000 on any day of the year, you don’t need to file Form 8938. For additional information, see the instructions to Form 8938.

NOTE: Be careful when calculating the value of your foreign assets. You need to convert the value from your foreign currency to United States dollars each year. As the US dollar falls, the relative value of your assets increase. For an example, see my article Weak Dollar Crushing the Foreign Earned Income Exclusion.

Do you spend some time in the United States each year? Are you unsure if you are a US or international person for the purpose of Form 8938? The answer is simple: If you qualify for the Foreign Earned Income Exclusion (FEIE), then you are an international person. If you don’t qualify for the FEIE, you live in the US for tax purposes. Yes, even if you spend significant time abroad, you live in the US for the purpose of this form if you don’t qualify for the FEIE.

If you don’t know whether you qualify for the FEIE, or have no idea what the FEIE is, then you are probably a US person. Basically, if you are a resident of a foreign country for a full calendar year, you qualify for the FEIE. Alternatively, if you spend more than 330 days per year abroad out of any 365 day period, you qualify for the FEIE.

Note: This is a summary of a complex topic. For a detailed article on the FEIE, check out Foreign Earned Income Exclusion Basics.

If you decide to hold your foreign real estate in a company or trust, you will have filing obligations in addition to Form 8938.

The most critical offshore tax form is the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

The law imposes a civil penalty for failing to disclosing an offshore bank account or offshore credit card up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.

In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

Other international tax filing obligations include:

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

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

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

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

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

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

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

Once you begin to expand your investment options beyond the United States, your IRS picture will become more complex. But, don’t let big brother bully you in to keeping your money at home. Don’t let these forms dissuade you from diversifying outside of your comfort zone or achieving significantly higher returns than are available from your local bank.

You have two options: 1) get in line and keep your money at home or 2) break from the crowd, file your forms, and make some real money.

If you choose diversify abroad, I suggest you hire a tax preparer who is experienced in international investments and forms to handle your reporting. Your local guy probably has no idea what any of this means and the cost of making a mistake is just too great for you to take on the IRS alone.

Tax Season’s Best Questions

10/16/2013/0 Comments/in My Thoughts, Taxation/by Christian Reeves

We get a lot of good questions from Expats around the globe during the April 15 and October 15 tax seasons. Here are a few from this go-round.

Moving to a High Tax Country

Q: “I’ve just moved to Australia in the last year. I currently have very little assets in the US and am working for An Australia company building a saving account in Australia. I am planning on purchasing a home and or investment property in the next 12 months with the intention of having around 5 properties in a few years. I’m trying to plan in advance to avoid long term capital gains and use smart tax strategies. I am planning on buying in Australia and own no property in the US. Will the US tax my income and capital gains? If you have any suggestions on resources to utilize I’d be very appreciative.”

A: Unfortunately for you, US tax will not be an issue. This is because your tax rate in Australia is certain to be higher than it would be in the US. For example, your personal tax rate in Australia will start at 19%, and max out at 45% on income over $180,000. Your rate in the US on income over $180,000 should be 28% to 39.6%.

Making things worse, Australia does not have a capital gains rate…capital gains are taxed the same as your ordinary income. Therefore, long term gains in Australia might be taxed at 45% compared to 20% in the US.

When you move out of the US to a country with a higher tax rate, you should not expect to pay any tax to the US. You must still file your US tax returns each year, but the Foreign Tax Credit should eliminate any US tax on your Australian income.

The Cost of Compliance

Q: “Thanks for the wonderful newsletter. I hope I get this email to you. I believe that someone from US would have a very hard time when opening up an IBC as it gets really expensive to file IBC paperwork with the CPAs. If also exiting the US with expatriation, it would cause problems with expatriation taxes. My CPA keeps on telling me that it would require $4,000-$5,000 dollars just to file all the forms needed. I was shocked at the costs…I am confused since they both told me there are a lot of people selling these offshore vehicles which can get me in a lot of requirements and problems. This is the same answer that I got from various tax attorneys in USA.”

A: I agree completely that there are a lot of promoters out there selling IBCs that can get Americans in to trouble. One of the quickest paths to disaster for an American is using an incorporator that does not provide US compliance. For more on this topic, checkout my article on offshore asset protection scams.

To avoid these issues, you should use a US tax expert to form your offshore structure. Companies such as mine will ensure you are in US tax compliance from day one.

Regarding the costs of compliance, offshore corporations and IBCs file Form 5471, which is a US corporate tax return designed to report ownership, control, and income from these types of structures. This return will require a profit and loss statement and balance sheet, but should be no more complex or costly than a typical US corporate return, Form 1120.

If someone is operating a large business with employees offshore, is retaining earnings offshore, or has a number of partners in the business, Form 5471 can become expensive…just as a complex Form 1120 can become costly.

If you are using an IBC for basic asset protection, filing your US return should not be a major expense. We typically charge $850 for Form 5471. If you are being quoted $3,000 to $4,000, you are either working with a major firm such Delloitte, or your CPA simply doesn’t want to handle the returns and is quoting a ridiculous rate to prevent you from setting up a structure.

State Tax Issues for Expats

Q: “I have heard that some people move to Texas or Florida before going offshore. Can you tell me why? When I moved from California to Panama, and become a resident of Panama, I had no problems.”

A: Right, if both H and W move out of California and become tax residents of a foreign country, then their State issues are eliminated. However, moving to Florida or Texas before going offshore reduces the risk of being audited on this issue by California.

First, I note that California doesn’t have a FEIE. So, if you move out of CA for two years and intend to return, 100% of your income earned abroad is taxable in California. You might avoid Federal income tax with the FEIE, but not CA income tax.

Second, for those using the 330 day test, State tax can be a real problem. This is especially true of they keep their old home and other ties to the State.

For example, I have had the case where Husband works offshore and qualifies for the FEIE using the 330 day test (military contractor) and the case where he lives offshore and qualifies under the residency test. Their wives lived in CA with the kids.

For the contractor, CA has no FEIE and thus 100% of his income is taxable in CA. You see this a lot with military contractors and oil field guys in hostile countries…obviously, H is not a resident of Iraq and intends to return to wife and kids when his contract is up.

For the person using the residency test, CA says half of H’s income is attributable to W because CA is a community property State. Therefore, 50% of H’s income is taxable in CA.

A more common example for non-contractors might be H and W have a small business netting $100,000 in Panama. H qualifies for the FEIE using the 330 day test, but W does not. She wants to spend more time visiting the kids / grandkids, while H is just done with the US.

They put all of their income under H and pay no Federal tax using his FEIE.

Then, CA comes along and says W is really a resident of CA, 50% of H’s income is attributable to W, and 50% of the income is taxable in CA.

One reason W might be a resident of CA is that she did not break off sufficient ties to the State and she intends to return there someday.

Do you disagree with CA’s determination? Legal fees will be at least $10,000.

Offshore Contractors and the FEIE

Q: “Christian, I am writing for my son who is in Afghanistan. He works as a contractor there but need to find a tax person who understands the 35 days in country rule. I’m sure you do but don’t know militarily if that is different. Would like your recommendation if possible.”

A: Yes, I am familiar with this FEIE and have had many contractor clients…maybe around 100 over the years. Here are the rules for contractors abroad:

First, a contractor is someone paid by a US or foreign corporation and not directly by the US government.

Second, a contractor may take the FEIE (military personnel do not qualify). Contractors must use the 330 day test and not the residency test. Here is a detailed article on the 330 day test.

The reason he must take utilize the 330 day test is that a contractor is not a tax resident of Afghanistan because he does not intend to make that his home. His intention is to return to the US after his contract is up. So, he must use the 330 day test and not the residency test, and may spend no more than 35 days in the US.

This means that he should spend most of his vacation days somewhere other than America. Remember, he is not required to be in Afghanistan to qualify…he need only be outside of the US. So, if a contractor is on a 2 months on 1 month off rotation, he should vacation in Latin America or the Caribbean.

It is important to note that, if a contractor misses the FEIE even by one day, then he loses the FEIE completely and all of his income is taxable.

Third, if a contractor is paid by a US corporation, then he must receive a W-2 with Social Security and Medicare deducted. If paid by an offshore corporation, then the contractor is not liable for these taxes.

Fourth, there is a special component of the Foreign Housing Exclusion for contractors in war zones. In most cases, he (the temporary worker) may only deduct the cost of maintaining one home abroad. If your employer provides housing, that is his tax home.

However, if he maintains a second, separate household outside the United States for his spouse or dependents because living conditions near his primary home are dangerous, unhealthful, or otherwise adverse, he can exclude / deduct this second home using the Foreign Housing Exclusion.

In other words, if he is in a war zone, he may exclude the value of two homes outside of the US…one for himself and one for his family. If he is not in a war zone, he may only exclude his primary offshore home.

Adverse living conditions include:

A state of warfare or civil insurrection in the general area of your tax home, and
Conditions under which it is not feasible to provide family housing (for example, if you must live on a construction site or drilling rig)

Moving a Business Abroad

Q: Christian, I have moved to Costa Rica and just love it here. I have a business and a corporation in Florida and need some tax advice. Can you help?

Q: You indicate you are operating a business through an FL company while living offshore. This will certainly increase the amount of tax you pay to the United States.

If you will qualify for the FEIE, then you should add an offshore corporation to your structure. The offshore company will bill the US company and you will draw your salary from the offshore company. This will eliminate self-employment and all other related taxes…reducing your US taxes by at least 15%.

Such a company should be in a country other than where you are resident, and one that will not tax your income. Therefore, I recommend Belize. I also note it must be an IBC and not an LLC.

Puerto Rico Tax Deals for Corporations

10/15/2013/0 Comments/in International Business, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

Thinking about moving your business offshore? If you are a US citizen, and your profits exceed $400,000, I guarantee Puerto Rico has a better deal for you.

This article was published in 2013. For a more up to date post from December of 2015, see Blood in the Streets- the Puerto Rico Tax Deal and Foreign Earned Income Exclusion vs. the PR Tax Deal.
The article below is focused on business owners that wish to move to PR. Act 20 allows you also allows you to live in the US operate a business with 3 employees from PR and pay only 4% corporate tax. Check out the Blood in the Streets post for more information on how to negotiate a deal and still live in the US.

As I reported last month, a US citizen can move to Puerto Rico and pay zero capital gains tax on his or her passive income and investments. That’s right, no US Federal or State tax on capital gains tax from real estate, stocks, and/or other investments acquired after you move to and become a resident of Puerto Rico.

This time around, I am here to tell you that Puerto Rico has a deal for business owners and entrepreneurs…a deal you can’t find anywhere else in the world unless you turn in your US passport.

Puerto Rico is offering business owners a tax contract similar to the one Switzerland and Russia negotiates with high net worth Europeans. Yes, Snowden’s Russia is a tax haven. For example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

A tax contract with Puerto Rico will allow you to cut your total (worldwide) tax rate down to 10% or lower without the need for any complex planning or structuring. Once you enter in to a contract, it can’t be modified or revoked by the government until 2036. Of course, you can leave Puerto Rico, thereby opting out of the tax deal, at any time. You can also spend a few months a year in the United States.

To receive these benefits, you are required to move yourself and your business to Puerto Rico, spend at least 183 days a year on the island, become a legal resident of this territory, and enter in to a tax contract with the government. Once you have relocated, you have opted out of the US Federal and State tax systems and in to the Puerto Rico tax code…which trumps the Federal code.

As a US territory, Puerto Rico’s tax code takes precedent over the US Federal tax code. While US Expats are bound by Federal tax law, American’s in Puerto Rico need only follow local tax rules.

Such a contract is the inverse of the Foreign Earned Income Exclusion (FEIE) and allows you to pay all of your taxes now at a reduced rate without the need to lock earnings in to an offshore corporation, captive insurance company, or some other complex tax deferral mechanism.

Let me explain: If you qualify for the FEIE you can earn up to $97,600 in salary free of Federal income tax in 2013. If a husband and wife are both working in the business, they might take out $195,200 combined. That is a major tax break which allows a properly structured offshore business earning $195,200 to be completely free of US tax.

Well, what if your business earns significantly more than the FEIE amount? You can usually retain excess profits in to your corporation and thereby defer US tax until you distribute these profits as a dividend. Capital gains, interest income and other returns derived from these retained earnings are taxable (may not be deferred) and dividends are taxed as ordinary income.

While the FEIE works great for those with business profits near the exclusion amount, it is not so wonderful for those earning significantly more. If you net $1 million a year and want to take that money as income now, then you are stuck paying US tax on the amount over the FEIE at 39.6% in 2013. This comes to about $318,000 in Federal income tax assuming a husband and wife both qualified for the FEIE and no State tax is due (($1m – $195,000) x .396) = $318,000. If only one person qualifies for the FEIE, your tax bill will be about $357,350 (($1m – $97,600) x .396) = $357,350.

In Puerto Rico, you pay income tax on the first $250,000 (using a graduated rate of up to 33%) and 4% on income over $250,000. There is no need to retain earnings in an offshore corporation and no issues related to tax deferral. You are paying tax each year as the money is earned…at a lower rate compared to those of us in the States, but no deferral or retainer earnings to worry about.

For example, on $1 million of business profits, your tax bill in Puerto Rico will be about $105,000, significantly less than the same US owned business operating offshore using the FEIE. This equates to an effective tax rate of about 10% ((.30 x 250,000) + (.04 x 750,000)) = $105,000 or 10%.

As your net profits increase, the benefit of Puerto Rico’s tax system increase and your effective tax rate drops. For example, on net profits of $3 million, your tax is approximately $185,000, for an effective tax rate of 6.2% ((.30 x 250,000) + (.04 x 2,750,000)) = $185,000 or 6.2%.

As stated above, if your net profit is anywhere near the FEIE amount, then living and working abroad and operating through a foreign corporation will give you the best tax deal. If your profits are between $100,000 and $500,000, then you might need to run the numbers to determine whether Puerto Rico or the FEIE provides the better option. Such an analysis would take in to account how much you are willing to retain in to an offshore corporation, how long you can lock those profits away, and the deductions you have available on your US personal income tax return (itemized deductions such as mortgage interest, property tax, charitable contributions, etc.). I have not considered these issues in the examples provided.

What about those of us earning less than $1 million from our business? In Puerto Rico, you will be required to take salary of 1/3 of your net profits, up to a maximum salary of $250,000, and pay 4% on the remaining 2/3. So, if you earn $300,000 in total profits, your tax would be about $38,000 or 12.6% ((.3 x $100,000) + (.04 x $200,000)) = $38,000 or 12.6%.

If that same $300,000 was earned as salary by a US citizen using the FEIE and an offshore corporation, the first $97,600 would be tax free and the remaining $202,400 would be taxed at around 31% in 2013. This means your US Federal income tax will be about $62,644 (($300,000 – $97,600) x .31) = $62,644 for an effective rate of about 20%.

If a husband and wife are both working in that business with a net of $300,000, the FEIE amount becomes $195,200, and the balance is taxed at approximately 29%, for a total tax of $30,392. Therefore, at this income level it will be more efficient for a single person to operate in Puerto Rico and a married couple to be based offshore (($300,000 – $195,200) x .29) = $30,392 or about 10%.

When you combine these business tax incentives with the personal tax benefits of zero capital gains, you have a very strong contender in Puerto Rico. It is a deal that no country in the world can offer a US citizen.

So, why is Puerto Rico doing this? This island territory is in its 8^thyear of recession and is desperate to attract some wealth and prosperity. 4% tax on business profits is better than no business and no tax revenues.

How bad is the economy? Puerto Rican bonds are sold in the US with yield above 10%, which is extremely high. So high that Puerto Rico was forced to cut its offering this week the island’s Government Development Bank announced it would cut bond sales to between $500 million and $1.2 billion for the rest of the year. This yield compares to California municipal bonds at a current high of 3.13%, up from 2.17% at the end of 2012.

As the territory struggles with $70 billion in public debt and a 13.9% unemployment rate, higher than any U.S. state, it is searching for new ways to bring in capital, employment and investment. The government hopes to cut its $820 million budget deficit in half by 2015.

But, there is hope for Puerto Rico. While the US is completely out of control, Puerto Rico’s deficit has been reduced from $2.4 billion over the last couple of years. The island’s five-year economic plan calls for creating more than 90,000 jobs that would add as much as $7 billion to the economy by 2016, and another 130,000 jobs and as much as $12 billion of growth by 2018.

While these tough economic times might prevent a firm from building a large factory, or committing millions to the Island, they should not deter a high net-worth investor and business owner from picking up and moving. These tax incentives are guaranteed by the government until 2036 and can’t be withdrawn or amended. Even a law change would have no affect because your earnings are not locked in to the corporation, as they are with retained earnings in excess of the FEIE.

For more information, here are some links to other sites.

Links to Outside Resources

If you are considering moving your business to Puerto Rico or abroad, please contact me for a confidential consultation. You can reach me directly at info@premieroffshore.com or (619) 483-1708.

Plant that First Flag Offshore

10/10/2013/0 Comments/in Asset Protection, Offshore Banking, Offshore Company/by Christian Reeves

As America hurdles towards default, more of us are considering diversifying out of the United States and planting the first flag offshore. While there may be some last minute backroom deal to stave off disaster, many of us have lost confidence in a system out of control.

If this resonates with you, I suggest you plant that first flag offshore. Create a safety net and a conduit to move assets abroad before these avenues are blocked.

For example, most experts agree that it will soon become impossible to invest or move your retirement account offshore. In order to take control over your IRA, you must form an offshore IRA LLC and invest your retirement in to that structure. These LLCs have been around for 20+ years, but their demise is eminent as the US government attempts to gain control over its citizen’s savings and assets.

Another example is the much maligned Foreign Account Tax Compliance Act (FATCA) legislation. This law basically requires all banks around the world to report to the IRS. It doesn’t matter if that institution has a branch in the US or any ties whatsoever to America. So long as it accepts US clients, it must report to the IRS. Failure to comply will result in fines, penalties, closing of correspondent accounts, the inability to transact in US dollars, and basically, making it impossible to do any business at all.

As a result, many banks have closed their doors to Americans. Those who still accept us have had to put in place special data gathering, reporting, and investigating processes that have cost even the smallest of banks millions of dollars. These costs are being passed on to account holders in the form of new application and monthly fees…which only apply to accounts with American signors.

FATCA doesn’t come in to full effect until July 1, 2014, so plant that first flag offshore as soon as possible.

What form might that first flag take? Here are a few options with links to find out more about each.

Offshore Retirement Accounts

You can take control over your retirement account, move it in to an offshore IRA LLC, open offshore bank and brokerage accounts, and get your savings out of the US. You can move some or all of your retirement assets from a prior employer. You can leave some with your current provider and transfer the balance to your LLC.

For an introduction, see my article on Offshore IRA LLCs.
For a different take, see my article on Making Your IRA Confiscation Proof.
For the tax benefits of taking your account offshore, see Tax Benefits (about half way down, in the section titled Take Your Retirement Account Offshore).

Offshore Corporation

You can form an offshore corporation, open a foreign bank account, and fund that structure with as much or as little as you like (depending on the bank selected). This will plant a flag, open a conduit to an offshore bank, and create a layer of asset protection not available in the United States. Should trouble arise, or you simply wish to diversify or move abroad, you are ready to go.

The basics can be found in my article titled Offshore Corporations.
For information on tax saving opportunities, see Eliminate US Tax in 5 Steps.
Worried about getting scammed or in to trouble with an offshore structure? Checkout my article Offshore Asset Protection Scams and How to Avoid Them.

Invest in Foreign Real Estate

Want to get money out of the US and in to an appreciating asset that can’t be seized by Uncle Sam? Consider investing in foreign real estate. While I recommend Belize, Panama and Colombia as great growth markets that are sufficiently developed and therefore relatively safe, just about anywhere in the world will provide some level of protection.

There are only three exceptions to this rule. The US has IRS levy agreements with Canada, France and the UK that allow the government to grab and sell real estate in these three countries. No court action is required and no extra protections are provided. Real estate in Canada, France and the UK is just as vulnerable to attack as property in the United States of America.

For the benefits of investing in offshore real estate, please read US Tax Breaks for Offshore Real Estate.
For information on Panama, checkout Is Panama the Next Singapore?
For information on Belize, checkout our Escape Artist portal.

I hope you have found these articles and reports helpful. Please contact me at info@premieroffshore.com or (619) 483-1708 for a confidential consultation on planting your first flag offshore.

Is Your IRA Confiscation Proof?

10/10/2013/0 Comments/in Asset Protection, Offshore IRA/by Christian Reeves

Are you thinking of using your IRA to invest abroad? Do you want to move your retirement account out of the United States? There are two very different ways to accomplish these goals. First, you can use a simple self-directed IRA and allow your custodian to make whatever investments you need. Second, you can take control over your account by forming an offshore IRA LLC.

With a self-directed IRA, you can direct the custodian where to invest your money, but you don’t control the transaction. If your custodian is experienced in offshore deals, he will probably do as instructed. If he is not comfortable with a situation, then he can refuse to make the transfer.

With an offshore IRA LLC, you have complete control over your retirement account. Your custodian makes only one transfer…in to your offshore IRA LLC. From there, you are responsible for all transactions.

If your objective is to make a variety of investments, hold property in an offshore LLC, and gain complete control over your retirement account, then you need an offshore IRA LLC.

If you are making one investment, especially in to foreign real estate, then you might be satisfied with a self-directed IRA.

For small retirement accounts, or those with very few investments, the costs of an IRA LLC might outweigh the benefits. For example, a $40,000 account might be sufficient to buy in to a development in Belize, but you may not be willing to pay $3,000 to fully structure the transaction. Therefore, economics can dictate the investment be made in a self-directed IRA without the benefit of an LLC.

If your IRA is $150,000, you wish to purchase properties in various countries and invest the balance in stocks and bonds through an offshore brokerage, then an offshore IRA LLC is required. It is unlikely that a self-directed custodian will agree to handle multiple complex transactions, and he certainly will not allow you to trade your own funds in an offshore brokerage.

In other words, a self-directed IRA custodian will need to handle each and every trade, investment, and transaction, and he will charge you for each. If you have an active investment account, these fees will probably eat you out of house and home right quick.

By utilizing an offshore IRA LLC, you eliminate these transaction costs. The custodian makes only one investment – in to your IRA LLC.

The offshore IRA LLC also gives you complete control over your investments. If you are concerned with the US government taking over your retirement account, then you need an offshore IRA LLC.

There is approximately $18 trillion in US retirement accounts and the national debt is nearly $17 trillion and rising. Food for thought…

When you make an investment using a self-directed account, it is the custodian who is making that acquisition on behalf of your retirement account. If an order comes through demanding the funds be returned to the US for any reason, then your custodian will be forced to liquidate the investments for whatever he can get and pay over to Uncle Sam. As the signor on all accounts and investments, he will have the authority and ability to comply with such an order.

As I said above, if you have an offshore IRA LLC, the custodian invests in to that entity and you take it from there. This means that all investments and accounts are held in the name of your LLC and you are the only signor on these accounts and transactions. The custodian can request that you return the assets to his control, but it would be impossible for him to compel you to do so.

To put it another way, it would be impossible for the Custodian to go in to court in Belize and gain access to your bank or brokerage accounts there because he is not a signor to the accounts and has no power over them. He would have no standing or right to sue you or your LLC in a foreign country as his authority is limited to US retirement accounts and transactions where he is a signor.

This protection only applies to offshore IRA LLCs. If you are using a US LLC, rather than an offshore IRA LLC, and hold accounts the US, then the US government can simply issue a levy. The same is true of accounts and assets held in Canada, France and the UK. For more information on government takings, see: Can the Government Seize My IRA?

The above example is carrying things to the extreme and assumes you are willing to ignore the demand of the custodian to return your funds to his control. A more practical benefit of the offshore IRA LLC is that it creates a level of impossibility or impracticability in forcing the return of IRA assets. The US government, in its infinite wisdom, may decide to grandfather in these offshore IRA LLCs and block all future formations.

In fact, most experts, providers and IRA custodians agree on only one thing: that the offshore IRA LLC is not long for this world. This structure gives the average person to much control over his or her (possibly only) significant asset and allows them to move it out of the reach of Uncle Sam much too easily. If and when the US government decides to come after retirement accounts, their first attack will be against the offshore IRA LLC.

When this happens, those who have formed and funded their offshore structures will likely be left alone. The stigma and difficulty of going after a number of retirees will generate way to much fear and bad press. Can you imagine trying to criminalize and force the sale of foreign real estate? That would be very ugly.

Far more likely is that existing offshore IRA LLCs will be left alone and grandfathered in to a new law or rule. Forming and funding new offshore IRA LLCs will become an impermissible distribution that is taxable and a penalty will be imposed. Such a change would probably not even rate a blip on the national news cycle.

And this can be accomplished with a very simple change: investing in a single member entity / LLC can be added to the list of impermissible transactions (collectables, life insurance, businesses of which you own more than 50% or are a highly paid employee, etc.). Alternatively, managing an offshore IRA LLC can be deemed to be operating a business, and you own 100% of that business, so it is improper. Either way, future transfers to offshore IRA LLCs can be eliminated with the stroke of a pen, no act of congress, vote, or other law need be passed.

Therefore, the best and only way to ensure you are allowed to control your own finances, and make your retirement account confiscation proof, is to place it in to an offshore IRA LLC and invest outside of the United States before the tides change. By holding accounts at banks that have no branches in the US, in physical gold, foreign real estate, and in other assets not easily seized, you have the best protection available.

If you found this information helpful, I suggest you also read my article on Self Directed and Offshore IRAs. This is more detailed and focused on the legal requirements of these structures.

If you have any questions, please contact me at info@premieroffshore.com or at (619) 483-1708 for a confidential consultation.

Solo 401k Retirement Plans for Expats

10/07/2013/0 Comments/in Offshore IRA/by Christian Reeves

I am often asked if an Expat can invest in a retirement plan. The simple answer is yes, there are retirement plans for Expats. Yes, if you are living and working offshore, you can use a retirement plan to reduce your taxes. Yes, the Expat can use a Solo 401k plan to save on taxes!

The US government treats all of its citizens the same. It doesn’t matter whether you are living in Panama City, Florida, or Panama City, Panama. So long as you carry a US passport, Uncle Sam wants his cut. Because you are taxed the same, Expats have access to all of the same deductions and tax savings plans as do people living in the US.

If you are living and working abroad, your first line of defense against the US tax man is the Foreign Earned Income Exclusion. With the FEIE, you can exclude up to $97,600 in 2013 of salary or business income from Federal income tax. This is the major tax advantage of living offshore…and the platform on which all other benefits, such as operating your business through an offshore corporation, are founded.

That is to say, if you are self-employed, or running a small business, and you qualify for the Foreign Earned Income Exclusion, you should be utilizing a foreign corporation. I have covered how to do this in great detail in various postings, so I won’t belabor the point here. For more information, see: Eliminate US Tax in 5 Steps with an Offshore Corporation.

Well, what can you do if your business has net profits in excess of FEIE, which is $97,600 (single) or $195,200 if a husband and wife are both working in the business? You can elect to retain the balance in to your corporation and defer US tax until you take it out. Though, you will pay US tax on all capital gains and interest income earned on those retained earnings.

A better solution might be to place that money in a US qualified retirement plan. When you put money in a retirement plan, you get the same benefits as someone working in the good old U.S. of A. You can select a traditional plan and take a tax deduction when you pay in, or setup a ROTH and pay no tax when you take the money is distributed to you.

Note: The Expat also gets to take a standard deduction, or all of the same itemized deductions as someone living in the US…including mortgage interest. You should only consider a retirement plan if your net income exceeds the FEIE and your allowed deductions. For example, it is unlikely that a retirement plan will be worthwhile for someone netting $110,000 from his or her business.

The best retirement plan vehicle for most self-employed Expats is the Solo 401(k). Qualified Expat small business owners can contribute much more on an annual basis than you can to a typical Individual Retirement Accounts, and even than to other small business plans such as the Simplified Employee Pension Individual Retirement Accounts. Also, with a Solo 401(k) you also have the option of making either tax-deferred (traditional) or tax-exempt (Roth) contributions.

For the high net worth individual, who wants to put away more than, say $50,000 per year, a defined benefit plan may be required.

For the very sophisticated entrepreneur, with up to $1.2 million to in excess profits, an offshore captive insurance company might be in order.

Solo 401(k) Retirement Plans for Expats

Your offshore corporation can establish a Solo 401(k) plan, provided that the only eligible plan participants are you (the business owner) and your U.S. spouse (if you have one). Generally this means you won’t be able to set up a Solo 401(k) if you have other U.S. employees. If you have US employees, you might consider segmenting them in to their own entity or converting them to independent contractors.

If those employees are offshore, converting them to independent contractors means you will need to provide IBCs for them so they are not caught in the web of paying self-employment tax.

Remember that this article is for the entrepreneur who is living and working abroad, qualifies for the Foreign Earned Income Exclusion, and is operating through an offshore IBC. As such, you have a lot more flexibility than someone living and working in the United States.

Contributing to a Solo 401(k) Plan

Similar to other 401(k) plans, Solo 401(k) plans allow contributions in the following ways:

An employee contribution of up to $17,500 if younger than age 50, or $23,000 if age 50 or above in 2013
An employer (or profit-sharing) contribution of:
1. Up to 25% of net adjusted business profits for those not required to pay self-employment tax
2. Up to 20% of net adjusted business profits for those who are required to pay self-employment tax

As an expat entrepreneurs, your salary is designated as the profit-sharing contribution. The maximum annual total limit for both types of contributions is $51,000, or $56,500 if age 50 or over for tax year 2013.

U.S. Tax Implications

Pretax option: Qualified contributions (employee and profit sharing) can be deducted from U.S. taxable earned income at the time of contribution. These contributions then grow on a tax-deferred basis until you begin to withdraw them after age 59½, at which time they will be taxed as ordinary income at your future U.S. marginal tax rate.

After-tax (Roth) option: If your 401(k) plan documents allow it, the employee contribution portion can also be made on an after-tax (nondeductible) basis, and contributed to a separate Roth 401(k) account that will growth free of U.S. tax. (Note that profit-sharing or employer contributions, which are not mandatory, cannot be made to Roth options at this time.)

Whether it’s better for you to make pretax or Roth contributions to a 401(k) plan will depend on your personal situation. If your taxable AGI will increase in future years, then you want to focus on Roth contributions. If your effective tax rate will decrease in the future (after retirement), then you want to focus on traditional plans.

Yes, it is possible for the Expat’s effective tax rate to increase after retirement. If most of your income was excluded by the FEIE, your effective rate might be near zero. After retirement, you might begin selling stocks, taking distributions, etc., all of which is taxable in the US. Therefore, an Expat’s effective tax rate will often rise after retirement.

Special Consideration for Expats: Unexcluded Earned Income Requirement

Note that your Solo 401(k) contribution must be made with unexcluded earned income (such as wages or self-employment income). If you either have no earned income or if you’re excluding all earned income from U.S. tax using the Foreign Earned Income Exclusion, you cannot contribute to a Solo 401(k).

This is one of the reasons I stated above that you should only consider a retirement plan if your income exceeds the Foreign Earned Income Exclusion. Another is that it makes no sense to lock money in to a retirement account if you can take it as salary tax free.

If you’re currently excluding all of your earned income using FEIE, but you could receive similar benefits by using the Foreign Tax Credit, rather than the FEIE, it could make sense to revoke using FEIE in order to contribute to a Solo 401(k) plan. In other words, if you pay a lot of local tax on your salary in the country you live, you may find that switching to using the foreign tax credit won’t leave you worse off in terms of U.S. tax and will allow you to invest in a Solo 401(k).

Note: If you make this switch and then change your mind within five years, you’ll need to apply for IRS approval to resume using FEIE by requesting a ruling from the IRS.

Summary

Solo 401(k)s can be a great way for a U.S. expat with an income from an offshore corporation of $200,000+ per person (husband and wife) to save money each year in a U.S. tax-advantaged account without locking that money in to their corporation as retained earnings.

Remember that retained earnings in an offshore corporation are usually distributed out as a non-qualified dividends. This means that these distributions will be taxed as ordinary income. You may be able to defer US tax for many years, but once you take out these profits, the tax hit will be significant.

I also note that passive income made by your offshore corporation will likely be taxable as earned. While a retirement account allows you to defer such tax, or pay zero capital gains (Roth), an offshore corporation usually has no such preferred tax status.

As you can see, there are a number of issues to consider when creating a retirement account and an offshore tax and business structure. If you are thinking about moving you and your business offshore, contact me at info@premieroffshore.com for a free confidential consultation. I will be happy to work with you to develop a plan that will reduce your worldwide tax burden.

Helpful Links:

IRS Publication 560, “Retirement Plans for Small Businesses”
http://www.irs.gov/publications/p560/index.html
IRS Publication 4222, “401(k) Plans for Small Businesses”
http://www.irs.gov/pub/irs-pdf/p4222.pdf
One Participant 401(k) Plans
http://www.irs.gov/retirement/article/0,,id=238750,00.html

Move to Puerto Rico and Pay Zero Capital Gains Tax

10/05/2013/0 Comments/in International Business, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

Are you tired of paying in to the Obamanation? Is most of your income from capital gains taxed at 24% plus whatever your State grabs? You can eliminate tax on interest, dividends and capital gains by moving to Puerto Rico…immediately and legally.

This article was published in 2013. For a more up to date post from December of 2015, see Blood in the Streets- the Puerto Rico Tax Deal and Foreign Earned Income Exclusion vs. the PR Tax Deal.
The capital gains benefits of Act 22 described require you to move to Puerto Rico. Act 20 allows you to operate a business with 3 employees from PR and pay only 4% corporate tax.

Those of you who have been following me on Live and Invest Overseas and PremierOffshore.com for a while know I am focused on showing business owners how they can move their operations offshore to eliminate or defer US tax using the Foreign Earned Income Exclusion. While this model works great for the entrepreneur or small business owner, it provides little benefit for retirees or those who make a living trading stocks and investing.

While the US is taxing and redistributing wealth as quick as it can, Puerto Rico has seized upon this opportunity (an Obamatunity if you will) to entice high net worth individuals to move to their happy islands. Puerto Rico has completely eliminated tax on capital gains, interest and dividends. Yes, that’s right, once you become a resident of PR, you can legally pay zero capital gains tax. No more Federal tax, no complex planning, and no fear of the US government finding your offshore account.

I am not talking about only cutting out your State tax…I am saying you can jettison ALL United States tax on interest, dividends, and capital gains. This is possible because Puerto Rico, while a commonwealth of the United States, is treated as separate for tax purposes. By moving to PR, you can opt out of the Federal tax system and in to the PR tax program. This is because, under the Internal Revenue Code (IRC), capital gains are sourced to your place of residence and the IRC has one section detailing Federal law and another specifying laws of the territories.

Retired? Puerto Rico does not tax social security or unemployment income.

I would like to note here that moving to a foreign country with a low capital gains tax rate does not reduce your effective tax rate on passive investments. This can only be accomplished by relocating to a tax friendly US territory. As a US citizen, you are taxed by the US IRC on your worldwide income no matter where you live. When you move abroad, you remain under the jurisdiction of the Federal Government. So, if your country of residence taxes your gains at 5%, and the US at 20%, then you pay 5% to your country and 15% to Uncle Sam for the right to carry his passport. But, when you move to Puerto Rico, you fall under a unique section of the US tax code for the Commonwealth which trumps Federal law. You are opting out of the IRC Federal system and opting in to the IRC commonwealth system.

In other words, once a U.S. citizen becomes a resident of Puerto Rico, any income derived by that person from sources within Puerto Rico is excluded from U.S. Federal income tax, and taxed under the Puerto Rican income tax code. However, any income derived from outside of PR remains taxed under the Federal law.

So, capital assets (such as land, stocks, bonds, etc.) acquired after moving to PR are tax free. As for property acquired prior to becoming a resident, special provisions can result in a 10% long term rate from the day you qualify and a 5% tax rate applies to property acquired prior to becoming a resident and held for at least 10 years thereafter. See details below.

Why is Puerto Rico Doing This?

While I could pontificate on how PR sees the error of our ways and is a bastion of freedom and capitalism, the truth is probably less grandiose. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. Puerto Rico has been battered by several years of recession and its unemployment rate is over 13 percent, well above the national rate, and its economy remains in a funk. Moody’s Investors Services rates the island’s debt one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

I also note that these tax breaks apply only to new residents and not those currently living in Puerto Rico. More specifically, they are available to individuals who have not been residents of Puerto Rico within in the last 15 years and who become residents of Puerto Rico on or before December 31, 2035. As such, PR is obviously attempting to bring in new money to revitalize their fledgling economy.

Qualifications

To qualify, you must become a tax resident of Puerto Rico, reside in PR for at least 183 days a year, and file an application for the exemption with the local tax authority. Once approved, the decree establishes the terms of the exemption and has the effect and force of a contract during the entire benefit period. Considering the weakness of the PR economy, and how frequently tax laws change, this contract status is a major benefit.

Incentives

The tax incentives available to individuals are as follows:

100% tax exemption on interest and dividend income earned after the nonresident individual becomes a resident of Puerto Rico; also applies with respect to alternative minimum tax (AMT) up to tax year 2036
100% tax exemption on interest, financial charges, dividends or distributive share on partnership income from international banking entities in Puerto Rico including AMT
100% tax exemption on long-term capital gains realized and recognized after becoming a resident of Puerto Rico but before January 1, 2036
If not realized and recognized within the incentive timeframe, regular individual long-term capital gain applies (currently at 10%)
Applies to appreciation of property after becoming a resident of Puerto Rico
5% tax on long-term capital gains realized before becoming a resident of Puerto Rico, but recognized after 10 years of becoming a resident of Puerto Rico, as long as recognized before January 1, 2036
This 5% long-term capital gain tax only applies to the portion of gain that relates to the appreciation of the property while the individual lived outside Puerto Rico
If the long-term capital gain is not recognized within these time periods, applicable individual long-term capital gain rate would apply on any Puerto Rico-source long-term capital gain

Puerto Rico also has great incentives for business owners, based around the tax breaks on dividend payments, which I will detail in a future article. If you are considering living and working abroad, give Puerto Rico a chance. Because of its status as a US territory, these islands can offer tax incentives to US citizens that are not available anywhere else in the world.

US Tax Breaks for Offshore Real Estate

09/19/2013/0 Comments/in Offshore IRA, Taxation/by Christian Reeves

Do you own property outside of the United States? Are you thinking about investing in offshore real estate? Are you an offshore real estate mogul looking to reduce or eliminate your US taxes? This article will cover all areas of US taxation of offshore real estate and provide insider tips and techniques to get your US tax bill under control.

So long as you carry a US passport, the IRS wants you pay tax when you sell offshore real estate. US citizens are taxed on their worldwide income and there are very few offshore tax breaks for capital gains and the passive income. Thus, it doesn’t matter whether you are living in the good ‘ole U S of A or abroad, passive income and capital gains are taxable as earned.

Active investors, real estate professionals, and those who buy in a retirement account are exceptions to the rule.

This means that offshore real estate is taxed the same as domestic real estate (with the exception of depreciation). The same tax rates apply, the same deductions for expenses are allowed, and the same credits are available. I will describe the best of these below.

In most cases, if buy a property in Panama and sell it after 3 years, you have a long term capital gain in the US, and owe tax at 20% to 23.8%. For the rest of this article, I will assume a long term US rate of 20%.

Offshore Real Estate and the Foreign Tax Credit

This doesn’t mean you must pay double tax, first in the country where the property is located and then again in the United States. The IRS allows you to deduct or take a dollar for dollar credit for any taxes paid to a foreign country…for every dollar paid to Panama your US bill should go down by one dollar. In practice, this never works out perfectly, but it does eliminate most double tax.

For example, let’s say you bought a property in Medellin, Colombia in 2005 for $100,000. In 2013, you received an offer you couldn’t refuse for $150,000, giving you a capital gain of $50,000. The capital gains tax rate in Colombia is 33%, so you pay $16,500 to Colombia.

The capital gains rate of Colombia is significantly higher than the United States at 20%, so you should not expect to pay any tax to the US. You will report the sale on Schedule D of your US personal return and deduct or take a credit for the $16,500 paid on Form 1116, leaving nothing for the IRS to leach on to.

Now let’s say you sell a property in Panama, where capital gains are taxed at 10%. In this case, you will pay 10% to Panama ($5,000) and 10% to the United States ($5,000), to get to the US 20% rate for long term capital gains.

If you had this same transaction in Argentina, Ecuador or Costa Rica, where real estate sales are not taxed, you will pay all of the “available” 20% to the United States.

Important Note: When deciding in which country to buy real estate, that country’s capital gains rate only comes in to play if it exceeds the US rate. If a country’s capital gains rate is 0% to 20%, you will pay 20% in total. If a country’s rate is more than 20%, then only the excess should be considered in your decision. For example, you are paying a 13% tax premium to buy property in Colombia because Colombia’s rate is 13% higher than the US’s capital gains rate.

Many clients look at a country like Costa Rica and think they are getting a deal or saving money by paying no capital gains tax when they sell their property. Well, these countries have other taxes and duties to make up for their zero capital gains rate, which might not deductible on your US return. In most cases, you are better off buying property in a country whose system mirrors that of the United States.

Cut Out the Tax Man – Offshore Real Estate in Your IRA

The exception to the rule above is offshore real estate held in an IRA LLC. By purchasing offshore real estate in your retirement account, you can defer or eliminate US tax on both rental profits and capital gains. If the country where your property is located doesn’t tax the sale, then you just might avoid the tax man all together. If the country taxes you at a relatively low rate, such as Panama at 10%, this might be the only tax you pay (ie. the IRA cut your total tax bill by half).

Let me explain: If you move your IRA or other type of retirement account away from your current custodian and in to an Offshore LLC, you can invest that account in foreign real estate. The LLC is owned by your retirement account and holds investments on behalf of that account. You buy the rental property in the name of the LLC, pay operating expenses from the LLC, and profits flow back in to the LLC and in to your retirement account.

I note that this structure is for investment or rental real estate and not property you want to occupy. If you later decide to live in the property, it must first be distributed out of the retirement account to you and taxes paid if applicable.

If you wish to purchase offshore real estate with funds from your IRA and a non-recourse loan, or you are in the active business of real estate, you can add a specially structured offshore corporation to eliminate US tax.

If you buy real estate with an IRA in the United States, you get the joy of paying tax on the gain attributed to the money you borrow (the mortgage). If 50% of the purchase price comes from your 401-K and 50% from a loan, half of the rental profits and half of the gain is taxable, with the other half flowing in to your retirement account.

Take this same transaction offshore and no US tax is due. Tax free leverage in a retirement account is one of the great offshore loopholes. Please check out this article for more information.

Offshore Real Estate and Depreciation

Owners of rental real estate in the United States get to utilize accelerated depreciation and deduct the value of the property over 27.5 years. If the property is offshore, you must use straight-line depreciation over 40 years and you get less bang for your depreciation buck.

On a $100,000 rental property, your annual depreciation deduction would be about $3,636 for US situated property vs. $2,500 if located outside the country. This means you would be paying a premium of $1,136 offshore real estate.

Don’t get to excited and cancel your offshore real estate deals just yet! The benefit of depreciation can be fool’s gold. The accelerated depreciation is great if you plan to hold the property for 20 years. However, if you plan on buying, improving and selling over a short period (a few years), then accelerated depreciation will cost you money, not save you money.

This is because depreciation is “recaptured” when you sell the property. Every dollar you were allowed to deduct over the years prior must be paid back, is added to your basis, and taxed at 25% rather than 20%. So, as a rough example, if you have a gain of $50,000, and took depreciation of $20,000, you owe tax at 20% of $50,000 for $10,000 plus 25% of $20,000 for $5,000. Therefore, you total tax due is $15,000.

The more depreciation you take, the more you must repay. If you hold a property for many years, taking a deduction today, and paying it back in the distant future, is a benefit. If you will sell the property in 3 or 5 years, taking the deduction now, and paying an additional 5% in tax later, is of little to no benefit.

I have had several clients over the years shocked at the size of their tax bills from the sale of a rental property. They had planned for a 15% rate (the previous long term rate), and ended up at 20% + recapture. In States like California, where values property values have gone down, it is possible to sell a rental at a loss and still have a big time tax bill from recapture.

This might lead some to think a good strategy is to not take depreciation, especially on property you plan to flip ASAP. Well, the IRS has a surprise for you: The tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)). This means you will pay tax on depreciation whether you take it or not.

All of this is to say that not being allowed accelerated depreciation on offshore real estate might be a good thing.

$250,000 / $500,000 Exclusion and Offshore Real Estate

As I said to begin this article, all of the same US tax rules apply to offshore real estate that apply to onshore properties. This holds true for the primary residence exclusion: If you qualify, you can exclude up to $250,000 single or $500,000 married filing joint, from the sale of your primary residence.

To qualify, you must own and occupy the home as your principal residence for at least two years before you sell it. Your “home” can be a house, apartment, condominium, stock-cooperative, or mobile home fixed to land anywhere in the world.

Tax Tip: You can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years.

Have you owned and been renting out a property in Panama for a few years? You might consider kicking out those renters, moving to Panama, and occupying the property for two years before you sell.

Did you convert a home from your primary residence to a rental property? The rule is that you must have lived in the property for 2 of the last 5 years to qualify for the exclusion. Therefore, you can live in it for two years, rent it out for up to 3 years, and then sell and get the full exclusion.

To get the $500,000 exclusion, both a husband and wife must live in the home as their primary residence. It is possible for one spouse to qualify while the other does not. For example, husband is living in the United States and visiting his wife and family in Panama. On a joint return, only the wife may take the exclusion for $250,000 when they sell the home in Panama.

You don’t need to spend every minute in your home for it to be your principal residence. Short absences are permitted—for example, you can take a two month vacation and count that time as use. However, long absences are not permitted. For example, a professor who is away from home for a whole year while on sabbatical cannot count that year as use for purposes of the exclusion.

You can only have one principal residence at a time. If you have a home in California and a condo in Panama, the property you use the majority of the time during the year will be your principal residence for that year. So, it would be possible for Panama to be your primary resident for one year and California to be your primary residence the next. Before you sell, make sure you have spent at least 2 of the last 5 years in the property.

Like-Kind / 1031 Exchange with Foreign Property

Because you get the “benefit” of all US tax rules when it comes to offshore real estate, you can use like-kind exchanges (also called a Section 1031 exchange) to defer US tax. The only caveat is that you can’t exchange US property for foreign property – it must be a foreign property for foreign property transfer.

In a like-kind exchange, you defer paying taxes by swapping your property for a similar property owned by someone else. The property you receive is treated as if it were a continuation of the property you gave up. The benefit is that you defer paying taxes on any profit you would have received.

You may only exchange property for other similar property, called like-kind property by the IRS. Like-kind properties must have the same nature or character, even if they differ in grade or quality. All real estate owned for investment or business use in the United States is considered to be like kind with all other such real estate in the United States, no matter the type or location. For example, an apartment building in New York is like kind to an office building in California.

All real estate owned for investment or business use outside of the United States is considered to be like kind with all other such real estate outside of the United States. Therefore, you can exchange an office building in Panama City, Panama for an apartment building in Medellin, Colombia. You may not exchange a property in Panama with a property in New York.

In practice, it’s rare for two people to want to swap their properties with each other…especially offshore, where only US persons benefit from this loophole. Instead, one of the owners usually wants cash and the other (the gringo) wants to avoid tax on his gain. In this case, you can still qualify for a like-kind exchange by adding a licensed third party specialist to the deal, called a qualified intermediary or QI.

Let’s say your property in Panama is worth $300,000, and you have a capital gain of $100,000. You can defer paying tax on this sale if you can find someone in Colombia who wants to swap. Of course, no Colombian wants any part of a US 1031 exchange because they get no benefit…only an American living in Medellin would find the tax deal interesting. So, after you identify the property you want in Colombia, you need to hire a QI.

Essentially, the QI buys the property in Colombia and then enters in to a like-kind exchange with you. So long as you can identify the replacement property within 45 days after you sell the Panama property, and your replacement property purchase is completed within 180 days, you have a qualified 1031 exchange. Because of these time limits, it’s a good idea to have a replacement property lined up before you sell your property.

You should also note that this tax strategy is only advantageous in countries with low capital gains rates. If the country has a tax rate equal to or higher than the US, there is no reason to enter in to an exchange. It will not reduce your tax in the country where the property is located, only in the United States. If the Foreign Tax Credit will eliminate your US tax obligation, then an exchange is pointless.

By swapping a property in Panama with a property in Colombia, you are deferring US tax on 10% of the gain. This is because you pay 10% to Panama and nothing at this time to the United States. When you sell the property in Colombia, there is no reason to enter in to a like-kind exchange – unless you want to defer the gain from Panama a second time. The tax rate in Colombia is higher than in the United States, so no tax will be due to Uncle Sam on the gain from that property.

Let’s say you had a gain of $100,000 on the property you sold in Panama in 2011 and you will have another gain of $50,000 when you sell the property in Colombia in 2016 (very good for you by the way).

When you sold the property in Panama, you paid 10% to Panama and transferred the gain to the property in Colombia for US tax purposes.

When you sell the property in Colombia in 2016, you will pay 33% on the $50,000 to Colombia, leaving nothing for the US on this portion of the transaction.

You will also recognize the deferred capital gain on $100,000 from the Panama property. You already paid 10% to Panama, so you will pay 10% ($10,000) to the US in 2016 from the sale of the Panama property in 2011.

All of this planning and structuring allowed you to defer a 10% US capital gain for 5 years.

Combo Deal: Yes, you can combine a 1031 exchange with the $250,000 primary residence exclusion. To qualify for both, you must hold the property for more than five years and live in it for at least two of those five years. Then, you can use the exclusion to reduce or eliminate the capital gains, including tax carry-over from a like-kind exchange.

Offshore Rental Properties

Rental income and expense from offshore real estate is reported on your personal return, Schedule E, just as a US rental property would be. You must keep US quality books and records, including all expenses from management, improvements, repairs, and taxes paid. You must follow all US tax rules for these deductions and expenses, such as depreciating improvements and deducting repairs.

The IRS has a right to audit you offshore real estate, so be ready. It may be common to pay your bills in cash in Colombia, but you will have a tough time deducting any expenses without a receipt and proof of payment (such as a cancelled check).

An area of emphasis in an audit of offshore real estate is travel and other expenses associated with visiting the property. If you are flying to Panama five times a year, hanging out for a week, and then expensing these trips against your one rental unit on Schedule E, the deduction will not survive an audit. In fact, it is likely to be the cause of an IRS investigation.

I generally advise clients that they may visit their rental properties once a year for a couple of days. If they have no other business abroad, and are not using the getaway as a vacation, the entire trip may be deductible. If you have a large portfolio abroad, then you might get away with spending more time traveling, but one trip per year is a safe deduction.

When reporting your rental property, remember to take depreciation. As stated above, the only difference in offshore real estate is the allowed depreciation method. You must utilize straight-line depreciation over 40 years.

US Tax Filing Obligations for Offshore Real Estate

Your offshore real estate comes with a number of new and exciting US tax forms to file. It is important you master these forms or hire someone experienced in there preparation. Failure to file, or filing late, can result in outrageously high penalties.

These draconian penalties are aimed at Americans hiding money offshore. Unfortunately, regular folks, with simple offshore investments, often get caught in the crossfire.

The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

For example, if you opened an offshore bank account to receive rent payments, and that account has more than $10,000 in it on any given day, then you must file an FBAR. If you send the funds to buy the property in to your offshore account, and then on to escrow, you must file this form. If you wired money from your US bank account directly in to escrow (which is a bank account you do not control), then the FBAR is not required.

The law imposes a civil penalty for failing to disclosing an offshore bank account of up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.

In addition to filing the FBAR, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

Other international tax filing obligations for offshore real estate include:

If your property is held in a foreign corporation, you must file Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

If you hold your offshore real estate in a foreign LLC, you may need to file Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.

If your property is held in an international trust, a Panamanian foundation, or a Mexican Fideicomiso, you may need to file Form 3520-A – Annual Information Return of Foreign Trust and possibly Form 3520 – Annual Return to Report Transactions With Foreign Trusts.

If your foreign assets are significant, you must file Form 8938 – Statement of Foreign Financial Assets was new for tax year 2011. The filing requirements (who must file) for this form are too complex to list here, so please see the instructions before filing.

The Offshore Real Estate Professional

If you are living and working abroad and in the business of real estate, you can realize some great tax benefits. The following section is for those who spend a significant amount of time and effort working their offshore properties, and not those with only one or two apartment units.

The typical investor in offshore real estate may only deduct his losses against other passive income. If you do not have any other passive income, losses are carried forward until you can use them.

An exception to this rule applies to a) active participants and b) material participants in the management of offshore real estate.

As an active participant in offshore real estate, you can deduct up to $25,000 of passive losses against other income (like wages, self-employment, interest, and dividends) on your US tax return. This allowance is phased out on a 50% ratio if your adjusted gross income is $100,000 or more.

As an active participant, you must share in the management, financial and operational decisions of the property and be knowledgeable in the day to day issues (usually by reviewing financial statements and other documents produced by the manager). This means you should be responsible for arranging for others to provide services like repairs, collect rents, etc. You may have a paid manager for the property and still be considered an active participant, so long as you manage that manager.

Besides the need to qualify as an active participant you must also meet these additional requirements:

You must own more than 10% of the property.

You cannot be a limited partner…you must be a general partner.

You must be an active participant in the year of the loss and the year that the loss is deducted. For example, if you are a passive investor in 2012, and active in 2013, you can’t deduct a loss from 2012 on your 2012 or 2013 return (because the 2012 loss was carried forward).

If you are a material participant in offshore real estate, you are much more involved and in control than an active participant. As a material participant (sometimes referred to as a real estate professional), you are in the active business of real estate and may deduct your expenses against any and all of your other income, without limitation or AGI phase-out.

It is relatively easy to qualify as an active participant. It is far more challenging to be classified as a material participant in offshore real estate. If you can meet the criterion, you will find that there are major international tax breaks and loopholes available to the real estate professional.

NOTE: The major benefit of being offshore and material participant / real estate professional is that you may draw a salary from an offshore corporation and qualify for the Foreign Earned Income Exclusion. This tax break is only available to offshore professionals and not those living or working in the United States.

To be classified as a material participant or real estate professional you must be active year-round in the operation of your offshore real estate business. You must work on a regular, continuous, and substantial basis, and offshore real estate should be your primary occupation. If you work a full time job and do real estate on the side, you are probably not a real estate professional.

According to the IRS, you materially participate in offshore real estate:

If (based on all of the facts and circumstances) you participate in the activity on a regular, continuous, and substantial basis during the year; or

If you participate in the activity for more than 500 hours during the year.

To meet the facts and circumstances test, offshore real estate should be your principal trade or business and you must have significant knowledge and expertise in that industry.

You can prove your level of involvement to meet the 500 hour test by any reasonable means. This includes calendars, appointment books, or narrative summaries identifying work performed and hours spent. Contemporaneous daily time reports or logs aren’t required but it is your responsibility to prove you meet the test, so any evidence you can muster will be a benefit. This is to say that the burden of proof is on you to demonstrate you qualify as a real estate professional.

In order to materially participate in offshore real estate, you should be living and working abroad. It would be near impossible to qualify as materially involved in properties in Colombia while living Texas. Therefore, you should also plan to qualify for the Foreign Earned Income Exclusion (FEIE). When the FEIE is combined with an eligible offshore real estate business, you can take out up to $97,600 in salary from that enterprise free of Federal income tax and make use of a number of other tax mitigation strategies.

In other words, a qualified offshore real estate professional can deduct his or her expenses against all other income, regardless of source and without limitation based on his or her AGI, and draw out up to $97,600 in profits free of Federal income tax. If a husband and wife both qualify as material participants and for the FEIE, they can each take out a salary of $97,600, for a total of $195,200 of tax free money.

To qualify for the FEIE, you must be out of the US for 330 out of 365 days or a resident of another country. If you are a resident of another country, preferably where your properties are located, then you can spend up to 4 months in the US each year.

The 330 day test is quite simple: you are either out of the US or you are not. The 365 days need not be in a calendar year (for example, May 2013 to May 2014 is fine) and there is no requirement to file for residency or spend a certain amount of time in particular country.

The residency test is more challenging. You must be a resident for a calendar year and move to a particular country with the intention of making that your home for the foreseeable future. You must submit a residency application to that country, file taxes, and generally become a member of the community.

The 330 day test is based on travel days and the residency test involves your intentions to move to a particular country and make that your home. It is always easier to prove how many days you are in the US. To put it another way, it can be a challenge to prove your “intent,” especially if your needs or intent changes after only a year or two.

For this reason, I suggest you qualify under the 330 day test in your first year abroad and then move to the residency test. This is the safest way to deal with the possibility of changes in circumstances.

If your offshore real estate business is focused in one country, you can obtain residency in that nation after a year and utilize the residency test to qualify for the FEIE. Utilizing the residency test in the long run is the best way to ensure you receive the benefits of the FEIE while being classified as a real estate professional.

If your offshore real estate business spans many countries, and you are on the road several months of the year, then you may need to utilize the 330 day test in year two and beyond. You may not be able to put down roots in one country, or you might not want to become a tax resident of any nation. In this case, you will need to watch your travel days to and from the US closely. If you miss the 330 days, even by one day, you lose the FEIE in its entirety and pay US tax on 100% of your salary.

If you qualify for the FEIE, you must operate your offshore real estate business through a foreign corporation. In order to minimize worldwide tax, you might consider a holding company in a jurisdiction that will not tax your income and subsidiaries in each country you do business to transact on behalf of your properties.

Whatever your structure, and wherever you decide to setup shop, you must incorporate outside of the United States. If you decide to skip this step, you will pay US self-employment tax on the salary. Even though you might pay nothing in Federal income tax, you will pay around $15,000 per person in SE tax. US SE tax is eliminated completely by the use of a properly structured foreign corporation.

The FEIE allows you to take out up to $195,200 (joint) free of Federal income tax, and a foreign corporation eradicates US SE tax. What if your profits are significantly more than $195,200? You can retain earnings in to your foreign corporation to be taken out as salary subject to the FEIE in future years or as dividends whenever you choose. Withdraws that qualify as salary under the FEIE, are taken out tax free. If they come out as dividends, they are tax deferred for as long as you see fit to maintain the corporation…which can be decades, even if the business has long since been shuttered.

If you are able to combine material participation / active business status with the Foreign Earned Income Exclusion, and do so through a foreign corporation, you might just operate your offshore real estate business free of any and all US tax and keep Uncle Sam out of your pocket entirely. But, this is a major endeavor and one you should not take lightly.

You must be ready to defend your position in an audit and keep US quality books and records to support both positions. To succeed in an audit of your active business status, keep extensive files, to-do lists, home and mobile phone records, business plans, project descriptions and instructions to employees documenting your active involvement in day-to-day activities of the business.

In order to prove your FEIE, keep track of travel to and from the United States and have your credit card and other records available to support you claims of days out of the country. If you will use the residency test, file for residency and, if possible, a work permit. Also, file a tax return in your country of residence and put down as many roots in to that community as possible. You may be able to structure your affairs in such a way as you pay very little in tax to this country, but you should file a return.

Conclusion

The world of offshore real estate investing can be a complex maze of US tax compliance, deductions, credits and exclusions. If you are a professional, or you’re considering starting an offshore real estate business, you will need a solid plan to minimize your worldwide tax obligations. Such a plan must take in to account your US requirements and those of the country(s) where your property is located.

I can assist you by forming basic holding companies for the passive investor, creating a custom plan for the professional, placing your cash and properties behind appropriate barriers for asset protection, and keeping all of these constructs in US tax compliance.

Feel free to phone me at (619) 483-1708 or by email to info@premieroffshore.com with any questions and a confidential consultation.

December 2019 Update – we no longer offer 1031 exchange servies. I am not aware of any global firm that supports these transactions.