Research, News and Legal Services for the Offshore Entrepreneur

Christian Reeves

Foreign Earned Income Exclusion or Puerto Rico Tax Deal?

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In this post, I will consider whether to live abroad and take the foreign earned income exclusion to save on US taxes or to live in the US territory of Puerto Rico. Both Puerto Rico and the foreign earned income exclusion are great tools for reducing your US tax bill. But, which one is right for you?

I should also mention that the foreign earned income exclusion and the tax deals available in Puerto Rico are the best and (basically) the only ways Americans can save on their taxes. Year after year, our tools are taken from us and we end up paying more and more simply because we have a blue passport. 

The foreign earned income exclusion allows you to exclude up to $108,700 in ordinary or business income in 2021. If a husband and wife both work abroad, and both qualify for the exclusion, they can earn a combined $217,400 tax-free. 

Any amount that you earn in excess of the FEIE will be taxable at your ordinary rate. I will assume that to be 30% for ease of calculation. I also note that you are taxed at the highest tax bracket. For example, if you earn $208,700 in 2021, you pay tax on only $100,000 but using the tax brackets as if you had earned the full $208,700. 

I should point out that we expats are no longer able to hold income in excess of the FEIE in our offshore corporations tax-deferred. That benefit went out with the Trump tax cuts and is not coming back. 

Puerto Rico basically has the opposite tax deal compared to the foreign earned income exclusion. You pay ordinary tax to Puerto Rico on your base salary, whatever that is, and then you pay 4% on all income over this amount. 

Most determine their base salary to be $100,000, which is taxed at 30% (again, for ease of calculation). Then, all qualifying business income over this amount is taxed at only 4%.

  • Note that you also pay 0% tax on capital gains on assets purchased after you move to Puerto Rico. This article is focused on business income. 

So, someone earning $100,000 a year would pay zero tax using the foreign earned income exclusion and $30,000 in tax using the Puerto Rico tax deals.

If that same person made $500,000 from a qualifying business, they would pay $120,000 (30% of $400,000) using the foreign earned income exclusion and $46,000 ($30,000 on the first $100,000 and $16,000 on the remaining $400,000) using the Puerto Rico tax deal. As your income goes up, so does the value of Puerto Rico’s tax program.

To qualify for the FEIE, most need to spend 330 days a year outside of the United States, especially during their first year abroad. To qualify for the Puerto Rico tax deal, you need to move to Puerto Rico, make that your home base, and spend at least 183 days a year on the island. 

Many find the Puerto Rico requirements easier to manage. However, in both cases, you need to be willing to move and spend a considerable amount of time in your new home base. The key to success, and being audit-proof, is committing to the expat lifestyle.

Note that the Puerto Rico tax deal does not only eliminate your State tax. It eliminates both your Federal and State tax. While moving from California to Texas has become popular, how about moving to Puerto Rico and going from a 45% rate (CA and Federal) to a 4% rate?

The Puerto Rico tax deal is focused on those who move a business to the island. The purpose of the program is to bring high-net-worth individuals and quality jobs to the territory. In contrast, the FEIE applies to business income as well as a salary you earn from an employer. 

The problem with the FEIE is that you might still get stuck paying 15% self-employment tax. If you operate a business, and file using a Schedule C, you must pay self-employment tax to the IRS. 

You can eliminate this tax by setting up an offshore corporation. Income goes into the foreign corporation and you draw out a salary. This salary will not be subject to self-employment or payroll taxes. 

So, which is right for you? The FEIE or Puerto Rico’s tax deal? In years gone by, this was a challenging question. When we could hold income in excess of the FEIE tax-deferred in an offshore corporation, the calculation was complex.

Today, it’s simple. If you’re single and make $100,000, then it’s the FEIE for you. If you’re married, and both work in the business, then this increases to $200,000 and you should stick with the foreign earned income exclusion.

Because your expenses will be higher in Puerto Rico, there is some room for debate regarding a single person making $200,000. However, if you are making $300,000, then Puerto Rico should be an easy decision.

Likewise, if you expect your business to net $500,000, then why bother with the FEIE? Get yourself to Puerto Rico immediately. If you will have capital gains on assets purchased after the move, Puerto Rico will look even better.

I hope this article comparing the foreign earned income and the Puerto Rico tax deal have been helpful. For assistance setting up an offshore corporation, or with moving to Puerto Rico, please contact me at info@premieroffshore.com.

Christian Reeves

Scams in the Offshore Bank License Market

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I’ve been in the offshore banking industry since 2003 and I’ve never seen the number of scams in the offshore bank license market as I have in 2021. The offshore bank license market is filled with scammers and fraudsters. 

Even respected websites like DealStream have many listings that are scams. Websites like DealStream allow anyone to post an advertisement for a business for sale. Some are paid posts and some are free. While DealStream does a good job evaluating posts, adding “trust badges,” and removing scams, a few still get through. 

For example, this post advertising a Crypto-fiat Bank w/System and License. For a mere 490,000 Euros, you can be the proud owner of a fully operational bank. When I contacted the seller, I got their pitch and was told that I could buy a bank in Canada or Estonia for this amount, my choice! 

More specifically, “Canada or Estonia ready license 50k. An online system with source code 200k. Connection to cards and bank accounts 200k. So total is 450k.” 

Of course, anyone in the know will laugh at this offer. A Canadian bank license would be worth many millions of dollars… and an offshore bank license from Estonia would sell for a million dollars. I also note that Canada does not even offer an “offshore” bank license. 

When I called the seller on this, they said the license is not a bank but a Money Service Business. Quite the bait and switch if you ask me. 

Then there are all the offers for Comoros offshore bank licenses on the web and on DealStream. When I Google “Comoros bank license,” I get page after page of offers to sell an offshore bank license from this esteemed jurisdiction.

So, why is an offshore bank license from Comoros almost always a scam? Even assuming that the offers are legitimate, and they have some backdoor to the government that will give you a license, why should you avoid a Comoros bank license?

It’s simple: an offshore bank license from Comoros is useless. In most cases, the best you can hope for when you buy an offshore bank license from Comoros is a piece of paper saying you’re a bank… Now what?

You’ll need to open correspondent accounts at a bigger bank to be able to operate. Smaller banks need relationships with larger banks before they can hold client money, send and receive wires, or operate in the most basic sense. Without a correspondent bank, your bank in Comoros is useless. 

And when you go to open a US dollar correspondent account at a US bank for your offshore bank licensed in Comoros, they will laugh at you. No sizable or quality bank will open a correspondent account for a bank licensed in Comoros. 

I do see offers where the sellers promise to get you a correspondent account… after you pay them the full amount, of course. These usually turn out to be money service businesses or EMI accounts that won’t operate as real bank accounts. Not to get into the weeds here, but a small bank is useless without a quality correspondent relationship.

I get calls all the time from people that have fallen for the Comoros bank license scam asking for help finding a correspondent bank. I tell them there’s nothing I can do for them. 

My suggestion is to stay away from any company offering offshore bank licenses from Comoros. If they’re willing to sell this piece of useless paper, then what does this say about the rest of their offerings?

EDITOR’S NOTE: DealStream has thousands of quality listings and does a good job ranking posts. This article is merely pointing out a few that are suspicious. 

In my experience, the quality websites marketing or discussing offshore bank licenses are as follows: 

  1. LowTax.net is a great source for news and information about the international banking and offshore corporate industries. The site tends to focus on Europe and is a news site that also allows advertisements. Premier has a few articles on this site from years back. 
  2. KPMG is a world-class accounting firm with great free resources on international banking. Many of their articles are focused on European banks and larger clients.
  3. BankLicense.pro is the best site for information on offshore banking licenses. It focused on the US territory of Puerto Rico and the top Caribbean jurisdictions. 
  4. Price Waterhouse Coopers is a major accounting firm with strong expertise in bank formation and compliance.
  5. Mundo Expert is a site that brings hundreds of experts from different disciplines together to offer their international business and formation services. 
  6. Each government has a website detailing its laws, requirements and listing the valid bank licenses. The top offshore banking government websites are OCIF in Puerto Rico (Spanish only), CIMA in the Cayman Islands, the ECCB for banks in the Eastern Caribbean, such as St. Lucia, and the US Federal Reserve for rules and regulations for Puerto Rico and US correspondent banking providers.

I’ll leave you with this thought on avoiding scams in the offshore bank license market: The very smallest legitimate license will sell for $3 million to $5 million USD. Then you’ll need corporate capital of $2 million to $5 million depending on the jurisdiction. If you’re looking for a low-cost offshore bank license, you’re going to get scammed.

I hope this article on scams in the offshore bank license market has been helpful. For more information on obtaining an offshore banking license, please contact me at info@premieroffshore.com. I will be happy to assist you to set up a new bank or acquire an existing one.

Christian Reeves

Where Should I Hire Offshore Employees

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I’m often asked, where should I hire offshore employees? That amounts to the same question as, where should I set up my offshore business? Where should I set up my outsourcing business that requires a number of employees? When asked where I should hire offshore employees, here’s the trick I’ve learned. 

Step 1 is to use Uber or Didi over a number of days in the city you’re thinking about opening up shop in. Are the rides cheap and are there many cars available? This will almost always tell you whether there are employees available in the city and whether the population is hungry for work. 

For example, in the United States and Puerto Rico, the cost of Uber is very high and the number of drivers has declined significantly during the pandemic. This is because the government is paying their bills and unemployment seems to be an unlimited resource in America. Thus, there is little incentive to work. 

And we see this proven out over several industries. Nearly every restaurant I visit in California is looking for employees. Several had to eliminate lunch service because they simply couldn’t find the workers. 

The same is true of sales, retail, and call center jobs. It’s difficult to fill these positions in the United States. Some drive Uber because they can stop after the maximum allowed income they can earn before reducing their unemployment benefits. But, many will not take a part-time or full-time job until these subsidies end. 

As most of these employees are renters, the fact that many are in rent forbearance in the US means that they have zero incentive to work. I recently stayed at an AirBnB for 30 days. It was a rental and I learned that the person had been in forbearance for over 12 months. They were taking in $3,000 a month in sub rent and paying zero to the building owner.

So, what does this have to do with the question of where should I hire offshore employees? Simple: if the government is subsidizing your target worker, you can’t compete. Laziness and getting something for free will always trump what you’re willing to pay or a fair wage.

Using the Uber test, you’ll find that cities like Tijuana, Mexico, and Santo Domingo, Dominican Republic are excellent for employee-driven businesses. Both of these locations have cost-effective Didi and Uber services and employees are readily available at a reasonable cost. 

Conversely, Cancun, Mexico fails the Uber test. While this is in part due to a lack of workers, it’s also a sign of corruption and other issues beyond the scope of this article. But, suffice it to say, the Uber test shows that Cancun should be avoided.

Step 2 is to look for cities with a number of bilingual call centers. If the city has a few thousand bilingual seats over multiple call centers, you know that you’ll be able to find quality bilingual employees. By offering a little better wage and better working conditions, you will attract more workers than you can use. 

Likewise, if the city does not have many call centers, it’s unlikely that people focus on English as a second language in school. There may be many job seekers, but very few will have the level of English you require. 

The rule of thumb is that the further south you move from the United States, the lower your costs will be but the more difficulties you will have in finding quality English speakers. This proves out true even in massive cities like Mexico City. 

For this reason, one of the best cities in the world to hire offshore employees is Tijuana, Mexico. Costs are a fraction of its neighboring city of San Diego, California where the minimum wage is now $14 per hour and going to $18 in a couple of years. In Tijuana, bilingual call center jobs pay $500 to $1,200 a month, with the average being about $900 per month.

Other benefits include the ability to easily commute to or from San Diego, access to US stores and tech, using US banks to operate, and the possibility of hiring US persons to train or work full time in TJ to support the local staff. None of this is feasible when your city is a flight rather than a 30-minute drive from a major US city.

My second choice for a city based on call center coverage is Santo Domingo, Dominican Republic. Also, Santo Domingo is the first choice for those on the East Coast while Tijuana is more efficient for those on the West Coast. 

There are over 50 call centers in Santo Domingo and the city’s educational system focuses on English. Many younger graduates or college students work in call centers. You’ll also find experienced managers and reasonable access to technology. 

Average call center salaries in the Dominican Republic are about half of those in Tijuana. However, the industry is competitive and you will pay a premium for quality English speakers. 

Note: The salary ranges from the link above include a large percentage of Spanish-only workers.

One interesting benefit of the Dominican Republic is its proximity to the US territory of Puerto Rico. Many American entrepreneurs have moved their businesses to Puerto Rico for tax savings. There are also many international banks opening on the island. These businesses can see significant cost savings by moving some of their services to the neighboring island, the Dominican Republic.

To be clear, I’m not suggesting that these cities are only good for call centers. I’m saying that these cities are the best for all offshore businesses where you require a bilingual workforce. I’m merely using call centers as an indicator of the number of English speakers available.

I hope this article on where should I hire offshore employees has been helpful. I believe the Uber test, along with the call center test, will give you a good indication of a city’s workforce availability and English proficiency. 

If you would like to hire us to set up a business in Tijuana or Santo Domingo, please contact me at info@premieroffshore.com. I will be happy to represent your company in these cities and build out your division or business in an efficient manner.

Christian Reeves

The IRS Targets US Lawyers in Supreme Court

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The IRS is targeting US lawyers in the Supreme Court and it’s going to have major implications for the offshore industry. The IRS has issued a “John Doe” summons to a law firm demanding the names and information on every client that has hired them for offshore tax planning… and the Supreme Court has allowed this summons to stand. 

When you hire a US lawyer to plan your offshore strategy, you expect attorney-client privilege. This right no longer exists for those in the tax planning industry. The US government needs cash and they have destroyed the attorney-client privilege to get it. 

The case started when an international tax client of the Taylor Lohmeyer Law firm in Dallas, Texas was audited. The IRS found that he had cheated on his taxes by saving about $2 million between 1995 and 2017 with international tax planning. The client agreed to pay the tax and penalties and the case was settled.

But that was just the beginning of the trouble for the lawyers who had set up his tax plan. The IRS issued a summons demanding the identity of every person who had hired the firm to structure their international tax plan. The IRS is asking for information on anyone for the firm to open offshore bank accounts, create structures, and/or advise on international tax matters.

The intent of the summons is obvious enough. Give us this information so we can audit all of your clients… putting the lawyers out of business and causing great expense for anyone who hired the firm.

And what of attorney-client privilege? What about the sacred relationship between a lawyer and his or her client? What about the privacy the client reasonably expected when he or she hired the firm? It all means nothing when the government needs cash. 

That is to say, the client’s identity should be privileged because its disclosure would be tantamount to revealing the reason that the client sought legal advice. When that information is given to the IRS, they are certain to begin an audit on these clients, and thus the court has placed a target on each client’s back.

The appellate court rejected this reasoning, ruling that there was no privilege because there was no specific protected communication at issue. Also, the summons merely indicated who hired the firm and for what purpose. The release of this information did not prove intent or illegal activity. 

Of course, the IRS will take this information and use it against the lawyers and the clients. The Supreme Court ruled against the law firm in refusing to hear the case on October 2, 2021, so let the audits begin.

What does this mean for offshore tax planning in 2021 and 2022? I think this will have a chilling effect on using the US council to plan or quarterback international tax strategy. If there is no privilege when you hire a US lawyer, and the IRS can gain access to your file without probable cause, why hire a US lawyer? 

I’ve said for years that US persons should hire a US lawyer to quarterback their international tax plan. A US lawyer will always have a better understanding of US tax laws and planning than a lawyer or advisor abroad. Also, the IRS is the agency all US persons must deal with, so the lawyer leading your team should be an expert in dealing with the Service.

But, if using a US lawyer will result in your being audited, even when you follow every rule and are in compliance, your US council has become the weak link in your chain. Why pay someone $500+ an hour just so they can turn over your files 10 years after the fact? 

And I do mean 10 years after the fact. Most states require lawyers to retain client files for 6 to 10 years, and most firms hold files for 10 years to cover themselves. So, a 10-year summons is likely to net all of your files. 

I can already see the comments on this post: but the IRS can only audit you for 3 years in most situations, and 6 years if a major deficiency is found. So, why did the summons in the above case cover 1995 through 2017? Note that the summons was issued in 2018 and the case has been working its way through the courts since then. 

Because the IRS has a trick for foreign bank accounts and structures. Yes, the IRS typically has 3 years to audit you from the day you file your return. However, if you don’t file the offshore reporting forms, then this statute never starts. 

Let’s say you file your 1040 form and report all of your US-sourced income. But, you don’t report any foreign-sourced income, an offshore company, or your offshore bank account. Well, you failed to file all of your forms and the statute has not started on those items. 

Specifically, let’s say that you didn’t file a foreign corporate return using IRS form 5471, an FBAR reporting your offshore bank account, didn’t check the box on Schedule D, didn’t report your offshore trust on forms 3520, and 3520-A, etc., etc. As these forms were never filed, the audit statute never started and the Service can go back as far as they wish.

But, I’ve gone off course here. My point is that the government’s need to raise money has destroyed attorney-client privilege for US lawyers that practice international tax law. Your US lawyer is now a liability. 

Therefore, I recommend using a non-US tax planning firm that is not a law firm and does not have data retention requirements. It is no longer safe to have a US lawyer quarterback your international tax.

I hope this post on the IRS targeting US lawyers in the Supreme Court has been helpful. For more information on setting up a compliant international business, please contact us at info@premieroffshore.com

Christian Reeves

How to Calculate the Foreign Earned Income Exclusion

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In this post, I’ll describe how to calculate the foreign earned income exclusion. This is meant as a general guide for calculating the FEIE and I assume that most will either use a software program to calculate the foreign earned income exclusion or hire a professional to prepare their complex tax return.

Before we get to calculating the foreign earned income exclusion, we should first determine if you need to bother. When should you use the foreign earned income exclusion?

First, I note that you must file a return and calculate the foreign earned income exclusion on Form 2555 to get the benefit of the exclusion. Just because you will pay zero tax with the exclusion, it doesn’t mean you are not required to file. 

In fact, the FEIE is the only tax calculation that’s “use it or lose it.” If you don’t file your return and calculate the foreign earned income exclusion, and you’re audited by the IRS, you can lose the exclusion and be forced to pay US tax on your worldwide income, even if you did not or don’t live in the United States. 

Second, you need only calculate the foreign earned income exclusion if your income exceeds the Standard Deduction. If your income is less than the Standard Deduction, then you probably don’t need to bother with the FEIE.

The Standard Deduction for 2021 is $12,400 for a single taxpayer and $24,800 for married filing joint taxpayers. If your income is less than this, you probably don’t need to calculate the foreign earned income excursion, but you probably do need to file a return (if living abroad).

Third, you need only calculate the foreign earned income exclusion if you live in a low or no-tax country. If the country you’re living in has a tax rate higher than or about the same as the United States, then you will use the foreign tax credit and not the foreign earned income exclusion. 

This is because you get a dollar-for-dollar credit for paying tax in a foreign country. So, if your US Federal tax rate is 30% and your tax rate in France is 35%, just use the foreign tax credit to pay zero US tax. 

 

Do I Qualify for the Foreign Earned Income Exclusion?

When it comes to calculating the FEIE, it’s an all-or-nothing situation. You either get to take the full exclusion or none of it. There is no prorated amount (unless you qualify using the 330-day test over two calendar years, see below). That is to say, if you do not qualify, or miss qualifying by even one day, you lose the entire exclusion and 100% of your income is taxable in the United States. 

I should also point out that the foreign earned income exclusion applies to ordinary income, salary, self-employment income, and/or business income. It does not apply to capital gains or passive income. Therefore, this article considers only ordinary income. 

There are two ways you can qualify for the foreign earned income exclusion. 

Physical Presence Test: be out of the United States and in a foreign country for 330 of any 365 day period. This is a simple test… be out of the US for 330 days of 365 and you qualify. However, if you miss it by even one day, you get zero FEIE.

Residency Test: be a tax resident of any foreign country for a full calendar year. This country should be your home and you should put down roots there. It usually means you will file and pay taxes in that country. 

Most clients use the physical presence test during their first year abroad. Then they move to the residency test once they are ready to put down roots. Also, because the residency test requires you to be a tax resident for a full calendar year, it’s much easier to begin your life outside of the US with the physical presence test. 

As stated above, the physical presence test can be taken over any 12 month period. So, it would be possible to use a March to March foreign earned income exclusion. In that case, you would prorate the FEIE for 10 months of 2021 and then 2 months in 2022. 

The FEIE for 2021 is $108,700, which amounts to $9,058 per month, or about $90,580 for the 10 month period. This amount could be doubled if a husband and wife both qualify for the FEIE, both worked in the business, and both took out a salary. 

 

How to Calculate the Foreign Earned Income Exclusion

To calculate the foreign earned income exclusion on salary, be it salary from your own foreign corporation or when you work for someone else outside of the United States, you simply take the exclusion amount and reduce your income by that number.

Again, keep in mind that you either get all or none of the FEIE, so prorating is only an issue when taken over two calendar years. In this section, I’ll assume you are taking the FEIE over only one calendar year. 

So, let’s say you earned $90,000 in 2021 and qualified for the FEIE. You would use form 2555 to report the salary and subtract it from $108,700. You would thus pay zero tax. 

Next, let’s say you earned $208,700 in 2021 from work and qualified for the FEIE. You would subtract $108,700 from $208,700, and pay US tax on the remaining $100,000. 

The bad news is that, when you calculate the tax, you use the tax bracket of someone who earned $208,700 and not the tax bracket of someone who earned $100,000. 

 

Self Employed Persons Reporting on Schedule C

Calculating the foreign earned income exclusion for self-employed persons that are reporting on Schedule C, and not using a foreign corporation, is much more complicated. I will simplify it here, but for more accurate calculations, see the IRS website.

To oversimplify a complex matter, when you report your foreign income on Schedule C, about 50% of your expenses are allocated to the FEIE. That means that the FEIE is reduced by about 50% of your business expenses. 

For example, let’s say your business income is $250,000 and your expenses are $50,000. When you calculate the FEIE, it is reduced by about $25,000, from $108,700 to $83,700. The result is that you can use $83,700 of the exclusion to reduce your taxable income from $200,000 to $116,300. You will pay US tax on this amount. 

Next, you will have to pay Self Employment Tax on your net profit. The FEIE does not apply to Self Employment Tax and thus you’re paying full SE tax on your business profits. The self-employment tax rate for 2021 is about 15.3%. 

Again, these are just “back of the napkin” calculations to help you think about how to calculate the foreign earned income exclusion. I assume that you will be using a software program or a CPA to prepare your complex tax return.

 

Options

The solution to the problem of calculating the FEIE on a Schedule C can be eliminated by forming an offshore corporation. Set up a foreign corporation and open an international bank account. Then draw a salary from that corporation of up to the FEIE amount. 

The FEIE and an offshore corporation work great for those earning $110,000 a year, or a husband and wife netting $220,000. But, what if your income is significantly higher than this? What if you’re taking home $500,000 in business income?

Then you should consider moving to the US territory of Puerto Rico. This island has unique tax deals that are only available in a territory. This is because, no matter in which state you live, you pay Federal Tax. Also, Americans living abroad are taxed by the IRS. But, Americans living in Puerto Rico are only taxed by Puerto Rico. 

If you move a qualifying business netting $500,000 a year to Puerto Rico, your tax rate will be 4%. This amounts to $20,000 in tax paid. This same income using the FEIE results in about $120,000 in tax paid (assuming a 30% blended Federal rate). 

I hope you’ve found this article helpful. For more information on forming an offshore corporation that qualifies to use the FEIE, or on moving to Puerto Rico, please contact me at info@premieroffshore.com. I will be happy to work with you to structure your international plan.

Christian Reeves

Changes are Coming to Roth IRA in 2022

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As the Biden administration searches for cash to fund their social programs, they are taking aim at your Roth IRA. If you have a larger Roth IRA, expect the government to begin taking a cut of your earnings or eliminate your ability to contribute to a Roth IRA in 2022. 

Under the new rules, persons with annual incomes of over $400,000 (and couples earning more than $450,000) would be prohibited from contributing to a Roth IRA in 2022. These same high earners would also be prohibited from converting their traditional IRA or other retirement accounts into a Roth IRA. 

In addition, if you have more than $10 million in your Roth IRA in 2022, no matter your income, you would be prohibited from contributing any more to that account. If you gambled on high-risk investments in your Roth IRA and it paid off, the government has determined that $10 million is enough for you.

Editor’s Note: As of the writing of this article, it appears the limit will be $10 million. There are some pushing for this amount to be lowered to $5 million.

And, finally, if your Roth IRA reaches $20 million in 2022 or thereafter, you will be forced to take a distribution to get below $10 million or $20 million. The final numbers are not in, but suffice it to say, if you really won big in your Roth IRA in 2022, you will be forced to distribute out the profits, losing the tax benefits of the retirement account.

If you’re a mere mortal or average earner like me, you might be wondering how the heck anyone can get $20 million into a Roth IRA. The contribution limit for 2022 is $6,000 for both traditional and Roth IRAs. 

It’s actually quite simple to understand (not to achieve, of course). Let’s take the case of Mitt Romney as an example. His IRA has received a lot of press and is a public record because of his political status.

It’s estimated that Mitt’sIRA reached as high as $101 million back in the day when he was running for President. How is this possible considering the contribution limits? 

Mr. Romney ran a successful investment firm called Bain Capital. This firm would invest in pre-IPOs and startups. Mitt would receive stock valued at a few dollars in exchange for his services, which he contributed to his IRA. 

When some of those companies went public and became billion-dollar successes, the value of his IRA account grew with the stock price. And, if he did cash in the stock, the money would remain in his IRA account tax-free (Roth) or tax-deferred (traditional IRA).

The difference between a traditional IRA and a Roth IRA is also simple. Money going into a traditional IRA is not taxed when earned. You pay tax on the income, profits, and interest earned when you take a distribution from a traditional account. 

A Roth IRA is the exact opposite of a traditional IRA. After-tax money goes into a Roth and you pay zero tax on the gains when you take it out (assuming you take out the cash at age 59 ½ years of age or take some other permitted distribution).

So, if the stock goes into a Roth IRA at $6,000 and comes out tax-free at $6 million, you have an absolutely massive tax-free transaction. You paid tax on the $6,000, but not on the gain of $5,994,000.

How big can these accounts get you ask? A recent ProPublica report claims that Peter Thiel, a PayPal co-founder, owns a Roth IRA that grew to $5 billion in 2019, up from less than $2,000 in 1999.

When these rules come into effect, Mr. Thiel will be forced to distribute most of his Roth IRA in 2022, losing all of the tax benefits. Otherwise, he needs to wait until 2027 when he’s 59 and a half to make these withdrawals tax-free. 

And these massive Roth IRAs are not as rare as you might think. Democrats on the House Ways and Means Committee released a list showing that, since 2011, the number of Americans with IRA balances of over $5 million nearly tripled to 28,000 for a total of $279 billion out of the reach of the IRS. 

In the big leagues, nearly 500 taxpayers had traditional IRAs worth $25 million or more, with the average balance in those accounts of $150 million. The average Roth IRA balance among the 156 largest accounts was $100 million.

I believe this is the first shot of the Bidan administration at traditional IRAs and Roth IRAs. As the government needs more money for its social programs, expect an all-out war on larger savers with money in retirement accounts. Money in a US IRA can be easily seized or taxed.

What’s next? How about limiting the investment options of all retirement accounts? Obviously, this administration needs to protect its people from making risky investments with their IRAs. We’re the government and we’re here to help! 

I expect self-directed IRAs to be eliminated soon and all retirement accounts to be forced into US treasuries. It’s been reported that these accounts were estimated to be around 19.29 trillion U.S. dollars in 2020. This cash could pay for a lot of green new deals!

So long as your traditional IRA or Roth IRA is in the United States and within the reach of the government, it’s at risk. For assistance in moving your IRA into an offshore IRA LLC, please contact me at info@premieroffshore.com. I will be happy to help to shield your investment account.

Christian Reeves

2021 Foreign Earned Income Exclusion and Tax Rates

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The Foreign Earned Income Exclusion is the most important tool expats and Americans living abroad have to reduce their US tax obligations. In this post, I’ll review the Foreign Earned Income Exclusion and explain how and when it can help you save on your tax bill.

In fact, since the Trump tax cuts, the Foreign Earned Income Exclusion may be the only way most expats can reduce their US tax. Because we are no longer eligible to hold business income tax-deferred in an offshore corporation, and all ordinary income is taxable as earned, the Foreign Earned Income Exclusion is the only way business owners can limit our tax exposure (the exception to the rule are those living in Puerto Rico).

Not so long ago, the Foreign Earned Income Exclusion was the trick for those earning around $100,000 a year. For larger businesses operated outside of the United States, we could hold the profits in the corporation in excess of the Foreign Earned Income Exclusion and only pay tax on that ordinary income when it was distributed as a dividend.

With the ability to retain ordinary income in the corporation eliminated, all we Americans abroad have left is the Foreign Earned Income Exclusion.

Before I get into the details, please note that this article is focused on ordinary income earned as a salary or as a self-employed person/business owner living outside of the United States. That is to say, I’m talking about ordinary income here and not passive or investment income.

There are two ways to qualify for the FEIE. You can be out of the United States for 330 of any 365 day period (physical presence test), or you can be a resident of a foreign country for a calendar year (residency test). Most expats use the physical presence test their first year abroad and then move to the residency test after they become legal residents of their new country. Those who don’t put down roots stick with the 330-day rule.

Also, the Foreign Earned Income Exclusion is the most help to those living in low or no-tax countries. If you live in a high-tax country, typically in Europe, you will probably benefit from the Foreign Tax Credit more than you will from the Foreign Earned Income Exclusion.

I should also note that Americans with income in excess of the Foreign Earned Income Exclusion might consider moving to Puerto Rico. US citizens who move to the US territory of Puerto Rico pay only 4%  tax on certain types of business income and 0% tax on passive income earned from investments made after you move to Puerto Rico.

 

Standard Deduction for 2021

I start this area of the Foreign Earned Income Exclusion with the standard deduction. Why? If your income is less than the standard deduction, you probably don’t need to bother with the Foreign Earned Income Exclusion. You might be required to file a US return, but you probably don’t owe much in tax if the standard deduction eliminates most of your ordinary income.

The standard deduction for 2021 is $12,550 for individuals and married couples filing separately $18,800 for heads of household, and $25,100 for married couples filing jointly and surviving spouses.

 

 

Standard Deduction Amounts KPE/IRS

  • For 2021, the additional standard deduction amount for the aged or the blind is $1,350. The additional standard deduction amount increases to $1,700 for unmarried taxpayers.
  • For 2021, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer remains the same. It is cannot exceed the greater of $1,100 or the sum of $350 and the individual’s earned income (not to exceed the regular standard deduction amount).

 

Foreign Earned Income Amount for 2021

The Foreign Earned Income Exclusion for 2021 is $108,700. This is up from $107,600 for tax year 2020 and $105,900 for tax year 2019. This means that a husband and wife filing joint, where both live abroad and earn ordinary income, might save up to a total of $217,400 in US taxes using the Foreign Earned Income Exclusion in 2021.

Note that the Foreign Earned Income Exclusion is a “use it or lose it” exclusion. If you don’t file, and the IRS audits you, then you will probably not be allowed to use the Foreign Earned Income Exclusion and will pay 100% tax on your worldwide income.

I believe the Foreign Earned Income Exclusion is the only tax exclusion that can be lost if you don’t file. For example, you would be allowed to take the Foreign Tax Credit if you have failed to file, but not the Foreign Earned Income Exclusion.

 

Tax Rates and Brackets for 2021

There are seven tax brackets for 2021. They are: 10%, 12%, 22%, 24%, 32%, 35% and 37% (there is also a zero rate). Here’s how those break down by filing status:

 

Conclusion  

I hope this article on the Foreign Earned Income Exclusion for 2021 has been helpful. As stated above, this is a use it or lose it exclusion. If you are a few years behind on your US tax filing obligations, please contact me at info@premieroffshore.com, and I’ll connect you with one of our international tax preparation experts.

Likewise, if you are being audited for an international tax matter, or your Foreign Earned Income Exclusion is being denied, contact me. I can introduce you to a US tax attorney who is an expert in these matters.

Christian Reeves

The Mexican Real Estate Market and why it’s Smart to Invest in it right now

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Everyday owning a house in the United States is becoming more of a dream than a reality. High prices have made it impossible for millions of Americans to live in big houses with huge yards as their fathers and grandfathers did.


For this reason, many Americans have chosen to retire abroad and buy a property and real estate in foreign jurisdictions. The high value of the dollar in foreign soil has made buying international real estate a great investment for business owners and particulars alike.


One country that is getting a lot of American investment in real estate right now is Mexico. Americans are buying houses and land in Mexico at an increasing volume and I don’t see this stopping any moment now.


Huge American companies have started to construct apartment complexes and huge beachfront territory to build houses in, something that would drain their budgets if they decide to do it in the United States.


What makes this business activity even wiser is that the persons buying those apartments and those beachfront houses are Americans. The prices are in dollars but at rates less than 70% of what you may find in the United States.


In many parts of Mexico you will find that they accept the same kind of housing credit that you may use to purchase a house in the United States with the same type of interest, maybe even a tad lower.


Because of American involvement and the surge in the Mexican middle class the Mexican Real Estate Market has been steadily growing for the past decade with no signs of stopping down. The best part is that there is no way that the prices reach the heights that houses in the United States may get.


The dream of owning a house is very much still alive in Mexico with 82% of the population living in bought houses, as opposed to in the United States where only 65% of citizens own their house or are paying for one.


A segment of the American population that is buying a great deal of property in Mexico is the American retirees who find that living in the United States is too expensive. The low cost of living and the proximity to the United States makes Mexico the favorite place for retirees.

Let’s just say that you make 3 thousand dollars a month from social security checks and other investments you might have in the United States. Those three thousand dollars amount to not much in the United States, but in Mexico, you can live an Upper Middle-Class lifestyle.


Depending on where you choose to live in Mexico, the rent won’t be more than 500 dollars, groceries will be 300, amenities 100, 200 to have someone clean your house, and the rest can be spent however you like.


The best part of this is that you can inherit it to your children and they can give it to theirs. The house will be part of your family for generations to come and the property will only go up in value.


Of course, I am talking about cities in Baja California like Tijuana and Ensenada that have the American border less than one hour away. Cities in Jalisco like Ajijic that have more American residents than Mexican ones have houses and apartments that go from $100k to $150k.


It would be wise to research what part of Mexico interests you the most before you decide to buy the property or real estate in the country. Mexico has many different landscapes and geographic locations.


If you are not an American retiree or someone who wants to buy a house in Mexico while working in the United States and earning dollars there are also huge opportunities for entrepreneurs and investors.


Large American companies have started to expand into Mexico creating the same outdoor malls, apartment complexes, residential areas, and other types of real estate projects. The best part about this, Mexico does not forbid these American companies from charging the rent in dollars.


You would still need a big investment to fulfill a project of this size, but the investment would be much less than in the United States. Also, dealing with the Mexican government in construction matters is much easier and faster than in the United States.


I cannot write an article about buying a property in Mexico without mentioning that the country has become safer and safer for foreigners. In a recent study, the main reason why Americans are hesitant to buy property in Mexico is because of security concerns.


Investing in a real estate company that has affiliations with the United States is the best way to avoid these problems or you research all of the thousands of American communities that have been formed by retirees all over Mexico.


Whether you are looking to buy property to retire in the country or searching for real estate to make an investment, the Mexican Real estate Market is only going to grow in the next few years. Email us at info@premieroffshore.com so we can help you buy the property or make an investment in Mexico.

Christian Reeves

Top 7 Cities in the Mexican Real Estate Market

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7. Loreto, Baja California Sur

If you drive south from California you will find the Mexican state of Baja California Sur. Baja California Sur is the home of many popular American destinations such as La Paz and Cabo San Lucas.


Both of these cities might be a good place to buy a house, but being a popular American destination makes them expensive. Many of the rent will be in dollars, besides, these cities are not exactly safe to live in.


Loreto is a favorite location for many Americans because of its proximity to the beach and its many American retiree communities who have called it home. Loreto is just a short flight away from the United States and most of the city speaks perfect English.


The beautiful golf courses scattered all over the city make it a prime destination for retirees. An apartment in Loreto with 3 rooms and 2 bathrooms can go for $1,500 a month. A little expensive for Mexico, but you pay for the safety, the community, and the gorgeous landscape.

 

6. Oaxaca, Oaxaca

Most Americans who look into buying real estate in Mexico want a city that has many elements of life in the United States. Still, there are those who want something completely different from their previous experience.


If the latter one is you I recommend Oaxaca. Oaxaca is in my personal opinion the city that most represents Mexico in its purest forms. The food, the music, the diverse languages, the museums, the pyramids. Everything in the city is plagued with history and culture.


Oaxaca is also one of the cheapest places in Mexico. You can easily live on a $1,200 dollars a month budget. I am including rent and amenities in that number, you can also add a cleaning professional for less than 300 dollars a month.


Oaxaca is not for everybody, but if you are familiar with the Mexican way of living and are looking for something completely different then Oaxaca is a great option where you can make the most out of your social security check.

 

5. Merida, Yucatan

If you are interested in the history and culture of Mexico but want something a bit more quaint and with a thriving American ex-pat community then Merida is the city for you. Beautiful pebbled streets and a large Mayan influence make Merida a sight to behold.


Yucatan is a beautiful peninsula close to the United States and to every major Mexican city, it is even connected to Cancun via a superhighway. Picture Merida as Oaxaca only a bit more modern.


Merida is also very safe and very cheap, depending on where you choose to live. Like most cities, Merida offers a diverse variety of living arrangements. Some may drain your social security check others may save you a fortune.


A great apartment in Merida with all amenities included may end up costing you about $1,800 dollars per month. Slightly more expensive than Loreto, but the architecture and culture definitely make up for it.

 

4. Guadalajara, Jalisco

It is no secret that the favorite state in Mexico where American retirees are choosing to call home in Jalisco. Jalisco has everything, beautiful beaches, culture, lakes, a huge number of American retirees, and the best city in Mexico in my opinion.


Guadalajara is a fantastic metropolis where you can experience a great life with everything you need surrounding you. Picture Guadalajara as a Los Angeles, but less crowded and one hour away from every landscape and geographic location you can picture.


You can log online and check the many American Expat communities who are living here. Fantastic education, great nightlife, huge acceptance of the LGBTQ community are many of the factors that attract Americans to Guadalajara.


Same as in Merida, the cost of living in Guadalajara depends entirely on where you want to live. From apartments that cost $2,000 a month to cheap houses in the central part of the city that go for $400, Guadalajara is something that you have to experience. Join the many Expats and retirees currently calling it home.

 

3. Tulum, Quintana Roo

So far, we have just mentioned cities that are cheap and have a very affordable cost of living. Tulum, located in the state of Quintana Roo is not one of those cities. Tulum is actually very expensive to live in, but it is worth it.


Tulum is one of the most popular travel destinations for Americans who travel to Mexico, in fact, it might even be their only point of reference when they think about the country. Tulum is right next to the most popular beach communities in Mexico, Cancun, and Playa del Carmen.

Living in Tulum is strictly for the Americans receiving a good percentage of money from Security checks or that has saved quite well for their retirement. Also, if you don’t love the beach then Tulum is not for you.


If you are attracted to everything I just mentioned then you can join one of the many Retiree and ex-pat communities who call Tulum home. Tulum’s prices might be elevated, but it is still much cheaper than anything else in the United States. In Tulum, you can fulfill your dream of living the luxurious lifestyle you always wanted.

 

2. Ajijic, Jalisco

Hands down the city in Mexico with the most retirees and ex-pats have to be Ajijic. Years ago an article was written about how the language most spoken in the city is English, and that seems pretty obvious when you consider that retirees now outnumber local residents.


If you haven’t heard about Ajijic don’t worry, the residents want to keep it a secret. The town is very protective about who comes to live there so your best shot is to interview a local well-established community of ex-pats.


Although rent is available, most of the residents of Ajijic choose to buy property near the lake. A lakeside house will cost approximately $100,000 dollars. You can find cheaper or more expensive options depending on where you choose to live.


The lake is one of the most beautiful ones you will ever see, attracting millions of tourists each year. It would be wise for you to take a look and visit the city before moving here. You will understand why Ajijic attracts the number of Americans it does.


1. Baja California

We might be cheating when it comes to the top city of this list. Baja California is a state in Mexico that borders both California and Arizona and it has three incredible cities that are loved by American retirees.


Tijuana borders the city of San Diego California, and for years now it has become the residence of many Americans who live in the city while they go to work in San Diego. This is a fantastic option as the United States is just a small distance away.


Rosarito is a small beach town located 30 minutes from the American border that offers fantastic beach resorts for a very low price. You can find a beachside apartment for less than $800 dollars a month.

Ensenada is a treasure found one hour away from the US-Mexico border. Ensenada has a great beach and a wine valley that rivals Napa. A relaxed vibe, great wines, and a thriving American community make Ensenada a great place to call home.

Christian Reeves

Coronavirus is causing American Companies to leave China and Manufacture in Tijuana

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It might come as no surprise to you, but the Coronavirus pandemic that started in China has created a lot of chaos and uncertainty in that country’s economy. Many American companies have chosen to stop manufacturing in the Asian country.


There were already many concerns over manufacturing in China way before the Coronavirus pandemic. How far away it is from the United States, the long time it takes for the product to arrive in the country, the illegal activities happening in some factories, and of course the trade war.


Coronavirus has been a nightmare for the outsourcing industry in China since the pandemic began in late January. Many American companies have stalled since they failed to receive their product from China or even some type of insurance.


American companies operating in China are losing millions of dollars each day, and what amazes industry analysts is how ill-prepared and unprofessional Chinese insiders reacted to the shutting down of the factories.

American Entrepreneurs were just told to wait there till the pandemic is over or to cut their losses. That made many companies angry and made them rethink their outsourcing strategy and supply chain.


Hasbro, one of the biggest companies manufacturing in China, announced that they will leave China before 2020 ends moving to another jurisdiction where they can have more control over their products and prevent this from happening ever again.

White House Insiders have started to draft plans to give monetary incentives to American companies who move from China to the United States. This is a great idea, but the factories are not looking at the United States for their new manufacturing home.


Southeast Asia and especially Mexico are the countries who are lined up to benefit the most from the Chinese exodus. Mexico’s proximity to the United States and its low wages makes it the best choice for American factories.


When the new and updated NAFTA agreement was signed a couple of years back (the US-Mexico-Canada Agreement), experts correctly predicted that Mexico could become the new China, the coronavirus chaos, and the reaction of the outsourcing industry in China just confirmed this in my opinion.

Manufacturing companies in Mexico have not stopped production because of the Coronavirus, they took precautions and are still sending the finished products in approved trucks complying with everything Health and Safety Regulation.


This is all possible thanks to the proximity of both countries, and because the northern part of Mexico where most of these factories are located have adapted to the needs of American companies.


The city of Tijuana in Baja California, which borders San Diego, has become a haven for American outsourcing companies. They have the biggest commercial border in the world, most of the residents speak English, they have schools dedicated to training professionals to fulfill the needs of the factories.


I know for a fact that more than 40 American factories have already asked about Tijuana and I expect that number to continue to grow, especially right now since the dollar has just reached new heights in Mexico.


As of the writing of this article, one dollar equals 23 pesos. Meaning that your investment in Mexico has the potential to be very low, I would highly advise you to get a proper quote regarding the cost of manufacturing before you decide Mexico is the right fit for your outsourcing needs.


Mexico has been in the outsourcing market for more than two decades but has stalled in this regard thanks to its problem with government corruption and the ongoing drug war causing many security risks for American investors.


For of these reasons, Mexico will continue to be a red flag for many Americans, but it should not slow you down. Security concerns have slowed in the country as the military has become heavily involved in protecting individuals.

Plus, thanks to the many professionals who are in charge of the outsourcing industry, you won’t ever have to set foot in the country. Which is what most of our clients do, they wait for their product to arrive in the United States and hire a consulting company to take care of the rest.


Thousands of Americans already have factories in Mexico. Companies like Hewlett Packard, Microsoft, Hyundai, Apple, Samsung all have factories in Baja California and will continue to expand.


There is no doubt that Tijuana will become the new Wuhan, this is a huge opportunity to cut ties with China and begin a new outsourcing operation in a country much closer to yours and in many regards more efficient and cheap.

I understand that there is more that needs to be known about Tijuana before choosing to move there, but that is why we are here. If you have any questions please feel free to ask them, we will happily settle your doubts and guide you through the process of helping you save millions of dollars by moving to Mexico.

Christian Reeves

Because of Coronavirus Tijuana is becoming a Haven for American Factories

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Unless you’re Purell or Amazon, there is no way that your business has not in some way been affected by the Coronavirus. The global economy has taken an unprecedented hit that is set to change the way many industries do business from now on.

One of the industries that are sure to be impacted the most is the outsourcing factories in China. Because of the Coronavirus, many factories have shut down causing Americans to lose millions of dollars in revenue. Also, the US government is putting ever-increasing pressure on companies to leave China and move the supply chain closer to home.

So, the question is: where will these factories go? Where can they move to maintain their lower costs of production, an efficient tax regime, and proximity to the United States./

It came as no surprise that Americans looked to a country that is literally right underneath them. Statistics have shown that there has been a massive surge in American companies looking to establish in Mexico.

More specifically Baja California, which is the state that borders California and is famous for being a haven for maquiladoras, which are American factories operating in Mexico protected under the Immex regime.


The Immex regime is a treaty established under the US-MEXICO-CANADA Agreement (Formerly NAFTA) that gives many incentives to American companies who manufacture in Mexico. One of the most attractive incentives being that they can operate 100% tax-free.


You read that correctly, you can operate in Mexico 100% tax-free if you follow the proper guidelines. Such as exporting and importing only the pre-approved materials and declaring everything to the proper authorities.


Clients that we have who take part in the Immex regime save millions of dollars each month by manufacturing in Mexico. Something they would not be able to do if they manufactured in the United States. Plus, the proximity to the United States makes it possible for them to take good care of their product. Something you can’t do if you operate from China.


In an interview with the President of the Maquiladora Industry of Baja California, he mentioned that more than 40 companies from the United States have questioned him about moving their plants from China to Baja California.

Even though the Coronavirus is a tragedy that no one expected, American business owners with ties to China were not happy with how the Chinese government reacted to this situation and wanted it to prevent it from happening again.

While the Mexican government is not the perfect example of how to deal with a pandemic of this sort, they made sure to protect the Maquiladora industry by letting go of non-essential personnel and keeping the persons in charge of production, with the safest sanitary protocols.

Also, one of the best decisions they could have taken is to not close the commercial border. While Americans and Mexicans need special permission to cross between countries, commercial trucks can continue to cross without any problem.

This was done to not halt the economy of both countries as the Maquiladora industry brings billions to both Mexico and the United States. To stop this industry would mean the loss of millions of jobs and billions of dollars.


A city in particular that has been receiving a lot of attention in this matter is the city of Tijuana, Baja California. Tijuana sits on the border of the United States and Mexico right next to the city of San Diego.


Due to its perfect geographical location, the city of Tijuana has adapted to fit the needs of the maquiladora industry. Many schools in the city have taught courses designed to fit the needs of the maquiladoras so they never ran out of workers.


Huge multinational companies like Samsung, Hyundai, Microsoft all have a factory in Tijuana. Some of these factories even operate for 24 hours in order to fulfill the extensive demands they require.


China has been the leader of the outsourcing industry for decades, but the industry has started to decrease in the past decades because of the lack of quality in the products and because of how hard it is to manage a company that is so far away.


Mexico offers wages similar to China, has hundreds of thousands of English speaking professionals, a well established commercial treaty, and decades of experience in the matter, making it China’s fiercest competitor.


Tijuana, in particular, is ready for the high demand for industry and is more than prepared to make American companies feel welcomed in Mexico. I expect Tijuana to become the new China in the next few years.


If you are interested in finding out what you need to operate a business from Mexico please feel free to contact us at info@premieroffshore.com.

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Steps to Follow in Order to Buy a House at a Banking Auction in Mexico

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Buying a house at a banking auction in Mexico is fairly easy if you follow the necessary steps in order to complete the process. All you need is a good legal representation and an estimate of how much money you wish to spend. Next, follow these steps to buy a house at a banking auction in Mexico.

1. When a mortgage loan is no longer paid, the banking institution by law can reclaim the property and put it up for auction.

Same as it is in the United States if a person does not pay his mortgage the bank can take away the property from him. This property goes into a list of real estate and properties that are to be auctioned in the near future.

2. The property that enters into legal conflict is placed at the disposal of a court, which will proceed to sell it at a public auction.

What makes the bank auctions in Mexico extremely safe for the buyer is that a state judge oversees all of the action and gives legality to the purchase being done. You don't deal with the owners and the property is yours almost immediately.

3. To participate, those interested must make a deposit in BANSEFI OF 10% of the published value and make an offer privately.

Banking Auctions in Mexico are not done publicly, they are what in the United States they refer to as silent auctions. There is no direct competition between particulars and you never know what the person next to you bid.

4. For security, you must go to the auction with the deposit ticket made in Bansefi.


Bansefi is the government institution in charge of regulating banking auctions. All of the money needs to go through their website. They will do the due diligence and give the okay to the judge that your bid is legitimate.

5. In this auction, the mortgage rights are granted to a third party, who must follow a legal procedure and become the new owner.


If you win the auction, you are automatically granted property rights there on the spot. If you do not wish to go you can give power of attorney to a trusted representative. The best thing about this part is that you become the owner the same day of the auction.


6. After the last step, the property is deeded

In order to complete this step, you will have to go to a Notario in Mexico. The role of a Notario in Mexico and a Notary in the United States is completely different. You have to pay a Notario in Mexico about 800 dollars for him to draft the deed to your new house.

7. The winner of the auction must pay the balance due (the purchase price less the 10% already on deposit ) in the period ordered by the judge through a resolution approving the auction, which ranges from 3 to 5days or from 10 to 15 days.


It is important to know that the payment for the house cannot be done in installments, it needs to be done in one whole payment in the amount of time that the judge determines. This is usually close to the date of the auction so you should have your money ready.

8. The possession of the property is given in a period of 6 to 12 months, assuming that all previous steps have been completed successfully

Times may vary depending on the type of land or real estate you purchased, but it is estimated that you will be living in your newly acquired property in less than a year. This is of course if you have all of your paperwork in order.

Besides the purchase of the property, there are other expenses that you should consider such as lawyer expenses, the Notario, and any and all pending expenses associated with the real estate.


It would be difficult for me to tell you how much this will cost as the cost of the Notaro can vary and how much involvement from a lawyer in Mexico you will need for the purchase. Every house in the banking auction has some sort of pending services and furnishes that need to be done so you should take those costs into consideration when purchasing the property.


Even though you purchased the property legally, you won’t be able to visit the property until everything has been put in order. In most cases, the past tenant will continue to live there until he is legally evicted.


The steps you have to follow in order to purchase property in Mexico through a banking auction are fairly simple. In just over a year you could own a vast amount of real estate in the country at a cost of less than 50 percent of what is estimated to be worth. Call us and we will happily guide
you through the process.


I hope you’ve found this article on buying a house at a banking auction in Mexico to be helpful.

For more information, or for assistance in any legal matter involving Mexico please contact us at info@premieroffshore.com.

10 Reasons to do Business in Mexico
Christian Reeves

10 Reasons to Move Your Business to Mexico in 2020

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In this post, I’ll look at the top 10 reasons to move your business to Mexico in 2020. The current government is focused on bringing in new jobs and new businesses to the country. If you’re looking to set up a lower-cost international operation, an outsourcing team, call center, financial services or Fintech company, Mexico should be at the top of your list. 

By way of background, I have operated this business from Panama, San Diego, CA, and Tijuana Mexico. We now have offices in Puerto Rico and Mexico City (in addition to TJ). I’ve been in the offshore industry since 2003 and can tell you from experience that Mexico has become a top tier offshore business jurisdiction. 

If you ignore the political hype between the US and Mexico, you’ll find that the new President is pro-business and cutting red tape right and left to facilitate business in Mexico. This is especially true in Baja California, the state where Tijuana is located and where I chose as my home base. I like to say that we’re on the hard-working and fun side of Trump’s wall. 

Here are the 10 reasons to move your business to Mexico in 2020

Cheap Cost of Labor

Mexico is a top tier business jurisdiction because of the availability of cheap labor. Costs are a fraction of the United States and English is readily available, especially in Baja California. The further south you go, the more difficult it becomes to find low-cost English speakers. 

Note that I say, “low-cost” English speakers are more available in Baja. This is because English is common in the border region. However, if you’re looking for high-level English speakers, such as engineers and PhDs, they are more likely to live in Mexico City and Monterrey than Tijuana. 

The average annual salary for an engineer in the United States is $85,663 dollars. The average annual salary for a mechanical engineer in Mexico is $298,500 pesos or the equivalent of $15,514 US dollars. 

This means that an engineer without a specialty makes almost five times more than an engineer with a specialty degree in Mexico. This is just one of the many professions were salaries are substantially lower. 

You can save a lot of money if you move your business from the United States to Mexico, and thanks to the excellent universities that they have in the country you won’t struggle in finding quality employees for your business. 

Cheap Cost of Living

Living in the United States has become increasingly expensive in the past few years, especially in California. Americans are dropping their dreams of living in a big house with a big garden for living in a small crowded apartment. 

Mexico is a very cheap country to live in. The cost of rent in Mexico is nothing compared to one you can find in the United States. You can live in an excellent apartment for less than $800 dollars a month. I am talking about a two bed and two bathroom place. 

For this reason, it might come as no surprise that many Americans are choosing to live in Mexico, bringing their portable businesses with them or commuting to the United States as necessary. In fact, thousands of Americans live in Mexico and commute to the United States every day. 

This is what I do… live in Tijuana and drive into San Diego or Los Angeles for meetings. If you have a Sentri pass, border wait will be about 15 minutes. If you don’t have Senri, the wait will be hours if you drive. But, you can walk across and take a trolly into the city in a few minutes. 

You’ll find that the number of Americans in Mexico has pushed up the costs of living in cities like Tijuana, but it remains a fraction of San Diego. If you don’t need to commute to the US, the cost of housing and the quality of life is better further south. 

Strength of the US Dollar in the Country 

As I mentioned before, Mexico offers American entrepreneurs the cheap cost of labor, living, and rent, and all of this is very accessible to American entrepreneurs because the US Dollar has been going upwards in the country. 

One US Dollar equals approximately 18.50 pesos and this is probably going to go up. Because of the proximity between both countries, and the economic relationship, movement in the dollar has an impact on the peso. 

Luckily, the American economy has been doing great, meaning that the US Dollar has been very stable in Mexico. The US Dollar is accepted in most businesses around the country and sometimes they will even set their prices in dollars. 

Investing using American currency in Mexico is a great benefit that you won’t be able to find in many countries. What better way to manage your portfolio than to do so with the currency of your own country.

Entry into the Latin American Market 

Mexico is the largest Spanish speaking country in the world and the second biggest country in Latin America. By investing in Mexico you building a base from which you can sell into the Latin American market. 

There are many different treaties between Mexico and many countries in Latin America that are not shared by the United States. If you decide to open a company in Mexico you can use those treaties to your advantage. 

Latin America is a large and great place for an American to expand their portfolio. There are so many opportunities in that market that you won’t be able to find in the United States such as the vast natural resources found here among many other things. 

Similarities Between the US and Mexico

Culturally, Mexico and the United States could not be more different. Despite this, the way that business is done in Mexico is very similar to how it works in the United States as Mexico adopted many of its practices from the American economy.

It is a blessing for many American investors when they come to Mexico and realize that they do not have to make any changes in their business plan as the business and market strategy tend to be the same. 

The Mexican stock market also works quite similar to how the American does. Even to the point where if there is a drastic drop in Wall Street the whole Mexican stock market will feel the impact. 

Vast Natural Resources

One of the many attractive things about investing in Mexico that you will find is that there are a huge number of vast natural resources in the country. Meaning that you can establish a company in Mexico with the sole purpose of exporting natural resources back to the United States or anywhere else in the world. 

Thousands of American companies are already doing this and are thriving in great ways by doing so. Mexico might have a big number of natural resources, but they lack the machinery to exploit all of these. 

American investment is widely accepted because of this reason, as the country and the company benefit hugely. Just like in the United States a good proposal needs to be approved in order for you to continue operating in the country. 

There are 31 states in Mexico and every one of them has something different to offer depending on your needs. I would recommend a great deal of research before you decide to invest in Mexico’s vast natural resources. 

Promising New Presidency

Two years ago Mexico had a very polarizing presidential election, quite similar to the one that happened in the United States. A great number of Mexicans support the new president and hail him as a hero of change, and others loathe him and consider him the worst thing to happen to the country. As I said, very similar to the United States. 

Mexico’s new president is promoting innovation and the creation of new jobs in the country by cutting red tape and inviting foreign investors to consider Mexico. This has not had the quick reaction that his political party might have hoped for, but it is slowly gaining traction.

Many of the changes will apply to small businesses, new and more efficient structures, and great opportunities for FinTech businesses under the Mexican SOFOM. In my opinion, the best changes are related to financial services, crypto exchanges, money transfer and remittance businesses, etc. 

His presidency is still very young and we will have to wait to see if he fulfills his promises, but right now things are looking bright. His political party does not want to be a one-trick pony so they are doing whatever it takes to please the people of Mexico. Creating new jobs through foreign investment is a great way to have voters on your side. 

Growing Economy

Mexico’s economy continues to grow despite its change in the presidency and the impact that the American economy has on the country. Mexico has been growing at a rate of 0.3% for the past decade. 

That number might seem small, but it gives an insight into what is happening in the country. Small nonrisk investments govern the market at this moment and will continue to do so in the long run. 

Financial institutions all over the country have benefited greatly over the growth of their sector and will continue to do so. If your idea is to start a financial institution outside of the United States I recommend doing it so in Mexico. 

Proximity to the United States

The main reason why you are probably considering to invest in Mexico is because of its location. Mexico is attached to the southern part of the United States share one of the biggest borders in the world. 

Even though the United States has another neighbor, Canada, Mexico is very different in many respects to both of those countries to make it a very interesting and promising option for investment. 

All of the major American Airlines have direct flights to Mexico City so you can be in the country in less than 5 hours, depending on your location. Also, thanks to its proximity to the United States residents of Mexico already know how business is done in America so you will not have to alter your business plan in the slightest. 

From my office in Tijuana, I can walk to the border and be across in 15 minutes. The wait time and the pedestrian crossing is less than 5 minutes on weekdays and less than 30 minutes on weekends. The line to drive across is a different story unless you have a Sentri pass. 

The proximity is a great advantage as you can take care of your business without leaving the United States. It’s also excellent for nearshore outsourcing and those, like me, who need to go to meetings in San Diego and Los Angeles regularly. 

Complete Control 

The tenth reason to do business in Mexico is that you can now have complete control over your operations. In most industries (not including banking or financial services), you no longer need a Mexican partner. Likewise, you don’t need a “bankers trust’ fideicomiso to hold real estate investments. 

For Fintechs and financial services companies operating through a SOFOM, all you need is a local representative. You give them a few non-voting shares and give up no control. This is a great improvement from when a Mexican person had to own 25% to 50% of these businesses. 

It’s become much easier to set up and control businesses in the country. Back in the day, doing business in this country was a real challenge. Ease of business has improved greatly in the last two years and every sign is that this will continue throughout 2020. 

For more on setting up a company in Mexico, see Step by Step Guide to Incorporating a Business in Mexico

For these reasons, and improved quality of life, I have chosen Mexico for my business. I plan to continue to expand and invest in Mexico. I highly recommend this country as an efficient option for international expansion. 

I hope you’ve found this article on reasons to move your business to Mexico to be helpful. For more information, or for assistance on investing in Mexico, contact us at info@premieroffshore.com or call us at (619) 483-1708

Guide to doing Business in Mexico
Christian Reeves

Guide to Doing Business in Mexico

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As an American investor, you have a ton of opportunities to make a number of investments in many countries around the world. Europe and Asia have had a rise of foreign investment going into the country, but there is another country closer to the United States that has been in the eyes of investors and financial institutions. 

I am talking about the southern neighbor of the United States, Mexico. Although Mexico is very close to the United States and it shares many similarities in how they do business. There are still a lot of things you must know about the country before you decide to invest in it. 

Even though both countries are connected and share the world’s largest and most traveled border, culturally they could not be more different. Mexico is a country full of tradition and history and its population loves to embrace it and celebrate. 

Mexico is the largest Spanish speaking country in the world and has the second largest population in South America. It’s where I moved my business a few years ago and I suggest you consider doing the same. 

A couple of years ago Mexico’s Secretary of Education made it mandatory for college graduates to learn a certain level of English before they graduate. For this reason, many of the younger Mexican workforces speaks a decent amount of English. Thus, there is a great deal of English speaking labor, especially in Northern Mexico and Tijuana. 

Education in the country has also been on an upward swing as many of its public institutions have been placed in top lists of higher education especially in the fields of medicine and engineering. 

Mexico has one of the vastest amounts of natural resources of any country around the world. Many of these natural resources are not being exploited to gain as much as they could be because there is not enough infrastructure in the country to do so. 

American and foreign investment in the country has for the most part been responsible for managing these natural resources. Thanks to these investments Mexico has emerged as one of the top emerging markets.

American companies, banks, and other financial institutions have taken advantage of Mexico’s relatively low labor costs and the cost of living to open subsidiaries inside of the country. Do not be surprised when you see the same companies that manage your portfolio in Mexico. 

How cheap it is to live in Mexico is also one of the countries selling points. Mexico is in many ways cheaper than the United States. Americans are taking advantage of this and are coming into the country in packs to commute back to the US or retire and spend their years enjoying the beach, weather, and many other benefits they could never afford in the United States. 

Mexico has a population of 128 million people living inside the country which is 1,964,375 square kilometers. Its major cities include Mexico City, Guadalajara, Monterrey, Tijuana, Queretaro, and Juarez. 

Their currency is the Mexico peso, but dollars are widely accepted in the country, especially in Northern Mexico. In fact, the US dollar has had a substantial rise in value in the country over the past few years. Making it an excellent moment to invest in the country as an American. 

Major exports include manufactured goods which are made in maquiladoras, vehicles and automobile parts, oil, oil and energy products, silver and metal, a wide variety of fruits and vegetables, coffee, and cotton. 

Major imports include machines for the manufacturing of metal and metal products, steel mill products, machinery for agriculture, electrical equipment, automobile parts, aircraft parts, and many products designed for repair or assembly in the country.

As you can see by its major imports and exports, Mexico has a vast amount of resources inside of the country but they do not have the machinery to exploit the full potential that these resources can provide. 

In the past few years, Mexico has had consistent economic growth. The growth has been slow but steady. This is despite the new presidency that is making many changes and reforms to the country. 

The main reason behind Mexico’s steady growth is its focus on innovation. Innovation has been a key platform on how the Mexican economy will grow in the next few years and it has succeeded with that promise. 

Guadalajara has been considered by many as the Mexican Silicon Valley thanks to its huge number of startups and a lot of American tech companies setting shop there. This is a prime place for foreign investment if you are interested in tech.

Mexico also has the benefit of being in a ton of partnership agreements with other countries. Meaning that investing in Mexico will get you a front-row seat to the economy of multiple countries. 

An agreement between Mexico, the United States, and Canada that has been extremely beneficial for Mexico’s manufacturing industry is the USMCA (formerly known as the North American Free Trade Agreement). 

There is a lot that you need to know before investing in Mexico. Although it is the closest country to the United States and a great window into the Latin American market, you should definitely take a crash course and learn about the country’s culture and identity before investing in it. We will happily guide you through that process. 

I hope you’ve found this article on how to do business in Mexico to be helpful. For more information, or for assistance on investing in Mexico, contact us at info@premieroffshore.com or call us at (619) 483-1708

setting up a business in Mexico
Christian Reeves

Step by Step Guide to Incorporating a Business in Mexico

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Step One: You Must First Reserve the Name of Your Company

Your name must be authorized by the Secretaria de Economía in Mexico. You should provide 5 options in order of preference. The Secretaria de Economia will eliminate those that have already been taken and you will receive the name of your company based on your preferences. In some cases, this process can be done online. Your Mexican lawyer or Notario can do this step for you. It should be noted that this step is completely free, can be done online.

Step Two: The Deed of Incorporation 

For this process, we will use a Notario. A Notario is much different than it is in the United States. Anybody can be a Notary in the United States (I know because I was one), but there are only a few Notarios in Mexico and they are chosen by the Governor of the state. Before this process, you must already know what type of business structure you want to operate from. There are a number of types of business entities in Mexico and I suggest you review them or listen to your lawyer before you can make a decision. I suggest Sociedad de Responsabilidad Limitada as it gives control to the person that provides the most capital. Each Notario is different and they charge approximately $10,000 to $15,000 pesos to do this.

Step Three: The Signing of the Deed of Incorporation

A Notario must be present when you sign the deed of incorporation. You will need the following: 

  • Every owner mentioned in the deed present
  • Identification documents of each member
  • Every owner that is foreign to Mexico must present his passport and proof of legal presence in the country
  • CURP (Mexican equivalent to a Social Security Number)
  • RFC Number (Tax ID)
  • Proof of address (Must be from Mexico)

Included in the deed of incorporation must be the person whom you give power of attorney to. This person will represent you in litigation and will act under your name. The cost of giving power of attorney to someone ranges from $5,000 to $9,000 pesos.

Step Four: Registering the Business Address

You must register the address of your business. This can either be in the place where you are doing business or where you desire to receive notifications at. 

Step Five: Registering the Business with the Mexican Tax Authorities

You must register the business for Tax Purposes with SAT, the Mexican equivalent to the IRS. I highly recommend that you make an appointment online before visiting SAT as lines can be extreme at times. They are going to ask for the same documents that you presented to the Notario when he drafted the deed of incorporation including the deed itself. If the deed is not yet finished you need a letter from the Notario stating that the deed is in process. 

Step Six: Only Applicable to Businesses that are Open to the Public 

This step only applies to businesses that are going to be open to the public like a restaurant or a retail store, if you are opening an office, a call center, or a manufacturing business then you don’t have to worry about this step. Before you open your business to the public you are going to have to notify the government in order to obtain a municipal business license. At this step, you must also secure any other type of license that you might need in order to start operating. For example, if you are opening a business that is going to be making hazardous materials like chemicals you are going to have to apply for a number of distinct licenses. The same goes if you are opening a restaurant.  

Step Seven: Registering Employees 

You will register all of your employees with the IMSS (Mexican Social Security Institute) and with INFONAVIT (Mexican Housing Fund). You must show in their paycheck the amount of money that is going to these two funds along with the local state taxes. This process can be either fast or slow depending on the amount of employees and the complexity of their contract

Step Eight: Foreign Investment Registry if Applicable

This step only applies if one of the owners is a foreigner who does not have a permanent resident status. If this is the case then you must also register the business with the Registro Nacional de Inversión Extranjera. The government office that keeps track of all foreign investment coming into Mexico. This can be done by the Mexican national who you gave power of attorney to. 

I hope this article on setting up a business in Mexico has been helpful. Once you have your entity, you will be able to open a bank account and will need a local accountant to handle payroll and related filings. We can help you to set up a business in Mexico. We are focused on Baja California (Tijuana, etc.), Mexico City, and Monterrey. For more information, and a detailed quote, you can reach me directly at info@premieroffshore.com. 

IRS Offers Expatriate Tax Deal
Christian Reeves

IRS Offers Expatriate Tax Deal – Expatriate Now!

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In this post, I’ll look at the 2020 IRS offers to low and medium-income expatriates – US citizens that wish to give up their US passports and escape the IRS once and for all. This expatriate tax deal is very limited in scope. But, if you qualify, you should act now to expatriate! 

Editor’s Note: This section applies to those who have given up their US citizenship or those who plan to give up their US citizenship. This tax offer is made to persons who expatriate from the United States. 

I mention this because, the term “expat,” commonly referrers to US persons living outside of the United States. Here, the term expatriate means someone who has gone through the process of renouncing his or her US citizenship. 

With that said, here’s the 2020 IRS offer to expatriates: 

Certain individuals who expatriate from the United States may be able to avoid the exit tax and other outstanding tax liabilities using the procedures the IRS recently outlined its website and announced in News Release IR-2019-151.

This tax deal applies to individuals who gave up or will give up their U.S. citizenship after March 18, 2010, and meet a number of other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).

In most cases, this means that make an appointment at a US consulate and formally renounce your US citizenship. You must also turn in your passport. 

This means that you must have a second passport in hand before you give up your US citizenship. It’s impossible to become “stateless.’ While this may seem obvious, you’d be surprised how many calls I get regarding expatriation from people who do not yet have a second passport and second citizenship.  

Per the US tax code, expatriates must comply with all federal tax requirements for the year of expatriation and for the five immediately prior tax years. In addition, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. If the net gain is over $725,000 (for 2019), the gain over this amount is includible in income for tax year 2019 (the 2020 number is not available at the time of this writing). 

A covered expatriate is anyone who:

  1. Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
  2. Has a net worth of $2 million or more; or
  3. Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.

That is to say, you’re a covered expatriate regardless of your net worth and income if you cannot make the certification. In my experience, individuals who have not filed their returns, or go through the expatriation process without the assistance of a tax expert, become covered individuals under #3. 

That is to say, there is no requirement to be in compliance with your US tax obligations before you give up your citizenship. So long as you have a second passport, you can make an appointment and give up your US passport. 

However, if you do this without first satisfying your IRS obligations, you become a “covered person’ by default. This tax liability will follow you into your new life. Unless and until you go through the formal process, you will never be free of the IRS. 

Also, international banks will only consider you a non-US person after you go through the formal process and receive a Certificate of Loss of Nationality from a US Embassy. This letter, which costs $2,350, must be provided to your international bank to remove your account(s) from their FATCA reporting systems. 

That is to say until you receive a Certificate of Loss of Nationality, banks will consider you a US citizen and report your accounts to the IRS under FATCA. 

Under the new deal for expatriates, individuals who meet the requirements will not be considered covered expatriates and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously. As stated above, the expatriation must have occurred after March 18, 2010.

Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. 

Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.

In addition, to be eligible for relief, the individual must:

  • Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
  • Meet the above income tax liability limits for covered expatriates for the period of five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
  • Have an aggregate US tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credit and foreign earned income exclusion, but excluding penalties, interest, and the exit tax of Sec. 877A); and
  • Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

The bottom line is that this tax deal for expatriates is meant for those who have lived their entire adult lives outside of the United States and have never filed a US 1040 personal income tax return. The most common example would be someone who has grown up in the UK, has a US passport because his father was a US citizen, has never lived in the US (though, they may have visited), and was unaware of their US tax filing obligations. 

Also, this expatriate tax offer is for lower to middle-income individuals. You must have a net worth of less than $2 million in the year you give up your US citizenship. I guess the IRS figures it’s not cost-effective to chase down those with a net worth of less than $2 million.

Finally, your net US tax due must be less than $25,000 per year. This will depend more on where you live than your net income. Because of the foreign tax credit, someone living in a high tax country such as France, and making $5 million a year, might owe nothing to the IRS when they file their US returns. Conversely, someone living in a zero-tax country, such as Belize, might owe more than $25,000 to the IRS on a salary of $200,000. 

If you meet the qualifications above, and you’re thinking about giving up your US citizenship, now is the time to do it. You should file and renounce during 2020 while the program is still in effect.

Changes to the Mexican SOFOM in 2020
Christian Reeves

Changes to the Mexican SOFOM in 2020

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Mexican reform is in full stride as the new president implements his programs. Some of these changes affect the Mexican SOFOM. Here’s what you need to know about setting up a SOFOM in 2020. 

Reform regarding SOFOMs in Mexico is likely to pass as most banks and financial institutions have already felt the wave of change coming their way. Whether it is good or bad is for you to decide about changes to the SOFOM in 2020. 

The agency in charge of creating new reforms in the country is called CONDUSEF. The CONDUSEF has in its power the ability to review and to make modifications to contracts involving SOFOMs. 

This is not limited to the way SOFOMs works as a whole, the modifications this government institutions make can even alter the way SOFOMs deal with clients and realize their service among other things. 

Think of CONDUSEF as the constitution of how SOFOMs operate in the country. These 2020 reforms, rules, and regulations only apply to regulated SOFOMs. If your SOFOM is not regulated then you won’t have to worry about this. 

In order for a regulated SOFOM to remain in business in 2020 and beyond, 70% or more of its assets must come from the allowed activities that it is authorized to perform as stated in the bylaws. Such authorized activities will usually include mortgages, financing, factoring, and the approval and issuance of credit. 

If your SOFOM does not generate 70% of its assets from this manner, then the same percentage needs to come from the administration of its portfolio as a way to be considered part of the financial system. That is to say, 70% of its income should come from the management of its assets (such as is the case with an investment advisor or fund. 

When a regulated SOFOM is considered part of the financial system, it can receive tax advantages. An important tax advantage that comes with the SOFOM being part of the financial system is that its credit portfolio will not be included in the calculation of the tax on its assets. 

Another tax advantage that you and your clients can take advantage of if you form a SOFOM is that the interest that you charge to your clients shall not be subject to a value-added tax. VAT is 16% in Mexico, so this is a big deal. 

SOFOMs are one of the preferred ways for foreign investors to begin capitalizing in the Mexican and Latin American markets. These structures have fewer restrictions on how they can operate compared to the US and Europe and are very powerful financial entities within Mexico.

All of the previous restrictions on investments by foreign investors associated with the capital stock of the SOFOMs have been eliminated. One of the many benefits of the reforms whose one of its main goals is to promote foreign investment. 

This is great news as before, foreign investors needed to do a ton of due diligence before they could invest in Mexico, and even when everything was in order their investment was limited. The red tape on SOFOMs was intense and intended to keep foreigners out. 

As of today, a SOFOM can be formed entirely with foreign investments as long as they follow the same protocol a Mexican entity needs to follow to be structured and that they register with the proper government institutions. 

This presents a great opportunity for foreign investors to take advantage of the situation and set up a SOFOM to operate within Mexico. This structure might provide financial services or investment management throughout Latin America. The SOFOM might also operate as a cryptocurrency exchange or money transmission business.

When you establish a SOFOM, you are given the opportunity to register it as a regulated or nonregulated entity. As a foreign investor, you have the advantage of using the nonregulated version as a low-cost financial services entity. The setup costs and operational costs for this entity in Mexico are a fraction of those associated with an international bank in Puerto Rico, for example. 

For the same reason, financial institutions who own a SOFOM or individual foreign investors have the opportunity to offer their clients a lower interest rate on credit and loans. Also, the costs of labor and other expenses will be significantly lower than in competing jurisdictions. For example, see Sample Operating Expenses for an Offshore Bank in Puerto Rico.

SOFOMs are becoming extremely popular in Mexico and I expect this popularity to continue in 2020 as the regime of the new president continues to implement his reforms The CONDUSEF is already preparing for an influx of foreign investment associated with the registry of SOFOMs. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico, contact us at info@premieroffshore.com or call us at (619) 483-1708

What is a Mexican SOFOM
Christian Reeves

What is a Mexican SOFOM?

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In this post, I’ll consider the question, “What is a Mexican SOFOM?” A Mexican SOFOM is a complex entity used for many purposes and the most powerful financial entity or structure in Mexico after a full banking license. In fact, a SOFOM is often the most efficient path to a banking license in Mexico. 

Mexico is a prime destination for American investors looking to grow their portfolios. Its proximity to the United States, secure banking laws, English speaking professionals, and the strength of the dollar of the country are all factors why American investors are doing business south of the border. 

One of the most powerful entities that you can use for your advantage is called a Sociedad Financiera de Objeto Multiple or SOFOM. There are a number of activities that you can do with a SOFOM such as financing, factoring, making loans, issuing credit, etc. The Mexican SOFOM is also used for cryptocurrency exchanges and money transmission businesses. 

Mexico is currently in the beginning of a new era as its President has promised a wave of reforms that will change many laws, one of the many reforms that have gone through is the way SOFOMs operate in the country. 

You do not need any special authorization to start operating as a SOFOM. Any person with proper Mexican identification can open a SOFOM. That is to say, the director and person responsible for the SOFOM must be a Mexican person. 

The Mexican federal government does not have to be involved at all in the process, so long as you register your financial institution as a non-regulated SOFOM, no license or special permission is required.

Establishing a SOFOM in Mexico works just like opening any other business in the country. Your company must be formed and authorized by a Notario. Do not get confused, a Notario’s role in Mexico is very different from the United States. A notary in Mexico is a very important person, where anyone can be a notary in the US.

Your Notario will create the bylaws of the SOFOM which will feature how the principal purposes of the entity will take place. It is important for you to have a business plan that explains in detail how your financial entity will work under a SOFOM. 

As part of one of its functions a SOFOM has the ability to act as a fiduciary in a guaranty trust that is formed to guarantee the credits that it issues, it should also be noted that trusts in Mexico do not work the same way as in the United States. 

One activity that cannot be done with a SOFOM receives deposits from clients as those are reserved for banks and financial institutions in the country. A partnership with a bank in Mexico is required. 

Partnering with a bank as a SOFOM is a great way to operate as a financial entity without an international bank license. The SOFOM structure allows you to hold client funds in your corporate bank account and transact as described above. 

There are two types of SOFOMs available, the regulated SOFOM and the unregulated SOFOM. If you will set up a regulated entity, within the bylaws of a the SOFOM you must include the phrase “financial entity with multiple purposes, a regulated entity”. 

Meaning that in your bylaws your SOFOM needs to be identified by the abbreviation S.O.F.O.M, E.N.R. Regulated SOFOMs are those that have business activities involving financial holding companies and credit institutions. 

Most regulated SOFOMs are owned or controlled by financial institutions and have a number of shareholders. This is because the SOFOM structure is often the most efficient path to an international banking license in Mexico.  

Unregulated SOFOMs work a little different than regulated ones. Unregulated SOFOMs are not overseen or are subject to any relevant banking or tax laws in a country such as the CNBV and SHCP.

Capital in unregulated SOFOMs is independent and does not include the participation of third party credit institutions and holding companies. You cannot use the word “bank” in the bylaws of an unregulated SOFOM. Also, an unregulated SOFOM does not have any minimum capital requirements. 

If you are establishing your SOFOM as an unregulated entity you must disclose to clients and possible investors that you are not subject to the supervision of Mexican Banking Laws or institutions such as the CNBV. 

The only government institutions that have the power to regulate unregulated SOFOMs are the Secretaria de Hacienda y Crédito Público (SHCP), CONDUSEF, and any other applicable anti-terrorism and money laundering laws. 

The bottom line is that the Mexican SOFOM is the most powerful structure to start a financial services business, mortgage or payday lender, to raise capital, or to operate a cryptocurrency exchange in Latin America. 

The setup process to start an unregulated SOFOM is burdensome and takes 3 to 4 months depending on the time of year. We will be happy to assist you throughout the process, including local representation, banking, and operational support. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico contact us at info@banklicense.pro or call us at (619) 483-1708

For more up to date information on offshore bank licenses and financial services structures, see www.banklicense.pro

Foreign Earned Income Exclusion 2020
Christian Reeves

Foreign Earned Income Exclusion 2020

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In this article, I’ll look at the Foreign Earned Income Exclusion 2020. The FEIE is the most powerful tool in the expat’s kit and is the focus of international tax planning for individuals and small business owners living abroad. The Foreign Earned Income Exclusion 2020 is the only major tax planning option left after Trump’s 2017 tax law changes. 

I wrote that the Foreign Earned Income Exclusion 2020 is the ONLY tax deal left after Trump’s changes to the US tax code. In previous years, small business owners could use the FEIE to eliminate the tax on their first $100,000+ and then retain profits in excess of the FEIE in an offshore corporation. These days are gone… we Americans can no longer retain profits in our offshore corporations tax-deferred. 

And there was a time when we had hope that the Foreign Earned Income Exclusion would be made obsolete by President Trump. During his campaign, he had indicated that he would move the US to a territorial tax system. Rather than taxing US citizens and residents on our worldwide income, we could pay tax only on profits made in the United States. 

Well, big corporations and multinationals moved to a territorial tax system, but the little guy got the shaft (per usual). We expats are still taxed on our worldwide income and we lost the ability to use an offshore corporation to retain profits over the Foreign Earned Income Exclusion 2020 amount tax-deferred. For more, see President Trump’s Tax Plan and Expats

With that in mind, here’s what you need to know about the Foreign Earned Income Exclusion 2020.

As stated above, the most important tool in the expat’s U.S. tax toolbox is the Foreign Earned Income Exclusion for 2020.  And, in most cases, the Foreign Earned Income Exclusion 2020 is the ONLY tax break you get for living abroad. 

If you qualify for the FEIE, you can exclude up to $107,600 in 2020 of earned income free from U.S. Federal income tax. This amount is up from $105,900 for the tax year 2019, $104,100 in 2018, $102,100 in 2017 and $101,300 in 2016. If you’re married, and both spouses qualify for the exclusion, your total combined exclusion may be up to $215,200.

There are two ways to qualify for the Foreign Earned Income Exclusion 2020. You can be out of the US for 330 out of 365 days or you can be a resident of a foreign country for a full calendar year. 

The first option, referred to as the 330-day test, is the easiest to use. Just be out of the US for 330 out of any 365 day period. For example, if you are out of the US from March 30, 2020, to March 15, 2021, you qualify for the Foreign Earned Income Exclusion 2020. 

The second option, known as the residency test, is much more challenging to implement. To oversimplify a complex topic, you need to move to a foreign country with the intention of making that place your home for the foreseeable future. You should have a residency permit and pay taxes in this new home. 

In most cases, you will use the 330 day test for the Foreign Earned Income Exclusion for the first year or two you’re living abroad. Once you’ve put down roots in a new country, you can switch to the residency test. 

Maximize the Value of the Foreign Earned Income Exclusion 2020

While you can’t retain earnings in an offshore corporation in 2020, you still need a structure in a tax-free country to maximize the value of the FEIE. 

First, if you use a personal bank account or a US company to run your business, you must pay self-employment tax on your income. The Foreign Earned Income Exclusion does not reduce self-employment or payroll tax. 

If you draw your salary from an offshore corporation, you can eliminate SE tax. This is a savings of about $15,000 a year for a single person earning $100,00 and about $30,000 for a husband and wife where both are working in the business. 

Second, if you operate a business without a corporate entity, the amount of your Foreign Earned Income Exclusion for 2020 will be reduced in proportion to your expenses. 

For example, the FEIE is $107,600 for 2020. Let’s assume you gross $160,000 from business and your net profit is $80,000 after deductible business expenses. You report this income on Schedule C and use Form 2555 to calculate the Foreign Earned Income Exclusion. 

Your allowed business expenses are about 50% of your gross. Because you are using Schedule C, your FEIE will be reduced in proportion to your deductible expenses. So, your available FEIE for 2020 is 50% of $107,600 = $53,800. 

You will be allowed to exclude $53,800 of your $80,000 net using the FEIE. Thus, you will pay US tax on $26,200. 

If you had operated your business through an offshore corporation for 2020, you would have paid zero in self-employment taxes and would have been allowed the full FEIE amount of $107,600. 

Perpetual Travelers and the Foreign Earned Income Exclusion 2020

There’s one group of expats that can never use the residency test. A perpetual traveler is someone that is out of the United States but never puts down roots. This group includes military contractors and those who can’t become residents of the country in which they work and Americans who travel constantly. 

If you’re a perpetual traveler, you won’t have a home base. You won’t get a residency visa and you will not pay taxes in any foreign country. In this case, you must use the 330-day test because you will never qualify for the Foreign Earned Income Exclusion 2020 using the residency test. 

Because the residency test allows you to spend more time in the United States, it might be in your best interest to gain residency in a low or no-tax country. For a list of options, see Which Countries Tax Worldwide Income?

One of the easiest residency programs for Americans is Panama’s Friendly Nations Reforestation Visa. Invest $25,000 in teak and get residency. For more on this topic see Best Panama Residency by Investment Program (note the investment amount has increased from $20,000 to $25,000 for 2020). 

I hope you’ve found this article on the Foreign Earned Income Exclusion 2020 to be helpful. If you need assistance preparing your US tax returns, drop me a line to info@premieroffshore.com and I will connect you with a tax prep expert. If you would like to form an offshore corporation to maximize the value of the FEIE, you can reach me by email or at (619) 483-1708

Income-Tax-Deductions
Christian Reeves

Itemized Deductions for 2020

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Itemized deductions are expenses on specific products, services, or contributions, that can be used to reduce your tax bill. These itemized deductions are only allowed if the taxpayer does not use the standard deduction to reduce the amount of taxes.

Some of the most popular types of itemized tax deductions used by taxpayers include charitable donations, child tax credit, adoption credit, mortgage interest, earned income tax credit, and medical expenses among many others.

You should not confuse itemized tax deductions with tax credits. Tax credits are a much simpler fiscal concept than tax deductions. With tax credits, you just subtract the number of tax credits to what you pay on yearly taxes, while tax deductions take into consideration many things such as what tax bracket you belong to.

There are many itemized deductions that you can include in your tax report, the list is quite extensive. You must do your research and make sure which deductions apply and which not, the following are some of the most popular itemized deductions for 2020.

By far one of the most popular items used to deduct taxes is by adding medical and dental expenses on your tax report. This includes payments done to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, etcetera.

Deductions using medical and dental expenses will remain the same percentage as in 2019 for 2020 which is 10%. Meaning that you will only be able to deduct those expenses that exceed 10% of your adjusted gross income. 

Taxpayers who reduce taxes through itemized deductions on federal income tax returns are permitted to reduce state and local real estate and personal property taxes including income taxes or general sales tax. 

These deductions done to state and local taxes are limited to a total of $10,000 dollars. Married taxpayers who file their taxes separately is $5,000 for each. These deductions are some of the most popular and it is quite easy to apply for them. 

Home Mortgage Interests may only be deducted on acquisition indebtedness interests such as your mortgage being used to buy, build, and/or repair your home. The amount that is allowed to do this can reach up to $750,000 or half which is $375,000 for those married taxpayers who file their taxes separately. 

Even though they have been a number of controversies involving charitable donations as a means to deduct taxes, these itemized deductions are still going strong. Although they are being scrutinized more than ever before and some changes were made for taxpayers who make charitable donations and then report them. 

Due to these changes and tax reforms the limit of cash donations allowed for public charities made an increase from 50% to 60% in 2020 and it will remain that percentage for the rest of the year. 

One of the major changes for itemized tax deductions in 2020 is for casualty and theft losses. Casualty and theft losses have been removed from the list except for the losses that can be proved in a federal disaster area.

Another major change on itemized deductions is the ones for job expenses and miscellaneous deductions which in 2019 were subject to a 2% deduction on Adjusted Gross Income. They have all been eliminated. 

The child tax credit had an extension of $2,000 for every child that qualifies that is refundable by up to $1,400. The $1,400 are subject to phaseouts and reviews by the corresponding fiscal authorities.

Adopting a child with special needs gives you as a taxpayer a credit of $14,300. The maximum credit that is allowed for any additional expenses is also $14,300. The amount fluctuates for taxpayers with an income that equals more than $214,520.

Student loan interest deduction for 2020 remains the same as it was in 2019 at $2,500. If you pay more than $85,000 you do not qualify for this deduction. This is one of the most sought after deductions, currently, there are a number of proposed reforms to make this number higher. 

Having a Medical Savings Account can be very beneficial for your tax plan. For individual taxpayers who are only covered by the Medical Savings Account, there is an annual deductible that is no less than $2,350 but no more than $3,550.

Shared individual responsibility payment has been eliminated for a variety of reasons, also the Pease Limitations for 2020 have been shut down. For Americans living outside of the country, the Foreign Earned Income Exclusion for 2020 is $107,600.  

I hope you’ve found this article on changes to the itemized deductions for 2020 to be helpful. For more information, or for assistance with international tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708