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tax planning for payday lenders
Christian Reeves

International Tax Planning for Payday Lenders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

offshore bitcoin license
Christian Reeves

Low Cost Offshore Bitcoin License

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The best low cost offshore Bitcoin license is from Panama. Specifically, the Panama Financial Services License is the best offshore Bitcoin license available. Here’s why Panama is the best.

When selecting an offshore Bitcoin license, you want to be in a country with a solid banking system which doesn’t regulate Bitcoin companies. You don’t want to be classified as a brokerage or a bank because of the high costs of compliance. Very few, if any, Bitcoin startups can withstand that level of overhead and scrutiny.

There are many countries that don’t regulate Bitcoin. For example, Costa Rica, Belize, Colombia, St. Kitts and Nevis, etc. Only the United States and Mexico (since 2015) in the region have called Bitcoin a “currency” and required licensing.

So, why does Panama offer the best low cost offshore Bitcoin license? Because you can operate a licensed but unregulated offshore Bitcoin brokerage in Panama. You can get a license from the government and not need to provide audited financials, compliance, or any of the other headaches associated with being regulated.

Bitcoin operators will find the right to say they are licensed as a plus in marketing campaigns. For example, the Panama Financial Services License allows you to make the following claim on your website: Bitcoin Capital Corp is a financial institution licensed by Ministerio de Comercio e Industrias – Republic of Panamá (MICI) in Panama as a Financial Institution and a member of the SWIFT/BIC Network Code: BTCAPAP1

  • Bitcoin Capital Corp is a fictional company for illustrative purposes only.

It’s important to note that you can’t say you’re regulated by MICI. You may only claim to be licensed by this agency.

So, you can’t use the word regulated in your marketing campaign. In addition, you can’t use the terms bank, brokerage, securities, savings and loan, trust (as in trust company, fiduciary or trustee), cash transfer, or money transfer. Each of these requires a different license… and are fully regulated.

That is to say, The  Panama financial services license does not allow the Panama company to engage regulated activities such as:

  • Securities trading or broker-dealer activities including investment funds, managed trading etc.
  • Any type of banking activity
  • Credit Union (cooperativas)
  • Savings and Loan (financiera)
  • Fiduciary (trust company) services
  • Cash transmittal services or currency exchange (e.g. bureau de change)

If you have a bank license from another jurisdiction, a Panama Financial Services Company can provide services to that bank. It may not offer services to the clients of the bank, only to the bank.

Above I said that an offshore bitcoin broker in Panama is not regulated, which is true. There is no audit requirement or government oversight. Of course, your banking and brokerage partners will impose rules. Also, the laws of Panama apply to you, just as they do to all businesses operating in the country.

This means your firm will need to follow the Anti Money Laundering, Know Your Client and Suspicious Activity laws. Also, your banking partner will demand you keep records to maintain a correspondent account.  

It also means that FinTech firms without correspondent bank accounts will have reduced compliance requirements compared to traditional brokerages. For example, a Bitcoin operator sending transfers across the network, outside of the banking system, will have lower compliance costs. Those who deploy an open, neutral protocol (Interledger Protocol or ILP) to send payments across different ledgers and networks will see added efficiency operating through a licensed but unregulated entity.

Another benefit of Panama is that an offshore Bitcoin licensed Financial Services Company has no minimum capital requirements. You can form your Bitcoin brokerage with any amount of capital you choose.

Of course, your transnational partners and correspondent banks will have account minimums. It would be a challenge for a company incorporated with $5,000 in capital to get the accounts and relationships it needs. The point here is that a Panama Financial Services Company operating as an offshore Bitcoin firm is free to set its capital as it feels appropriate without interference from a government regulator.

The average cost for a licensed offshore Bitcoin firm in Panama is $35,500. This includes opening a business account, assisting you to find office space or a virtual office, and 12 months of tax and business consulting to ensure the structure operates as intended. Annual fees are about $1,500 per year thereafter.

The time to form an offshore Bitcoin company is usually 7 days to setup the corporation and 15 days to receive the license after all of the documents are received by the governments and all of their questions are answered.

I hope you’ve found this article on the best offshore Bitcoin license to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

UBIT in an IRA
Christian Reeves

What is UBIT in an IRA?

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UBIT in an IRA is a real pain in the rear… at least if you’re IRA is onshore. When you take an IRA offshore, UBIT is not big deal. Here’s an explanation of UBIT in an IRA and how to deal with it.

UBIT stands for Unrelated Business Income Tax. We call this type of income in an IRA UBI and the tax you pay on that income is UBIT. We investors hate UBIT because it results in our IRA investments being taxed at around 35%.

That’s right, not all investments made by an IRA are tax free (ROTH) or tax deferred (traditional account). Some investments are taxable before they reach your IRA account. UBIT is the name for the tax assessed on profits derived from certain investments in your IRA or other plans (401-k, etc.).

UBIT applies to three types of investments in your IRA:

  1. When you buy real estate with a mortgage,
  2. When you buy stocks or other assets with leverage, and
  3. When you invest in an active business that’s not taxed at the corporate level.

When you buy a rental property with a mortgage, income and capital gains attributable to that mortgage are considered UBI. Thus you will pay 35% in UBIT on these profits before they reach your IRA.

For example, you buy a rental property in your IRA. 50% of the money for the purchase comes from your IRA account and 50% from a nonrecourse mortgage.

Because 50% of the money came from a loan, half of the net rental profits each year are UBI and taxable. The other half flow into your IRA tax free.

Likewise, when you sell the property, half of the capital gain is taxed at 35% and the other half flows into your IRA tax free.

  • Yes, that’s correct. A UBI capital gain is taxed at ordinary income rates and not the 20% long term capital gain rate.

The same goes for stocks and other investments made with leverage. Any income earned on that leverage is taxable at 35%, not long term capital gains rates.

This can get really bad in high leverage accounts like as currency / FX trading. I’ve seen leverage at 100 to 300% offshore. Basically all the gains are UBI and you pay UBIT at 35% on each trade.

Last but certainly not least are investments into active businesses from your IRA. When you invest in an active business that passes untaxed income to you, this is UBI and taxable at ordinary income rates.

For example, you invest in a US partnership using IRA money. The partnership issues a K-1 to your IRA LLC reporting net profits. If that K-1 was issued to an individual, he or she would add it to their tax return and pay tax on the profit.

The same goes for an IRA account. You don’t get to deposit untaxed business income into your IRA. You must pay tax on those profits first, just as an individual would. Of the three categories, this one makes the most sense. Without it, all businesses would be held in IRAs and no one would ever pay tax on the profits.

If that same business were operated through a US corporation rather than a partnership, the entity would pay corporate tax at 35% and pass a dividend to your IRA. This is not UBI because the income was taxed at the corporate level. A dividend from a corporation is not UBI while a K-1 or other distribution of pretax money is UBI.

When you have UBIT in an IRA, you must file IRS Form 990-T to report the gain. Your IRA pays this tax, not you (the IRA owner). So, you better have enough cash in the account to cover the bill.

Above and in other articles I always refer to UBIT in an IRA as being taxed at ordinary income rates. This is the simple way to say it… one we can all relate to. Technically, the UBIT rate for an IRA is found in the Trust and Estate tax table, not the ordinary income tax tables.

Trusts and estates have a sliding such that most UBIT will be taxed at 33% or 39%. This is basically the same as the ordinary income rate… certainly close enough for a free blog article!

That’s everything you need to know to understand UBIT in an IRA. Now, here’s how to avoid paying it.

Any time you invest in the United States with leverage, or in an active business using your IRA, you will pay UBIT. There’s no way around it. If you make those investments outside of the United States, you can eliminate UBIT by forming a UBIT blocker corporation.

The same US rules apply to IRAs offshore that apply onshore. Therefore, a distribution of untaxed business profits from a foreign partnership to an offshore IRA LLC is taxable as UBI.

Also like the US, a dividend from a foreign corporation is not UBI and not taxable when it reaches the offshore IRA LLC.

So, if you will make an investment into a foreign business, or are using leverage, you can place an offshore corporation in between the investment and your IRA. Your IRA invests into the corporation and the corporation invests into the business or buys the rental property.

Money flows from the investment back to the corporation. Then the corporation issues a dividend to the offshore IRA LLC. Because dividends are not UBI, no UBIT is payable. We call this a UBIT blocker corporation.

You might be thinking to yourself, hey, that’s pretty slick. Why can’t I do the same thing in the United States? Why are UBIT blockers only available offshore?

Because, when you put a US corporation in between your IRA and your investment, that corporation must pay tax on any gains derived. The US corporation pays 35% corporate tax on US source income. All you’ve done is converted UBI into corporate income taxable at corporate rates instead of trust and estate rates.

The key to an offshore UBIT blocker is that the corporation must be set up in a tax free jurisdiction. If you pay zero corporate tax, you can pass profits from the investment to the corporation and then to the LLC tax free. Once converted from ordinary income into a dividend, UBI is eliminated and the IRA gets to receive the transfer tax free.

I hope you’ve found this article on UBIT in an IRA interesting. For more information on how to setup an offshore IRA LLC with UBIT blocker, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

operate an investment fund tax free from Puerto Rico
Christian Reeves

How to operate an investment fund tax free from Puerto Rico

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The best tax deal available to hedge fund traders and investment fund managers is Puerto Rico. There’s no tax holiday available anywhere in the world that can compete with the offer from Puerto Rico. Here’s how to setup and operate an investment fund tax free from Puerto Rico.

First, let me explain why Puerto Rico can make an offer to US hedge fund managers that no one can match. It’s because Puerto Rico is a US territory with its own tax code. Any US citizen that becomes a resident of Puerto Rico, and operates a business from the island, is exempted from Federal tax laws and pays only tax in Puerto Rico.

The same is not true when you move abroad or setup an offshore company. Federal tax laws apply to any business owned by a US citizen or green card holder… unless that business is in the US territory of Puerto Rico.

The fact that Puerto Rico is exempted from Federal tax laws is codified in US Code Section 933. It states, in part:

“In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.” (26 U.S. Code § 933 – Income from sources within Puerto Rico)

So, if you’re living and operating your investment fund from Puerto Rico, you’ll pay only Puerto Rico tax. A resident of Puerto Rico is someone who spends at least 183 days a year on the island and otherwise qualifies for Act 22. In addition, Puerto Rico should be your home base and the center of your financial activity.

Your fund will need to be licensed under Act 73, the Economic Incentives for the Development of Puerto Rico Act. Act 73 offers a tax holiday to any investment fund providing services from Puerto Rico to individuals and companies outside of Puerto Rico. Eligible services include investment banking or other financial services including but not limited to:

  • Asset management,
  • Alternative investment management,
  • Management of private capital investment activities,
  • Management of hedging funds or high risk funds,
  • Pools of capital management,
  • Administration of trust that serve to coovert different groups of assets into securities, and
  • Escrow account administration services.

Note that Act 73 requires you provide services from Puerto Rico to persons or businesses outside of Puerto Rico. You don’t incorporate your fund in Puerto Rico… you operate it from Puerto Rico to qualify for Act 73. Operate as a standard offshore master feeder fund in Cayman or another tax free jurisdiction. Basically, the service of operating the fund is being exported from Puerto Rico to Cayman.

Your feeder funds should be organized based on where your clients are domiciled. For example, a Delaware LLP for US investors and an offshore feeder for foreign and tax exempt investors (such as US IRAs and pension funds). You, the general partner and manager would be a resident of Puerto Rico.

Under Act 73, your profits in the fund are taxed at 4%. When those profits are transferred to you, the fund owner/manager resident in Puerto Rico, they will be tax exempt dividends. Thus, your total tax burden is 4% on your profits.

Remember that, as a resident of Puerto Rico, Federal taxes do not apply to you. Thus, you will never pay US tax on these profits. This is not tax deferral as you see offshore… this is a tax rate of 4%, plain and simple.

I should point out that these tax benefits are not meant for your US resident investors. They get their K-1s just as they normally would from your domestic feeder. These tax incentives are meant for the owners of the fund who are resident in Puerto Rico.

  • Nonresident shareholders of the fund can achieve tax deferral on Puerto Rico sourced income while resident shareholders can take distributions tax free.

Also, the 4% rate applies to Puerto Rico sourced income. It does not apply to any US effectively connected income or US source income. Funds and REITS may have US taxable income from lending or any number of other activities in the States.

Structuring and operating a fund from Puerto Rico will dramatically decrease your US taxes. It will also reduce the complexity of your tax planning. So long as you meet the requirements of Act 73, you’re clean in the eyes of the IRS.

Act 73 is only one of several tax incentives available in Puerto Rico. For example, Act 20 allows any service business relocated to the island to receive this same 4% tax rate. For more, see: Puerto Rico is the Top Jurisdiction for US Businesses.

Large funds might decide to enter Puerto Rico using the offshore banking statute, Act 273. For more on this, see: Lowest Cost Offshore Bank License is Puerto Rico. This article is focused on deposit taking banks. There is a section of 273 for International Financial Entities that is used by some investment managers.

I hope this article on how to operate a fund or investment business tax free from Puerto Rico has been helpful. For more information, or to setup a business under Act 20 or 273, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to negotiate a tax holiday with the government of Puerto Rico.

EB-5 Business
Christian Reeves

Where to start an EB-5 business

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This article is about where to start an EB-5 business. Where to set up an EB-5 visa company with 10 employees, get your US green card and passport, and pay near zero in US taxes. If you’re considering where to open an EB-5 visa business, I bet you’ve never considered this tax trick.

First, a bit on the EB-5 investors visa. With the EB-5 program, you can invest $500,000 in an approved project or start your own business and invest $1 million. That business must employ at least 10 people and operate until you get your US passport. This article is focused on entrepreneurs who wish to start their own business to immigrate to the United States.

After you setup a business, it takes about a year for your US green card to be issued (for your EB-5 application to be approved). Then you wait 5 years to gain citizenship. Once you have your US passport, you have all the rights of a natural born American… your citizenship can’t be taken away for any reason.

That is to say, you must keep your business going, and 10 employees working, for those 6 years (or a bit more). If you can do that with an investment of $1 million, great. If not, you’ll need to put in more. If you make a profit, you can take it out as a distribution… just keep the business going at all costs.

The EB-5 program has been growing quickly. Back in 2009, investments totaled $300 million. It’s increased by about 30% per year, and brought in finds of around $7 billion in 2015. Experts expect it to grow by 30% to 50% in 2017.

The largest number of investments have come from China. 8,156 visas were issued to Chinese nationals in 2015 compared to 111 visas to persons from India (the second largest group).

One reason 2017 is expected to be a record year is that the United States Citizenship and Immigration Services has proposed significant changes to the EB-5 investor visa program. They’re looking to increase the minimum from $500,000 to $1.35 million and the stand alone business amount from $1 million to $2 million. Those who file before the increase will be allowed to proceed under the lower amount.

Now on to the focus of this article, where to start an EB-5 business.

The best place to start an EB-5 visa is San Juan, Puerto Rico. Period, end of discussion. No area or city in the United States can compete with Puerto Rico when it comes to starting an EB-5 business.

The reason to set up your EB-5 business ub Puerto Rico is simple and can be stated in one word: TAXES.

Once you have your green card, and eventually your passport, you’ll be taxed on your worldwide income. That includes income earned in your home country and money made in the United States. The US IRS wants a cut of every dollar you make!

That includes capital gains and passive income. When you sell real estate, stocks, or any other capital asset, you must pay US capital gains tax on the sale. Capital gains are currently taxed 23.8% and this is expected to go down to 20% once Obamacare is eliminated.

The same goes for income from your EB-5 business. You’ll pay Federal income tax on your profits at about 35% and another 10% to your state (if you’re in New York or California). You must pay your taxes, and keep your business going for at least 6 years, to receive your passport.

The only EB-5 region of the United States that won’t tax your business income and capital gains is the territory of Puerto Rico. If structured properly, you’ll pay only 4% in corporate tax on your EB-5 profits and zero in capital gains and dividends from foreign corporations (such as those in your home country).

This is to say, an EB-5 business set up in Puerto Rico will pay 4% in corporate tax and you’ll pay zero on your foreign sourced income (profits earned outside of Puerto Rico). You can cut your US tax from 40% to 4% by setting up your EB-5 business in  Puerto Rico.

In order to combine the US EB-5 investors visa with the tax benefits of Puerto Rico, we follow these steps:

  1. Form and license an Act 20 business in Puerto Rico with a minimum of 5 employees.
  2. Apply for the EB-5 visa.
  3. Once the EB-5 is granted, hire an additional 5 employees to reach the required number of 10. Act 20 required 5 employees while the EB-5 requires 10.
  4. You immigrate to the United States using your green card.
  5. Apply for the Act 22 personal tax holiday in Puerto Rico.

Once all of these steps are complete, you’ll have an Act 20 business taxed at 4% and zero tax on your worldwide income through Act 22. You’ll also have a green card and, if you keep the business going and in compliance, a passport after 5 years.

In order to qualify for Act 22 (step 5), you must be living in Puerto Rico. Specifically, you must buy a home on the island and spend at least 183 days a year there. You can spend the rest of your days abroad or in any part of the United States.

For example, we have clients that spend 100 days a year in New York, 183 days in Puerto Rico, and the remainder (80 days) traveling.

If you travel extensively, you must be sure to spend more time in Puerto Rico than you do in the United States. For example, 160 days in Puerto Rico, 40 days in the United States, and the rest traveling abroad.

I hope you’ve found this article on where to start an EB-5 business to be helpful. Please contact me at info@premieroffshore.com or call us at (619) 483-1708 with any questions. We’ll be happy to assist you through all stages of this process.

how to report foreign salary
Christian Reeves

How to report a foreign salary or international business income

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Here’s how to report a foreign salary or international business income. If you earn money from working as an employee or independent contractor, you need to report it on your US tax return. Here’s how to report income paid by a foreign company.

I’ll briefly comment on income earned from abroad while living in the United States. Then I’ll focus on how to report a foreign salary or other income while living abroad and qualifying for the Foreign Earned Income Exclusion.

If you’re living in the United States and are paid by a foreign company, you have self employment income. This must be reported on Schedule C and self employment tax will apply.

Being self employed means you can deduct any expenses you had, such as travel, equipment, etc. It also means you’ll pay self employment tax in addition to ordinary income tax on your net profits. SE tax is 15%.

Anyone who does not qualify for the Foreign Earned Income Exclusion should report income from abroad on Schedule C. Even if you did the work outside of the United States, if you were a US resident during the tax year, you have US source self employment income that goes on Schedule C.

For example, you’re a US citizen living in California throughout 2017. You travel to Taiwan for 2 months on a special project earning $30,000. All of the work on this project is performed while you are in Taiwan.

This income is taxable in the United States and self employment tax applies. If you paid any taxes in Taiwan, you can use the Foreign Tax Credit to eliminate double taxation.

Same facts as above, but you’re in Taiwan for all of 2017 and earn $100,000. You’re out of the US for 330 out of 365 days and therefore qualify for the Foreign Earned Income Exclusion using the physical presence test for 2017.

If you’re an employee of a Taiwanese company, your US taxes are relatively simple. You file Form 2555 with your personal return (Form 1040), claiming the FEIE and reporting your salary from a foreign employer. Because you earned less than $102,300, you will pay zero US tax on your income.

If you had earned $200,000, and paid tax in Taiwan, you would use the FEIE on your first $100,000 and the foreign tax credit on the second $100,000.

Salary is taxable at 18% in Taiwan and your US rate is probably about 30%. So, you’ll pay 18% on $200,000 to Taiwan and 12% to the United States (30% – 18%) on the second $100,000 which was over the FEIE amount.

If you’d been working in a country that didn’t tax your salary, you would have paid zero tax on your first $100,000 using the FEIE. For example, you could have lived tax free in Panama while working remotely for a Taiwanese company.

If you’re not an employee of a foreign corporation, then you have income from self employment. SE income will be reported on Schedule C which will link to Form 2555 and apply the FEIE.

For example, you’re an independent contractor working in Panama for a company in Taiwan. You earn $100,000, which is paid into your personal bank account. You will pay zero income tax because you qualify for the FEIE. However, you will pay 15% in self employment tax. SE tax is not reduced by the FEIE.

For more on self employment tax for those living and working abroad, see How self employment tax works when you’re offshore

You can eliminate self employment tax by forming an offshore corporation and having your employer (the Taiwanese corporation in this example) pay into that account. You then draw a salary reported on Form 2555 and not Schedule C.

Your offshore corporation will file Form 5471. In most cases, this will be attached to your 1040 behind Form 2555.

Keep in mind that Form 2555 can be used with any foreign corporation. It doesn’t matter if you’re an employee of an offshore corporation that you own or an employee of someone else. So long as your salary comes from a foreign company, and you qualify for the FEIE, you can avoid self employment tax and Schedule C.

An offshore corporation can also help to defer US tax on income over and above the FEIE. For example, you’re living in Panama, qualify for the FEIE, earn $200,000 from work, and are paid into your Panama corporation.

You can take out $100,000 and report that as your salary on Form 2555. You leave the balance in the corporation as retained earnings. You will only pay US tax on this money when you take it out of the foreign corporation, usually as a dividend.

I hope you’ve found this article on how to report a foreign salary or business income to be helpful. For help preparing your US returns, or to setup an offshore corporation in a tax free country, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Trump Tax Plan for Expats
Christian Reeves

Trump’s Tax Plan for Expats

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Most of Trump’s tax plans will help American expats. If you’re living abroad, and making more than the Foreign Earned Income Exclusion, or have significant capital gains, Trump might cut your US taxes significantly.

First, I should point out that there’s been no indication Trump will attack the FEIE. I don’t expect this Exclusion to be reduced. If you’re working abroad and earning less than $102,100, you’re golden.

Second, note that Trump’s changes to international tax law have been focused on import taxes and preventing jobs from going overseas. Unless you sell a physical good into the United States, his negative tax plans should not affect you.

That is to say, if you’re an expat with a portable business, or an internet, service, drop shipping, or consulting business, Trump’s plans won’t hurt you. So long as you’re not importing into the United States, there’s no need to worry.  

Let’s take a look at a few highlights of Trump’s tax plan.

  • Reduce taxes across the board, with special focus on working and middle-class Americans
  • Ensure the wealthy pays their fair share, but not so much that it’s detrimental to jobs or undermines the ability to compete
  • Eliminate special interest loopholes, make business tax rates more competitive in order to keep jobs in the US, and create new opportunities to revitalize the economy
  • Lower childcare costs by allowing families to fully deduct the average cost of childcare from their taxes

The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. Personal exemptions will be eliminated as will the head-of-household filing status.

In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers.

Most importantly, Trump’s tax plan will lower personal income taxes and reduce the number of brackets. Under Trump’s plan, our current seven tax brackets will be collapsed into just three.

Lower-income families will end up with an effective income tax rate of zero. According to Trump, a middle-class family with two children would see a tax cut of about 35%.

The proposed income tax rates for a married filing joint taxpayer are as follows:

  • Less than $75,000 – 12%
  • More than $75,000 but less than $225,000 – 25%
  • More than $225,000 – 33%

Tax brackets for single filers will be exactly half of the amounts listed above. This is why there is no more “head of household” or status, nor is there a “marriage penalty.” The single tax brackets are now exactly half of those for married joint filers.

Remember that your first $102,100 will be excluded under the FEIE. So, an expat’s tax bracket will start at 25% and go up to 33% on salary in excess of the Exclusion.

I also note that your bracket begins at 25% and not at 0% or 12%. The excluded $102,100 counts toward your bracket, it doesn’t start at zero as if the income was never earned.

So, someone who earns $200,000 in salary for 2017 will pay 25% on about $100,000 (the amount over the FEIE). If that same person earns $300,000, the first $100,000 is tax free, the second $125,000 is taxed at 25% and the remaining $75,000 is taxed at 33%.

Self employed expats operating through an offshore corporation can manage these taxes by holding income in excess of the FEIE in the corporation as retained earnings. Pay yourself (and your spouse, if possible) the max allowed and retained the balance in your corporation tax deferred.

American expats can eliminate income tax using the Foreign Earned Income Exclusion. There is no such tax break for capital gains. So long as you hold a blue passport, Uncle wants his cut of your passive income.

Trump has suggested he will keep the current long-term capital gains tax rates of 0%, 15%, and 20% but reduce the number of tax brackets from seven to three as described above. Trump’s simplified and consolidated tax brackets, and their corresponding long-term capital gains tax rates are:

Marginal Tax Rate Taxable Income (Single) Taxable Income (Married Joint Filers) Long-Term Capital Gains Rate
12% $0-$37,500 $0-$75,000 0%
25% $37,500-$112,500 $75,000-$225,000 15%
33% $112,500 and above $225,000 and above 20%

DATA SOURCE: WWW.DONALDJTRUMP.COM

It’s also become clear that Trump plans to repeal Obamacare (the Affordable Care Act), and thereby eliminate the 3.8% investment income tax. Under Obama, most investors were paying 23.8% on long term capital gains. Under Trump that will likely go back to 20%.

Nowhere in Trump’s tax plan is a reduction of self employment or payroll taxes mentioned. Therefore, American expats will benefit from incorporating offshore and running their businesses through an offshore company.

You should report your salary on IRS Form 2555 as coming from a foreign corporation to eliminate self employment and payroll taxes of 15%. For more on this, see: How self employment tax works when you’re offshore.

Remember that self employment taxes are not reduced by the Foreign Earned Income Exclusion. The FEIE applies to income taxes paid against your salary. SE tax is not an “income” tax.

The only way for an expat to eliminate SE and payroll taxes is to operate his or her business through an offshore corporation. This trick alone can save you $15,000 a year if you’re single or $30,000 if a husband and wife both work in the business and max out the FEIE.

I hope you’ve found this article on Trump’s tax plan for expats to be informative. For assistance with an offshore corporation or US tax compliance, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

foreign real estate with my IRA
Christian Reeves

Can I buy foreign real estate with my IRA?

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The number one question I get on offshore IRAs, is “can I buy foreign real estate with my retirement account?”  The answer is a resounding yes. You can buy raw land, a home, condo, office building, or anything else you like outside of the United States within your retirement account.

In fact, you can buy or invest in just about anything offshore. The only limitations on your IRA are found in Section 408 of the Internal Revenue Code. This says you are prohibited from investing in life insurance, collectibles, and certain coins (collectable coins that are not 99.99% pure).  Other than that, you can place whatever you like in your IRA.

Foreign real estate is the most popular investment with our offshore IRA LLC clients. They choose real estate as a way to further diversify out of the US and out of the dollar. To take some cash off the gambling table in the time of Trump and to help grow retirement wealth or turn it into income from rental profits.

There are two ways to buy foreign real estate in your IRA. You can setup a self directed IRA and ask your custodian to make the investment. This is best if you will have only one international investment and don’t want to open a foreign bank account for your retirement account.

The other option is to take your entire retirement account offshore. Get rid of your custodian and take over management of your IRA. Get the entire account out of the United States and under your control.

You can do this by forming an offshore IRA LLC owned by your retirement account. Then this LLC appoints you as the manager and opens international bank accounts at institutions that understand US IRA rules.

The last step is to instruct your custodian to invest your entire IRA into this newly formed offshore IRA LLC. Once the cash is transferred into the IRA LLC bank account, the custodian’s control ends and yours begins.

From here you can buy and sell foreign real estate, trade stocks, buy physical gold, and generally manage the assets of the account for the benefit of your IRA. You are to act as a professional investment manager and “always work in the best interest of the account.”

Once you’re installed as the manager of your offshore IRA LLC, you’re responsible to follow all of the US rules imposed on professional investment managers. This basically means that you can’t personally benefit from your retirement account.

So, you can’t buy a house and live in it, can’t borrow from the account, can’t use IRA funds to pay off an existing or personal mortgage, and can’t combine IRA money with after tax money in one offshore account.

These rules are detailed in IRC Section 4975 and referred to as prohibited transactions. A prohibited transaction is any improper use of an IRA by the account owner or account manager (both of whom are now you), beneficiaries, or any disqualified person.  

Examples of prohibited transactions include:

  • Borrowing money from your IRA
  • Selling your property to your IRA
  • Using your IRA as security for a loan
  • Buying property for personal use

Most of these are self explanatory. I should point out that you are allowed to use loans to by foreign real estate in your IRA. You are just prohibited from pledging your account as collateral for that loan. To put it another way, you can borrow money to buy foreign real estate with a nonrecourse loan. You can’t borrow with a recourse loan that’s guaranteed by the IRA or by you personally.

Above I said that these rules apply to you, beneficiaries and disqualified persons. Disqualified persons are defined in IRC Section 4975(e)(2). Here are the most common disqualified persons:

  • The account owner (obviously)
  • A person providing services to the plan such as an attorney, CPA, real estate agent, investment advisor, etc.
  • A business, corporation, partnership or trust of which you own 50% or more (ownership or control / voting rights)
  • Your spouse, parents, grandparents and great-grandparents, children (and their spouses), grandchildren and great-grandchildren (and their spouses).

The term “disqualified person” does not include siblings (brothers and sisters) or aunts, uncles and cousins of the IRA owner.

With all of those caveats, you are absolutely allowed to by foreign real estate in your IRA. You can do it through a custodian, if you don’t mind having him in control of the property, or setup an offshore IRA LLC to handle the transaction.

I hope you’ve found this article on whether you can buy foreign real estate in your IRA to be helpful. For more information on taking your account offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We have been assisting clients get their accounts offshore since 2002 and will be happy to work with you.

Just remember that there are risks in taking your IRA offshore. You must follow all the IRS rules and act in the best interest of the account. This means you’ll need ongoing support and an incorporator / advisor who’s an expert in these US rules. If you don’t hire Premier, hire someone in the United States. For more on why you need a US expert, see: Risks in Taking Your IRA Offshore.

Trump Travel Ban
Christian Reeves

Trump’s next travel ban will affect up to 16 million American citizens

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Trump’s travel ban prohibiting those from 7 high risk countries from entering the United States for a few months has sparked protests across the country and crocodile tears from Senator Chuck Schumer. This ban affects a relatively small number of foreigners and caught 109 people “in the air,” who were held at US airports for hours on end.

Having been detained at two different airports over my many years of travel, I can relate to their pain. So far, 100,000 US visas have been revoked since Trump’s travel ban and a former Prime Minister of Norway was inconvenienced for a whole hour because he had visited Iran.

No matter your political affiliation, we all feel for those impacted by Trump’s travel ban (maybe not the PM, but everyone else). But these numbers are NOTHING compared to what’s coming for American citizens in 2017!

The Trump IRS will begin revoking or failing to renew the passports of Americans with “significant” tax debts in early 2017. If you owe more than $50,000, your passport can be taken away and you will be prohibited from leaving the United States.

About 16 million Americans, many of them expats, have significant tax debts. Thus, Trump’s 2017 travel ban will affect up to 16 million American citizens. It promises to be the largest travel ban enforced by any country since World War II.

If you owe more than $50,000 to the Federal government, including interest and penalties, your passport and right to travel can be revoked.

Also, the IRS must have made some effort to collect from you. This means that:

  • The IRS has filed a notice of federal tax liens and 90 days has passed without your filing an appeal.
  • The IRS must have attempted to levy your bank account.

It’s not required that an agent contacted or visited you. Nor is it necessary that you actually received the notice of tax lien or levy… just that they were mailed to your last known address.

Both of these collection procedures are automated – handled by IRS computers. Anyone oweing $50,000 or more for over 1 year will have had a lien and levy issued, so anyone with an qualifying tax debt can have their passport revoked.

There are some situations where the IRS is prohibited from collecting from you and from revoking your passport. If your tax debt meets the following tests, you will be exempt from the travel ban. If the debt is:

  • Being paid in a timely manner under  an installment agreement entered into with the IRS,
  • Being paid in a timely manner under an offer in compromise accepted by the IRS,
  • For which a collection due process hearing is timely requested for a levy, or
  • For which collection has been suspended because a request for innocent spouse relief under IRC Section 6015 has been made

In all other cases, if you owe $50,000 or more, you will land on Trump’s next travel ban list.

The process of placing a US citizen on this travel ban list requires that the IRS certify the debt (send a letter) to the State Department by stating that you owe $50,000+ and asking them to revoke or refuse to renew your passport.

When asked to refuse to renew or issue a passport, the State Department will hold the request for 90 days.

During this time you can negotiate with the IRS (not State) and attempt to resolve the debt. Your options are to pay in full, prove the debt is in error, or enter into an installment agreement that’s acceptable to the IRS.

There is no wait period allowing you to resolve your debt before the State Department revokes your passport!

Once your passport is revoked or refused ( the 90 day grace period passes), your ability to negotiate an installment agreement is gone. Your only options are:

  1. Pay the bill in full,
  2. Wait out the 10 year statute of limitations or successfully complete bankruptcy so that the debt is no longer legally enforceable,
  3. Pay the bill down so you owe less than $50,000, or
  4. Prove the debt is in error.

If you’re at risk of losing your US passport, there are two ways to avoid Trump’s travel ban. You can buy a second passport from a country like St. Lucia or Dominica, or you can gain residency in a country like Panama and move there.

It will cost you about $130,000 to buy a decent passport. You can get residency in Panama with an investment of $20,000 if you’re from a friendly nation.

However, both of these options must be completed before you lose your US passport. Once you’re on the travel ban list, no country will grant you residency or citizenship. Also, you will be unable to leave the United States, so there will be no way to complete the application process.

I hope you’ve found this article on Trump’s next travel ban to be helpful. For more information on how to settle your tax debt, to buy a second passport, or to negotiate residency in Panama, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

subpart f income
Christian Reeves

Subpart F Income Defined

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When a US citizen forms an offshore corporation in a low tax country different from his country of operation, he has a Controlled Foreign Corporation with possible Subpart F income issues. In this article, I’ll review the Subpart F rules and determining factors.

First, let’s talk about a Controlled Foreign Corporation. Subpart F only applies to CFCs.

A CFC is a foreign corporation primarily owned by a US person or persons. A US person is any US citizen, resident or greencard holder. Ownership means stock ownership or voting rights / control. So, a CFC is a foreign corporation where US persons hold more than 50% of the stock or voting rights (ownership or control).

Above I said that Subpart F applies to offshore corporations formed in countries other than your country of operation. This would usually be in a low tax country like Nevis or Belize to worldwide local taxes.

This is because Subpart F is targets income and profits that has little or no economic relation to the CFC’s country of incorporation.

Subpart F income includes insurance income, foreign base company income, international boycott factor income, illegal bribes and income derived from counties on the US blacklist (as sponsors of terrorism).

I’ll assume that you, my esteemed reader, aren’t running guns, bribing public officials nor trading with Iran or North Korea. So, that leaves insurance income and foreign base company income.

Subpart F Insurance income is the income earned from insuring risk outside of your country of incorporation. Unless an exception applies, insurance income earned by a CFC is taxable in the United States in the year earned.

The insurance section of the Sub F rules is meant to prevent multinationals from building large stashes of tax deferred profits offshore through “self insurance schemes.” Exceptions include the mini-captive insurance company and certain licensed foreign insurance providers.

The mini-captive exception allows you, the US small to medium sized business owner, to self-insure against foreseeable risks up to $2.2 million per year as of 2017. That is to say, you and expense and take a deduction for of up to $2.2 million per year in self insurance costs paid to an offshore CFC owned by you or your US corporation.

Subpart F foreign base company income is the broadest category and includes any income earned that has no economic connection to your country of incorporation. There are 5 types of foreign base company income:

  • Foreign personal holding company income,
  • Sales income,
  • Services income,
  • Shipping income, and
  • Oil-related income.

The foreign personal holding company rules basically turn your offshore corporation into a disregarded entity or partnership when it comes to passive income. In most cases, passive income and capital gains will flow through from your offshore CFC to be taxed in the United States.

For purposes of subpart F and the regulations, foreign personal holding company income consists of the following:

  • Dividends, interest, rents, royalties, and annuities;
  • Gain from certain real estate transactions (does not apply to real estate professionals earning ordinary income rather than passive income);
  • Gain from commodities transactions;
  • Foreign currency gains; and
  • Income that is equivalent to interest income.

Foreign base company sales income is profits from sales where the CFC is unnecessary in generating the income. For example, a US company sells inventory to a Panama corporation and that Panama corporation sells the inventory to Asia, without making any improvements or adding any value.

In this case, the Panama company is unnecessary and any income attributed to it will flow back to the United States.

However, if the Panama CFC does add significant value to the inventory, then the profit it retains would not be considered foreign base company sales income. In that case, the US company would pay tax on the value it created, the Panama company would retain income based on the FMV of the value it added, and the company in Asia would do the same.

Foreign base company service income is income generated from services earned for work done outside of the CFC’s country of incorporation for or on behalf of a related person. It does not include income derived in connection with the performance of services that are directly related to:

(a) the sale or exchange by the CFC of property manufactured, produced, grown, or extracted by it and which are performed before the time of the sale or exchange; or
(b) an offer or effort to sell or exchange such property. IRC 954(e)(2), Treas. Reg. 1.954-4(d).
(c) nor is service income that falls within the definition of Foreign Base Company Oil Related Income. IRC 954(b)(6).

Finally, foreign base company service income does not include certain services income derived in the active conduct of a banking, financing, securities, or insurance business. IRC 954(e)(2).

I hope this article on Subpart F income has been helpful. For more information on forming an offshore corporation, or devising an international tax plan, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

protect IRA
Christian Reeves

Enhanced Protection for Your IRA

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Many people think that IRAs are protected from civil creditors and the IRS… many people are wrong. Here’s how to get enhanced protection for your IRA and take control of your investments.

IRA assets are protected to varying degrees by each of the states and under the federal bankruptcy law. In order to secure 100% protection from all creditors and the IRS, you need an enhanced protection plan for your IRA. Remove your retirement account from the United States and get it away from US judges and creditors.

First, let’s look at what protection your IRA has. I’ll focus on California here, knowing that many states have similar rules.

In California, 401(k)s and profit-sharing plans are protected from civil creditors but not the IRS. IRAs are not as protected as 401(k)s because they are not covered by federal statutes. Therefore, a civil creditor’s ability to get your retirement account in California will depend on what type of account you have and how much you have in it.

401(k) accounts have better protection is because federal law prohibits civil creditors from going after pension plans that were set up under the Employee Retirement Income Security Act (ERISA). Examples of ERISA-qualified pension plans and benefit plans:

  • 401(K) accounts
  • pension and profit-sharing plans
  • group health and life insurance plans
  • dental and vision plans, and
  • HRAs, HSAs, and accidental death or disability plans

Plans not covered by ERISA include IRAs, Roth IRAs, SEPs, and SIMPLE IRAs. These are covered by state law only, which offers far less protection than federal law.

California protects only that portion of your IRA which a judge believes you need to survive. This is the amount necessary for the support of you and your dependents at the time you retire. Yes, standard of living you’ll be allowed in your old age is at the discretion of the judge.

In deciding how much to “allow” you to keep from your IRA, the judge will consider the following questions:

  • Do you need the retirement funds now, and if so, how much?
  • Will you be able to replenish your retirement account if it’s awarded to a creditor?

Bottom line is, if you have a job and are under age 65, the court is likely to take all of your retirement savings. If you’re retired and in poor health, they’ll leave you enough to support yourself… not necessarily enough to maintain your current standard of living, but enough to keep you alive (think welfare recipient lifestyle without all of the Obama benefits).

Keep in mind that none of these plans are protected from IRS levy!

The most efficient way to enhance the protection of your IRA is to move it offshore. Get your retirement account away from US judges while maintaining the tax benefits. Take it offshore and out of the reach of future civil creditors and IRS levy.

It’s important to note that your IRA will retain its tax deferred (traditional) or tax free (ROTH) status. So long as you follow the rules, you can invest your IRA as you see fit, which includes  offshore. The fact that this enhances your protection is a side benefit of investing abroad, not the sole motivating factor.

Here’s how to take your IRA offshore…

We first move your account from your current custodian to one that allows for international investments. Most custodians, such as Vanguard, Fidelity, and Chase don’t allow foreign investments. They want you to buy their bonds and those products on which they earn the highest commission. When you go offshore, your custodian gets no commission and has no control over your investments.

Note that changing custodians is done by transferring your account. It doesn’t involve a roll over and has no limitations.

Next, we form an offshore LLC in a max security jurisdiction like Cook Islands, Belize, Nevis, etc. This LLC is owned by your retirement account and you’re named as the manager of this company.

Then the LLC opens an offshore bank account and your custodian invests your account into the LLC by transferring cash to this foreign bank account. You’re the signer on the account and the one in control over all transfers and investments originating from it. That is to say, you have checkbook control over your IRA once it’s in an offshore LLC.

Tip: The IRS can levy your foreign account if your bank has a branch in the United States. For this reason, I recommend international banks that don’t have branches in the US.

Once your IRA is offshore, it’s your responsibility to manage the money for the benefit of your account, just as a professional advisor would (or should) do. This means you can’t borrow against it, use it for your personal expenses, buy home and live in it, etc.

You’ll find that the rules around offshore LLCs are simple. So long as you transact at arm’s length and act in the best interest of your IRA, you’ll stay out of trouble.

I hope you’ve found this article on how to enhance the protection of your IRA by moving it offshore to be helpful. For more information, and assistance in taking your retirement account offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708 for confidential consultation.

self employment tax
Christian Reeves

How self employment tax works when you’re offshore

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If you’re living abroad and paid by a US company, you’ll pay self employment tax on your earnings. If you’re living offshore and operating a business without an offshore company or LLC, you’ll pay self employment tax on your profits. Here’s how self employment tax works when you’re offshore and how to avoid it.

All Americans that are self employed or who business owners are responsible for paying self employment tax in one form or another. It doesn’t matter where you live or work… if you’re self employed and hold a blue passport, you must pay SE taxes.

Self employment taxes are assessed as 15.3% of your net profits. The Social Security portion has a limit on how much of your income is taxed, whereas the Medicare portion does not.

The Social Security component of self employment tax is 12.4% and applies to the first $127,200 of SE income in 2017. The Medicare component is 29% and applies to all SE income.

I generally summarize it to say that an American earning $100,000 offshore will pay about $15,000 in SE tax. This is an oversimplification, but makes the math easier. I will also round off some numbers in this article, such as how to calculate payroll taxes.

Common types of income that are subject to self-employment taxes include:

    • Income from home-based businesses
    • Income from freelance work
    • Income from work as an independent contractor
    • Income from a business operated in the United States that has not been subjected to payroll taxes (reported on a W-2)
    • Income paid to an expat from a US corporation
    • Income paid to an expat that goes into her personal bank account rather than into an offshore corporation
    • Any income from work you do while abroad that’s not a salary from a foreign corporation reported on IRS Form 2555.

Self employment tax is meant to target income from work that’s not otherwise subject to payroll taxes. As an employee of a US corporation working in the US, you pay about 7.5% in payroll taxes, which is matched by your employer. Thus, total payroll taxes are around 15%. When payroll taxes don’t apply, the worker gets to pay the full 15% as self employment taxes.

Note that the Foreign Earned Income Exclusion does not apply to self employment tax. The FEIE allows you to exclude your first $102,100 in wage or business income from Federal income tax. Self employment tax is not an income tax and not covered by the FEIE.

So, an American who spends 330 days abroad, earns $100,000 in salary, and is paid by a US corporation, won’t pay any income tax. However, they will get the joy of contributing $15,000 to our social welfare system.

Here’s how to eliminate self employment tax as an expat.

In this section, I’ll assume you’re an American citizen living abroad and that you qualify for the Foreign Earned Income Exclusion. This means you’re out of the country for 330 out of 365 days or a legal resident of a foreign country and don’t spend more than 3 or 4 months a year in the US.

This article doesn’t apply to Americans working abroad for the US Government or those working for foreign affiliates of US companies that have entered into a voluntary payroll tax agreement.  For more information, see: Social Security Tax Consequences of Working Abroad

Self employment taxes apply to income paid to you from a US corporation or money that goes into your personal bank account. It doesn’t matter where that account is located… if money from labor goes directly into a personal account, it’s subject to US self employment tax.

Self employment tax does not apply to income paid to you as salary from a corporation formed outside of the United States. This company can be incorporated anywhere in the world… a high tax country like France or a zero tax country like Panama are equal in the eyes of the IRS for purposes of SE tax mitigation.

So, if your employer pays you a salary as an employee of his non-US corporation, SE tax doesn’t apply.

Likewise, if your clients pay into an offshore corporation owned by you, and you draw a salary from the net profits, this salary is not subject to self employment taxes. It doesn’t matter that you own 100% of the business.

The compliance key to eliminating SE tax is to report your salary on IRS Form 2555. On Part 1, section 5, you must be able to check box A for foreign entity or box D for a foreign affiliate of a US corporation. Box D is applicable so long as your employer hasn’t entered into a payroll tax agreement with the IRS, which is very rare.

The bottom line is that you should always form an offshore corporation to operate an international business.

You never want to use an offshore LLC treated as a disregarded entity.

Nor should you deposit business income into a partnership, trust, Panama foundation, or a personal bank account. B

Business income and expenses should be processed through a foreign corporation, with your salary moving from the corporation to your personal account each month. This salary is then reported on Form 2555.

If your US clients don’t want to pay into an offshore corporation, you might be able to form a US billing entity. Clients would pay the US corporation and the offshore corporation would bill the US company. This can effectively move taxable income out of the US corp and into the offshore corp with no US taxes due.

A US billing entity is only advisable for those with no US employees, no US offices, and no US source income.

I hope you’ve found this article on how self employment tax works when you’re offshore to be helpful. For more information, and to form an offshore business structure, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to set up your US compliant foreign corporation. 

st lucia second passport
Christian Reeves

Changes to the St. Lucia Second Passport Program in 2017

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One of the hottest citizenship by investment or purchase programs is the St. Lucia second passport. An investment of $500,000 to $550,000 in government bonds, or paying a fee of $100,000 (single), gets you one of the top passports on the market.

Because of the popularity of the government bond program, they’ve made this option more expensive in 2017. Here are the new fees all the changes to the St. Lucia second passport program in 2017.

The new government fees as of January 1, 2017 for the “donation to the Saint Lucia National Economic Fund” citizenship program are as follows. Whenever you see the word “donation,” know it means purchase price.

  • Single applicant: $100,000
  • Husband and wife: $165,000
  • Husband, wife and up to two dependent children: $190,000
  • Each additional dependent child: $25,000

These fees don’t include other government charges, such as your background check, or legal fees. If you’re from a top country, like the US, UK, Canada, etc., additional fees are usually around $30,000 for a single applicant. If you’re from a country where a background check is more  difficult, such as China or India, expect to pay around $40,000.

If you prefer to get citizenship and a second passport in St. Lucia through investment rather than purchase, you can buy non-interest bearing government bonds. These 5 year bonds issued and guaranteed by the government.

A single applicant will need to invest $500,000 in government bonds and a husband and wife can invest $550,000 to qualify for a second passport from St. Lucia. You will get this investment amount back after 5 years. You won’t earn any interest but you get your investment back in full.

The new government charge as of January 1, 2017 for the purchase of these bonds is $50,000. This is a non-refundable fee applicable only to bond investors.

However, in practice, this is not really a “new” fee. Most agents and lawyers who facilitate these programs charge a fee of around $50,000. They don’t earn a commission on the bonds, so this was the standard fee being charged by the industry. What the government has done is to formalize the fee.

So, your total out of pocket costs for the government bond program are around $50,000. Your total out of pocket costs for the donation / purchase option are around $130,000. This assumes a single applicant from a top tier country.

The question becomes, do you want to lock up $500,000 for 5 years to save $80,000?

A husband and wife investing $550,000 into government bonds for 5 years will be saving  around $100,000. This is because of the additional legal fees associated with multiple applicants.

Of course, it ignores the opportunity costs associated with the investment. You get zero interest from St. Lucia and could have deployed your capital elsewhere.

Another way to value the St. Lucia bond program is that an investment of $500,000 gives you a return of $80,000 over 5 years. This is a ROI of $16,000 or just over 3% per year… not horrible and not to exciting.

No matter which program you chose, a second passport from St. Lucia is a top tier travel document. It gives you visa-free or visa on arrival access to 125 countries and territories, ranking the Saint Lucian passport 37th in the world. Click here for a list of visa free countries.

While a passport from St. Lucia doesn’t get you into the United States or Canada, it does give you access to all of the European Union. Most importantly, it gives you visa free access to the EU’s Schengen Region, which includes Austria, France, Germany, Italy, Spain, Switzerland, and 26 different European nations in all. Basically, it gets you anywhere you want to be in Europe.

If you’re focused on visa free access to the United States, you’ll need a passport from Malta. This one requires an investment of $1.2 million and is far more complex to acquire than St. Lucia.

For example, Malta has a physical presence requirement where you must live on the island for 183 days of the first year. You must also buy a home, and fulfill other terms. For more, see: Second Passport from Malta.

St. Lucia has no physical presence requirement or other hoops to jump through. So long as you have the cash, and a clean background (no criminal history), you’ll be approved.

And, again ignoring the opportunity costs, getting that passport for only $50,000 out of pocket, is an amazing deal. That’s a fraction of the cost of competitors like St. Kitts.

I hope this article on the St. Lucia passport program for 2017 has been helpful. For more information on this or other citizenship by investment options, please send an email to info@premieroffshore.com or give us a call at (619) 483-1708.

offshore LLC
Christian Reeves

US Filing Requirements for Offshore LLCs

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Did you form an offshore LLC last year? Are you using an offshore LLC to hold foreign investments or to protect an international bank account? Here are your US filing requirements for that offshore LLC.

As the owner of an offshore LLC, you’ll need to file an entity election form, an annual tax return, a foreign bank account report, and possibly a statement of foreign assets. Here are the primary US filing requirements for offshore LLCs.

IRS Election to be Classified as a Disregarded Entity

Most offshore LLCs used as investment holding companies should be classified as disregarded entities for US tax purposes. This means that income and profits flow through to your personal tax return (Form 1040) as they are earned.

An offshore LLC owned by one person is a disregarded entity. An offshore LLC owned by a husband and wife, who live in a community property state, is also a disregarded entity. An offshore LLC owned by two people who are not married is a partnership.

Note that only offshore business profits can be held in an offshore corporation as retained earnings. Thus, only business profits can be deferred using a foreign structure.

Because there is no US tax benefit for passive investors in using an offshore corporation, they usually select an LLC with disregarded entity status. This is because the IRS form required from a disregarded entity is much easier (and cheaper) to complete than the one for an offshore corporation.

You must file a form with the US IRS to classify your offshore LLC as a disregarded entity, partnership or corporation. That is to say, you need to select this classification by telling the IRS your preference.

To select your classification, you should complete IRS Form 8832 within 75 days of forming your offshore LLC. I suggest you send in this form as soon as you receive your company documents from the registrar.

As you go through this form, you’ll see that there is a default classification for various entities. If you’re at all unsure, send in the form. It’s better to get the guaranteed result by filling in one extra form than wonder or make a mistake.

Also note that there are some structures that can’t elect to be treated as a partnership or as a disregarded entity. See page 7 of the instructions to Form 8832 for a list of those entities. In most cases, a corporation can’t elect to be treated as a disregarded entity.

Annual Tax Return for an Offshore LLC

Once your international LLC is categorized as a disregarded entity, you must file IRS Form 8858 each year. This form reports income, expenses and transactions involving the LLC, all of which should flow-through to your personal return.

Form 8858 is a simplified tax return that just asks for the basics on your foreign transactions. It’s attached to your personal return (Form 1040), so no need to send in a separate packet. This also means it’s due whenever your personal return is due (April 15 or October 15).

If you didn’t make the election to be considered a disregarded entity, then you might need to file a Foreign Partnership Return (IRS Form 8865) for a Foreign Corporate Tax Return (IRS Form 5471). Both of these take a lot more work to complete than Form 8858.

It’s very important that you file Form 8858 every year. The penalties for missing it are outrageous.

The penalty for failing to file IRS Form 8858 is $10,000 per year. If the IRS sends you a notice reminding you to file, the penalty becomes $10,000 + another $10,000 for every 90 days you refuse to file after being notified. The cumulative penalty can be $50,000 per year per entity. See page 2 of the instructions to Form 8858 for more details.

Foreign Bank Account Report for an Offshore LLC

If your offshore LLC opens a bank account, and you’re the signer or beneficial owner of that account, you must file a Foreign Bank Account Report (or FBAR) on FINCEN Form 114.

An FBAR is required for your offshore LLC if you held more than $10,000 in cash or securities in an offshore account. Even if you had that balance for only one day, you must file a foreign bank account report.

Also, this is the cumulative total of all your accounts… all the accounts you are either the signer or beneficial owner of. If you have $5,000 in a personal account and $6,000 in your offshore LLC, then you have $11,000 offshore and need to report.

Like Form 8858, the penalties for making a mistake on the FBAR are quite high. If you think you might need to file, then file. Submitting an extra form to cover your backside is always better than taking a risk of $10,000 to $50,000 a year.

Statement of Foreign Assets

If you have significant assets offshore, you likely need to complete Form 8938, Statement of Foreign Assets for your offshore LLC. Here are the filing requirements for Form 8938.

  • If you’re married filing joint, living in the United States, and have more than $100,000 in foreign assets at the end of the year, or more than $150,000 on any day of the year, you must file Form 8938.
  • If you’re married filing separately, living in the United States, and have more than $50,000 in foreign assets at the end of the year, or more than $75,000 on any day of the year, you must file Form 8938.
  • If you’re single, living in the United States, and have more than $50,000 in foreign assets at the end of the year, or more than $75,000 on any day of the year, you must file Form 8938.
  • If you’re married filing joint, not living in the United States, and have more than $400,000 in foreign assets at the end of the year, or more than $600,000 on any day of the year, you must file Form 8938.
  • If you’re married filing separately, not living in the United States, and have more than $200,000 in foreign assets at the end of the year, or more than $300,000 on any day of the year, you must file Form 8938.
  • If you’re single, not living in the United States, and have more than $200,000 in foreign assets at the end of the year, or more than $300,000 on any day of the year, you must file Form 8938.

These are the most basic filing requirements. You should review the instructions carefully to figure what constitutes a “reportable” asset and whether you need to file this form.  

If you’re unsure, or right on the line, I suggest you send in the form because the penalties for failing to file can reach $50,000 per year (do you see a theme developing?). Better to be safe than sorry when it comes to offshore reporting.

I should also point out that there are a few investments that don’t need to be reported on the FBAR or the Statement of Foreign Assets. Primarily, gold and real estate held in your name outside of the US do not need to be reported.

However, if you hold those assets inside of an offshore LLC, the LLC must be reported. The only time gold and real estate are exempted are when they’re held in your name without a an offshore structure such as an LLC, corporation, trust or foundation.

And, when I say they don’t need to be reported, I mean that your ownership of them does not need to be reported. When you sell, the gain is taxable and is to be reported on your personal tax return. Also, if the foreign real estate is a rental, you must report income and expenses to the United States just as you do domestic property.

I hope you’ve found this article on the offshore filing requirements for offshore LLCs to be helpful. For more information, or to be connected to an international tax expert who can prepare your returns, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

offshore trusts and community property
Christian Reeves

Offshore Trusts and Community Property Law

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Here’s an overview of offshore trusts and community property law.  If you’re married, and live in a community property state, you and your spouse must work together to form the most efficient asset protection structure. An offshore trust must include special provisions for those in community property states.

Let me frame the issue surrounding offshore trusts and community property a bit…

In a community property state, all assets are equally and jointly owned by both spouses. When one spouse passes, 100% of the assets get a step up in basis to their value at the time of his or her death.

For example, let’s say you have assets worth $1 million. You purchased them years ago for about $400,000. Thus, if you sell them, you’ll pay capital gains tax on the $600,000 profit.

When a spouse dies in a community property state, 100% of the joint property transfers to the surviving spouse. Also, the basis of that property is bumped up to the value on the date of death.

So, in the example above, the basis of the property increases from $400,000 to $1 million. If the surviving spouse were to sell all of the assets on that date, she would pay zero in capital gains tax. If the survivor holds the assets for 3 years, and they increase in value to $1.1 million, she will pay capital gains tax on only $100,000.

If this same couple didn’t live in a community property state, the surviving spouse would receive a 50% step up in basis, rather than 100%. This is because common law states view ownership as 50/50, rather than 100% by the community.

The surviving spouse would get a step up of 50%, from $400,000 to $700,000. If she sold the assets on the date of death, she would pay capital gains tax on $300,000.

Here’s how community property law impacts an offshore asset protection trust…

Most offshore asset protection trusts are structured to make transfers to them as incomplete gifts, so that the gift tax rules do not apply. When an incomplete gift is made to an offshore trust, the value of trust assets remain in your U.S. estate for federal estate tax purposes.

Because offshore trusts with U.S. settlors / owners are considered grantor trusts under the U.S. code, community property and other rules also apply. This means that, when one spouse in a community property state passes, the survivor should receive a step up in basis of 100% of the assets in the trust. If the couple lives in a common law state, 50% of the assets in the asset protection trust receive this basis increase.

The issue is that offshore trust are, by definition, formed in a foreign country. Some jurisdictions have community property statutes built in to their laws and some do not. If the country where you form an asset protection trust does not have a community property statute, the surviving spouse may not be entitled to a 100% step up in basis. In some cases she will receive only a 50% increase because the offshore jurisdiction will be considered a common law county.

For example, in California, community property transferred to an irrevocable trust loses its community property character. A poorly planned offshore asset protection trust might convert community property assets into common law assets, thereby costing you hundreds of thousands or even millions of dollars at tax time.

For this, and many other reasons, you should always hire a U.S. expert to quarterback your offshore trust.

When selecting a jurisdiction for an offshore trust for a community property client, we often start with the Cook Islands. This country was the originator of the offshore asset protection trust and is always working to improve it’s effectiveness as a tax and asset protection tool for U.S. persons.

The Cook Islands has enacted legislation to preserve the community property character of assets and the 100% step up in basis. Section 13J of the International Trusts Act provides that where a husband and wife transfer community property into an international trust or to a trust that, subsequently becomes an offshore trust (under Cook Islands law), that property will retain its community property status. Specifically, the Cook Islands will deal with the property according to the law of the jurisdiction from where it came (the community property state).

It’s also possible to use this same Cook Islands statute to preserve the separate property status of assets held before marriage in a community property state. For example, a trust set up before marriage might include language ensuring it remains separate property. Also, if both spouses agree after marriage to separate their property with a transmutation agreement, a Cook Islands trust can be designed to enforce that agreement.

The bottom line is that, so long as both spouses agree on how to handle the assets, a Cook Islands trust can be drafted to meet their needs. It’s not possible to transfer community property into an offshore trust without both spouses consent. To do that would result in a fraudulent conveyance.

I hope you’ve found this article on offshore trusts and community property law to be helpful. Please contact me anytime for assistance in forming an offshore trust or asset protection structure. You can reach me directly at info@premieroffshore.com or call us at (619) 483-1708. All consultations are private and confidential.