Offshore Asset Protection – International Trusts and Offshore LLCs

asset protection trust
Christian Reeves

Maximum Security with a Cook Islands Asset Protection Trust

/0 Comments/in , /by

The Cook Islands asset protection trust is the Fort Knox of asset protection. An offshore trust from the Cook Islands is the ultimate in personal privacy and protection – often imitated but never duplicated. If you want to build an impregnable fortress offshore, you want a Cook Island asset protection trust.

The Cook Islands asset protection trust is the best available because it works. Every time a well designed Cook Islands trust has been tested in court by a civil creditor, it has protected our clients assets.

Note that I said civil creditors. The Cook Island trust is not intended to keep out the US government. If you’re a US citizen, you must report your offshore trust and offshore bank account to the IRS. Also, you must usually pay taxes on the gains within the trust.

Another reason a Cook Islands trust is the best available is because it’s flexible. You, the settlor, can manage the assets of the trust until a “bad thing” happens. If you come under attack by a creditor, you will turn over this responsibility to your offshore trustee.

When you come under duress, your licensed, bonded and insured trustee in the Cook Islands will step in and assume the management of your trust. They will captain the ship until you have dispatched your foe in the courts. If you need cash, the trustee will send it to you. If you want to buy a property overseas or invest in gold, your trustee can facilitate that on your behalf.

This is why the Cook Islands asset protection trust is the best of both worlds – you have 100% control of the assets unless and until you come under attack. If that occurs, a trusted and professional trustee steps in to your shoes and manages the trust per your prior instructions.

Note that this max protect offshore trust is meant to secure your assets from future civil creditors. If someone sues you after you funded your offshore trust, there is nothing he or she can do to reach your assets. If they sue you before you fund your trust, they can probably knock down your walls and breach the castle.

The Cook Islands is located due south, near Australia and New Zealand in the same time zone as Hawaii. The trustees and other professionals, with whom we’ve worked for over 10 years, are lawyers, CPAs and other licensed professionals from New Zealand.

With the Cook Islands, you’ll be working with top veteran attorneys from reputable jurisdictions. These are high level professionals and not the typical paper pushers you meet in the banana republics around the Caribbean.

Another benefit of the Cook Islands is that, should a creditor bring suit against the trust, they’ll need to do it in New Zealand. Legal cases are heard in New Zealand courts who apply Cook Islands law. You know that the process will be fair and that the laws will be administered properly… another feature often missing in less reputable Caribbean jurisdictions.

The next feature of the Cook Island offshore asset protection trust is “portability.” You can move the trust and its assets out of the Cook Islands at any time. That’s right, a Cook Islands Trust can be moved to another jurisdiction if you come under attack.

Let’s say a creditor has won their case in US and is attempting to enforce their judgement in Cook Island. Assuming the statute of limitations hasn’t run out, and it appears the creditor is making headway, you can pick up the assets of the trust and move them to another country such as Belize or Cayman Islands. The creditor might spend many thousands of dollars bringing an action in Cook Islands to find an empty treasure trove when he finally makes it past the gates.

Remember, when the statute of limitations clock runs out, New Zealand will refuse to hear any cases against your Cook Island trust.

Beating that statute of limitations is a very difficult thing to do for a civil creditor, especially one from the United States. Thus, it’s rare for a creditor to even get the right to have their case against a Cook Islands offshore asset protection trust heard.

This is because the Cooks Islands statute of limitations is one year from the date the trust is funded or two years from the cause of action (the date the harm occurred).

Because US litigation usually takes years, by the time the case is complete in the US, and the creditor has a civil judgment they want to enforce in Cook Islands, the clock has run out. That is to say, by the time the creditor gets a judgement in the US, they will be barred by the statute of limitations in the Cook Islands from collecting on that judgement.

Of course, we hope you never need to use your Cook Island asset protection trust. Maybe trouble never finds you and your structure sits unused as an insurance policy. Maybe creditors decide not to sue because your assets are out of their reach. Often the case is never brought because the US lawyer refuses to take the case on contingency because the probability of collection is low.

If you do need your asset protection trust, and it’s within the 1 or 2 year window, the Cook Island law is still there to support you. The only way the creditor can enforce a judgement against you in Cook Islands is to prove beyond a reasonable doubt (a very high legal standard) that the sole reason you setup the offshore trust was to transfer assets away from that particular creditor.

Of course, there are many reasons to set up an offshore asset protection trust. For example, to facilitate your international investments, international estate planning, general protection (not related to one particular creditor), etc. Each of these reasons should be documented during the formation phase to support your use of a Cook Island trust.

So long as the trust is used to protect against future civil creditors, and not the US government, your offshore structure will provide an impenetrable barrier through which no creditor may pass.

I hope you have found this post on offshore asset protection trusts in the Cook Islands helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

protect your IRA
Christian Reeves

Protect Your IRA by Converting it into an Offshore Trust

/0 Comments/in , , /by

You know that offshore asset protection trusts offer the best security available. They’re an excellent way to protect your after tax savings. But, what of your retirement account? In this post I’ll show you how to protect your IRA by converting it into an offshore trust.

Let me start by talking about where to build your fortress, then we’ll review the safety features of an offshore trust. Finally, we will get to how to protect your IRA by adding those features to an offshore IRA LLC structure.

Here are the pillars to solid offshore asset protection:

Jurisdiction: Where you incorporate your offshore trust or LLC is just as important as how you build it out.

History: Select a country with a long history of standing up for plaintiffs rights. One that has been offering international trust services for decades without being broken and at a high / professional level.

Case Law: Select a country where offshore asset protection statutes have been tested in many court battles. If those cases have been heard in both the US and in the foreign jurisdiction, all the better.

Quality Local Representatives: Hire a trust company and protector service staffed by quality attorneys with licenses from major jurisdictions.

For all of the above reasons, Cook Islands is the best country in which to build an offshore asset protection structure. The best jurisdiction in which to make your stand.

A Cook Islands Trust is the strongest form of asset protection worldwide.  It has the most proven asset protection case law history in the world. Representatives in Cook Islands are New Zealand or Australian attorneys with decades of experience defending client’s assets. The Cook Islands ticks every box.

Next, let’s talk about the structure of an offshore trust for asset protection. What we call the “trust” is comprised of several components.

Settlor: The settlor of the trust is the owner of the assets going and the person creating the trust. The person funding the trust / transferring their assets to the trust.

Trustee: The person or firm outside of the United States that will manage your trust and handle local filing and compliance. Should you pass away, the trustee will distribute your assets per your letter of wishes (see below).

Protector: The protector, also based outside of the United States, steps in to manage your assets within the Trust if you come under duress. If someone sues you, then you transfer management responsibilities to the protector.

Offshore LLC Management Company: Most clients want to maintain control of their assets until and unless they come under duress. For this reason, we form an offshore LLC to manage the trust. The trust transfers its cash to this asset management firm, which happens to be owned and controlled by the settlor. If the settlor comes under duress or attack, he returns this responsibility to the trust and then the protector.

Trust Document: The trust document is the very long and detailed contract between the settlor, trustee and protector. It’s the heart of your asset protection plan and what must stand up to US, IRS, and creditor scrutiny.

Beneficiaries: Those who will receive the assets of the trust should something happen to the settlor(s).

Letter of Wishes: A letter sent by the settlor to the trustee telling him or her how to disburse the trust assets at your passing. This letter can be as simple or complex as you like.

That’s a very brief summary of how to structure an offshore trust. Now we are ready to apply those tools to protect your IRA. For more information on trusts, see my International Trust page for more detailed information.

Remember there are a bunch of IRA rules to follow to ensure your account remains tax deferred in the United States. So, this is not as simple as forming a trust and putting your IRA money in that trust. That would be an improper distribution resulting in taxes and penalties on your retirement money.

  • See my Offshore IRA page for the basics of moving your retirement account offshore.

When we take an IRA offshore we form an LLC in a foreign country that won’t tax your investments. When we want to maximize the protection for your IRA, we form that LLC in the Cook Islands.

In this way, the same history, law and professional services will apply to your Limited Liability Company as give the offshore asset protection trust it’s standing.

The offshore IRA LLC has a Member (like a Settlor) and a Manager (like a Protector). By using a Cook Islands protector as the Manager, we maximize protection. The LLC will also have a detailed Operating Agreement which uses many of the same asset protection tools as is found in an international trust agreement.

Before I get to that, let’s talk about the Member. This is a rather strange concept when we have an IRA and an LLC.

In most situations, the Member of an LLC is the person or persons who will control the company. Not in the case of an offshore IRA LLC.

IRA rules dictate that the Member must be the IRA account… not a person, nor you the beneficial owner of the account. The account itself owns the LLC. That is to say, the Member is the owner of the underlying assets of the company, and that owner is the account, not you.

The ownership statement of your offshore IRA LLC will look something like this: IRA Custodian Company, Inc. FBO Bob Smith IRA Account #55-55555555

  • Remember that all offshore IRA LLCs must have a US custodian. For more on that, see my Offshore IRA page.
  • FBO = For the Benefit of

It’s the Manager and the Operating Agreement where we have room to maneuver. We’ve spent many weeks working with experts around the world to convert our strongest offshore trust document into an offshore IRA LLC Operating Agreement.

We’ve also contracted with the very best protectors in the business, who are based in the Cook Islands, to act as the Manager of your offshore IRA LLC. They will manage your IRA investments to your specifications and create a solid barrier between your account and any civil creditors.

By combining the benefits of an offshore trust with the IRA rules, we have developed a custom max protect solution you will not find anywhere else. If you have a high risk of litigation, or otherwise believe your retirement assets will be at risk if under your direct control, we can help you protect your IRA by going offshore through a Cook Islands LLC and adding on a Cook Islands protector as your Manager.

I hope you’ve found this post on how to convert your IRA into an offshore trust to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation on how to max protect your IRA when going offshore.

These services are meant to protect your IRA from future civil creditors. We will not build a structure to hide assets from the IRS or the US Government. Also, offshore asset protection is only available if you are not currently in litigation. Going offshore after the harm is done could be a fraudulent conveyance and thus illegal.

Panama foundation IRA Tax
Christian Reeves

Panama Foundation IRA Tax Review

/in , /by

The Panama Foundation has been approved as the “owner” of a U.S. retirement account in Panama.  This means that, those who want to invest in Panama, have access to banks or brokerage services in Panama, or hold their retirement account n the most advanced asset protection and estate planning tool available, may now move their IRA to a Panama Foundation.

This article is a review of the U.S. and Panama tax laws as applicable to holding an IRA in a Panama Foundation.  I’ve included cites for those who want to delve in to the U.S. tax code or the ERISA statutes.

I begin by noting that the U.S. code sections that allow you to move your U.S. retirement account in to a domestic or foreign LLC are the same ones used to support the Panama Foundation.  The Foundation is conveyed in to a disregarded entity for U.S. tax purposes, just like an LLC, but retains its estate planning and asset protection components in Panama.

The Panama Foundation IRA structure we have created is designed around the U.S. domestic business trust IRA and the offshore IRA LLC.  In a business trust, the IRA makes an investment in to the trust by acquiring the “beneficial interest” of the trust.  Often the IRA will purchase 100% of the “beneficial interests” of the trust, much like it will acquire 100% of the “membership interest” of a limited liability company or shares of a corporation.  Essentially, the term “beneficial interest” is the title for “equity interests” in the business trust.

Using IRC § 4975 (e)(2)(G) and ERISA Reg 2510.3-101(b)(1), we have applied these rules to the Panama Foundation, which is a hybrid trust and corporate entity.  In the case of the Panama Foundation, the IRA account is the trustor or settler of the Foundation (i.e., the party who transferred assets to the Foundation) and the beneficiary (the party that holds the beneficial interest of the Panama Foundation).  Therefore, the IRA account is both the trustor/settlor and the only beneficiary of the Panama Foundation.

Limitations! 

In a traditional asset protection structure, we don’t usually recommend the Founder be the same “person” as the beneficiary.  In the case of a Panama Foundation IRA, this is required to maintain the tax preferred status of the retirement account under U.S. law.

Also, the Panama Foundation IRA we have created may not act as both the owner of your retirement account and as an asset protection trust for your after tax (non – IRA) money.  You may not mix after tax cash with your retirement savings.

U.S. Tax Classification of a Panama Foundation IRA

When you take your retirement account offshore, the objective is to (legally) eliminate all Federal and States filing obligations.  To accomplish this, the Panama Foundation IRA must have only one member/founder and be considered a disregarded entity for U.S. tax purposes.  This is quite different than a typical trust used for estate planning purposes or a Panama Foundation used for asset protection.

Specifically, a typical U.S. trust is governed under Subchapter J of the U.S. tax code § 641.  The Panama Foundation’s tax status is determined under the “check-the-box” Treasury Regulations.

Under Treasury Reg. 301.7701-4(b), a foreign entity is treated as a business entity and classified for under Treasury Reg. 301.7701-2.  Under this section, a business entity with two or more members is classified as either a corporation or a partnership.  A corporation is then defined to mean a business entity organized under a state or international statute which refers to the entity as “incorporated” or as a “corporation.”  For example, a Panama corporation is by default a foreign corporation, and not a partnership or trust, because it is “incorporated” under the relevant Panama code sections.  Likewise, any entity ending in Inc., A.G., Corp., Ltd., or a similar designation is assured to be a corporation for U.S. tax purposes.

Now that your Panama Foundation is classified as a disregarded entity, because it has only one owner of the beneficial interests and/or submitted the form to be classified as a disregarded entity, it will not have to file federal or state income tax returns.

State tax:  For example, every corporation doing business in California is subject to the minimum franchise tax of $800.  The same goes for any LLC formed in California.  But other entities, such as trusts formed outside of the State, are not required to pay this tax.  For more information, see the California Revenue and Taxation code and related regulations (§ 23038 and CA Admin Code Title 18 § 23038(a), (b)-1 and (b)-2.  As to the disregarded entity status in California, see Rev and Tax Code § 17942(a) and (b).

Plan Asset Rule

Once your retirement account has been moved to a Panama Foundation, and you are the manager of that Foundation, you’ll be required to follow the various Plan Assest Rules as defined in the ERISA Regulations at 2510.3-101(a)(2).  As the plan manager, you become a fiduciary of the IRA and must always act in the best interest of the account and the Panama Foundation IRA.

As a fiduciary, you are prohibited from borrowing from the plan, using the funds for your personal benefit, making certain prohibited investments, and engaging in any transaction at less than fair market value.  Basically, you are to manage the Panama Foundation for the benefit of the retirement account as a professional investment advisor would.  You should act as if the funds belong to someone other than you… which, in fact, they do… cash belongs to the IRA.

I would like to point out here that these rules apply to Panama Foundations and LLCs that hold a U.S. retirement account.  They are not applicable to a Panama Foundation used to protect after tax money (personal savings).

For more information on your rights and responsibilities, as well as a discussion of what you may and may not invest in, please see my Self Directed IRA page (top right of the menu).

Documents of the Panama Foundation

Where a typical Panama Foundation consists of a Foundation Charter and a Letter of Wishes, a Panama Foundation IRA is built upon a similar Charter and an Operating Agreement.  The Charter sets forth the purpose of the Foundation in general terms and the Operating Agreement (which is a private document not filed with the government) describes the IRA structure in detail.

The Foundation Charter is public record and filed in Panama.  The Operating Agreement is essentially a contract between you and the U.S. custodian detailing each party’s rights and obligations with regards to the IRA Foundation.  Collectively, these are referred to as the Foundation documents.

The Foundation documents work together to set forth the purpose of the Foundation, which is to make appropriate investments and manage the IRA funds it controls.  As such, these documents give the manager (you) the authority to open bank and brokerage accounts, purchase property, and spend money to improve or add to that property.

It is the Foundation Charter that gives the Founder the ability to enter in to the Operating Agreement with the retirement account administrator.  Then it is these documents together that allow you, the beneficial owner of the retirement account, to be appointed as the manager.

As the manager of the Panama Foundation IRA, you have the right to make investment decisions, as well as any changes to the Foundation Charter and Operating Agreement.  As such, you are taking the right and responsibility to make decisions away from the U.S. administrator.

The administrator agrees to transfer this authority to you, and you agree to indemnify him from any actions you take as the manager of the Panama Foundation.  In other words, the Operating Agreements says you must follow all applicable rules (such as the plan asset rule), and can make any permitted investment you like.  If you lose money, or break a rule and the IRA is penalized by the IRS, that’s on you… the administrator has no liability.  His job is to 1) invest the IRA in to the Panama Foundation and 2) file annual forms with the IRS.  For this, he will charge a few hundred dollars a year.  He doesn’t get to charge a fee or make a commission on any of your investments and has no liability if you make a bad deal.

As such, you will be the only signatory on the bank accounts.  The U.S. administrator will have no right to force the assets of the Panama Foundation be returned to the United States.  If you come under attack (litigation), then you decide how to handle those offshore accounts.

Finally, you are not required to seek the administrator’s permission for any investment.  You have total control over the check book of the Panama Foundation… and that’s how the administrator wants it.

Active Business in a Panama Foundation IRA

The Panama Foundation, as defined in Law No 25, Private Interest Foundations, issued on June 25, 1995, may not operate an active business.  So, while it is legal for a U.S. IRA to operate a business, it is not possible to do so if you move the retirement account in to a Panama Foundation.

However, I don’t see this as much of a drawback… an offshore IRA should not be operating a business anyway.  Any business owned and operated by a retirement account will generate Unrelated Business Income in the United States, which will be taxed at 35%.  That’s right, active business income earned in a retirement account is taxable.

To eliminate this tax, an offshore IRA structure may form a UBIT blocker corporation to hold the business.  Then, the corporation passes interest and dividends up to the Foundation/IRA.  This converts the UBI in to traditional investment income and avoids the UBIT.

For more information on UBIT and blocker structures, please see my various posts on this topic.  Suffice it to say, any active business owned by the Panama Foundation IRA should be in a Panama corporation.

I hope you have found this review of the Panama Foundation IRA structure helpful.  For more information, please call us or send an email to info@permieroffshore.com.  We will be happy to work with you and answer any questions you may have.

Note that we are the creators of the Panama Foundation IRA structure.  As such, we are uniquely qualified to help you move your retirement account to Panama.

IRA to Panama
Christian Reeves

Move Your IRA to Panama

/in , /by

We have been working for months with lawyers, banks, and government agencies in Panama and are finally ready to announce some great news for those seeking asset protection.  You may now move your IRA or other retirement account to Panama and in to the best protection and estate planning tool available… the Panama Private Interest Foundation.

This represents the culmination of a great deal of negotiation and a titanic shift in the offshore IRA industry.  While you were previously required to form an offshore LLC, you may now utilize a U.S. compliant Panama Foundation to hold your retirement account.  This means you have access to all of the investment service providers, banks, and investment opportunities in Panama without being required to add a Panama corporation to your offshore LLC or getting your LLC licensed to do business in Panama… which is a major hassle costing thousands of dollars to complete.

This also means your IRA is in a Category III entity, which is much more advantageous for larger accounts and gives you access to a wider range of jurisdictions.

Let me explain.  Before we created the Panama Foundation IRA, you were required to place your IRA in to an offshore LLC.  This is because you needed to move it in to a disregarded entity for U.S. tax purposes to maintain the tax benefits of being a U.S. compliant retirement account.  If you wanted to invest in a country that doesn’t have an LLC statute, you needed to create a subsidiary corporation under your offshore LLC.  This increased the formation costs and maintenance, as well as the U.S. compliance required to move your IRA offshore.  Most notably, the offshore corporation is required to file a U.S. tax return, IRS Form 5471, which creates too many headaches to list here.

* The only countries offering compatible offshore LLCs are Anguilla, Nevis, Belize, and the Cook Islands.  Obviously, this limits your investment options unless you form an offshore corporation owned by the LLC.

Being what is referred to as a Category III entity, the Panama Foundation may open accounts and make investments in Panama (obviously) and other countries that have agreements with Panama.  This includes Hong Kong and Cayman Islands.  Cayman is universally regarded as the most advanced offshore banking jurisdictions for larger investors, but has no LLC statute.  Structures from Anguilla, Belize, Nevis and Cook Islands are (basically) prohibited from opening accounts in Cayman, but a Panama Foundation has the same legal standing as a domestic entity… which is a major advantage.

* For more on Cayman, please see my article on this topic.

Also, when designing an offshore IRA structure, you want to ensure you are not required to file any U.S. tax forms.  Eliminating filing requirements will save you thousands in compliance costs and greatly reduce the probability of being audited.

Moving your IRA in to the Panama Foundation structure we have created eliminates all U.S. filing obligations.  Both an offshore LLC and our Panama Foundation structure are classified as disregarded entities for U.S. tax purposes and therefore not required to file a return… again, unless you add a corporation to the structure.

* There are times when a corporation and filing Form 5471 can be a major advantage.  See my articles on UBIT blockers for more information.

I also note that the Foreign Bank Account Report (FBAR) is not required for a bank or brokerage account owned by a retirement account.

The above description covers just the basics of moving your retirement account in to a Panama Foundation.  I will be releasing a detailed analysis of the structure and its legal basis in the U.S. in the next few days.

Please understand that the Panama Foundation IRA has a different objective than our typical asset protection structure.  As this Foundation must meet all U.S. requirements for a retirement account, and we wish to prevent the need to file U.S. returns, it uses a different legal system than a Panama Foundation for protecting after tax income.  That is to say, not all my comments and articles on the Panama Foundation apply to a Foundation which holds an IRA.

Basically, what we have done is take those aspects of the Panama Foundation that maximize asset protection and estate planning for U.S. persons, and convert them in to a structure that can support your retirement account.  Once the account is inside the Panama Foundation, you are the manager and have complete control over the investments and the checkbook of the Foundation.

As the manager of the Foundation, and the fiduciary of the retirement account, it’s your job to manage the assets of the Foundation for the benefit of the retirement account, and not for your own gain.  I will address this in more detail in my next post.

Our design also incorporates legal components from the U.S. business trust (which is quite different from a U.S. grantor trust) and the offshore LLC structures we have offered for the last several years.

The Panama Foundation IRA may hold any investment permitted under the U.S. IRA statutes.  This includes physical gold, bank and brokerage accounts, and real estate.  In fact, the Panama Foundation may hold land or other property to be improved by the Foundation, or a rental where the Foundation is to collect rents and pay expenses.

So, moving your IRA in to a Panama Foundation rather than an offshore LLC, will allow you to invest in and open accounts in Panama without a corporation or other expensive maneuvers.  If Panama is where you would like to keep your investments, or you need access to other advanced markets (such as Cayman), you should consider forming a Panama Foundation IRA.

Please send an email to info@premieroffshore.com for additional information.  We will be happy to review this unique structure with you.

Stay tuned for my tax and legal analysis of the Panama Foundation IRA…

Panama Foundation Scam
Christian Reeves

The Panama Foundation Scam

/in , /by

Just about every week someone calls asking about using a Panama Foundation as a charity.  This is known in tax circles as the Panama Foundation scam and the internet is filled with it.  Avoid the Panama Foundation scam at all costs.  It will lead you down a very bad path with the IRS.

Here’s how the call goes:  “Hey there, I’ve been reading on the internet and came across your site.  What I’d like to do is…”

By this time I already know what’s coming, but let them proceed anyway.  Just about any call which is prefaced by, “I was reading on the internet” is leading nowhere good.  There are very few sites that provide both asset protection or formation services and U.S. tax compliance.  If a company is based offshore, they can tell you whatever they want to make a sale.  If they are in the U.S. and have U.S. licensed professionals, then they follow the law first and look to make the sale second.

Ok, enough pontificating.  Back to the Panama Foundation scam.

“I want to form a Panama Foundation and operate it like a charity.  I want to make donations to this charity and deduct them on my U.S. taxes…” or something like that.

Here’s the bottom line on the Panama Foundation scam:  The Panama Foundation is not a charitable entity and can’t be turned in to a charity.  All of the websites and marketing brochures talking about this are scammers… or, worse, they believe the cr*p they are selling and are tax protestors.

The U.S. tax code is very clear.  Only donations to a U.S. licensed charity may be deducted on your personal income tax return.  That is to say, only donations to a charitable organization licensed under 501 (c) (3) of the U.S. Tax Code are deductible.  Your Panama Foundation won’t get a 501 (c) (3) license, so you can’t deduct transfers to it.  If you were to spend the time, money and effort to get a license, there would be no reason to use a Panama structure… you would incorporate in the U.S.

Even if you wanted to donate to a church or legitimate charity in Panama or elsewhere, such a donation is only deductible if that entity is licensed in the U.S.  Of course, you are free to give to anyone or any organization you like.  You just don’t get to deduct that payment on tax returns.

For example, the Red Cross is incorporated in Switzerland, as are most of the major charities.  These organizations then form corporations in the United States and apply for charitable status before taking donations.

Sometimes the Panama Foundation scam relies on the private interest foundation tax rules rather than the charity code section.  A private foundation in the U.S. allows you to donate property (usually appreciated assets) to your personal foundation.  You get to deduct the fair market value of the donation in the year given (which is why appreciated property is recommended) and then transfer a small percentage of that property to a licensed charity over a number of years.  This allows you to maintain control over the property, manage it for the benefit of a charity, and give up only a portion over time.

So, the Panama Foundation scam often takes verbiage and rules from the private interest foundation sections and applies them to the Panama Foundation.  Unfortunately, there is nothing legitimate to this analysis.  The Panama Foundation is not a private interest foundation as defined in the U.S. code and this is just a scam to sell Panamanian entities to those looking for a tax loophole.

Just last week I came across someone who took the Panama Foundation scam to a new level.  He would form the Foundation and file the charitable tax return in the United States for that entity.  This was done with the intent of confusing the U.S. IRS computers into thinking it was a legitimate charity.

He would then sell this “licensed” foundation for many thousands of dollars to someone who fell for the scam and thought they were getting a charity or private interest foundation.  Of course, the sham will be discovered some day and all the donations will be reversed.  This will mean big time tax, interest and penalties will be assessed against the buyer… and criminal charges brought against the scammer… if he can be found on the day of reckoning.

Don’t fall for the Panama Foundation scam.  The Panama Foundation is not a charitable organization as defined by any section of the U.S. tax code.  This is one of the many reasons you should only form offshore structures with a firm that provides U.S. tax compliance.

Physical Gold
Christian Reeves

Physical Gold is the Ultimate Investment

/in , /by

Physical gold has served as the universal currency for 5,000 years and will continue to do so long after We the People, and this nation of ours, have ceased to exist.

Physical gold is also the only reliable hedge against political instability, government debt, and inflation.  It is a borderless currency whose value comes from supply and demand, not how ever much the government decides to print.  It’s not based on a government promise or regulation, but is a physical precious metal.

Need proof?  Physical gold has the highest liquidity value in the world.  You can exchange it for cash in any major city in the world, and at just about any time of day.  If you hold your gold outside of the reach of Uncle Sam, you can access it at any time, and exchange it for local currency, or goods and services, with minimal effort and at a guaranteed rate.

And gold thrives during inflationary times.  Not if, but when, the United States and the U.S. dollar go through a revaluation, it will be physical gold that soars and where everyone is rushing to.  Don’t be the sheep.  Invest outside of the U.S. in physical gold now, while prices are low and access is assured.

* Note that I write about physical gold because I believe in its value and the need to diversify abroad.  Premier doesn’t sell gold and we are not investment advisors.  We can introduce you to firms in Panama and Switzerland that can assist you, but we earn no commissions or other income from these transactions.  My advice here is independent and without financial motive.

More importantly, the price of physical gold is not dependent on investors or the markets.  In fact, investors accounted for only 16% of the gold supply in 2013 (World Gold Council).  The largest mover was consumer demand at 51%, then reserve banks at 17% and industry use at 12%.

If you’re like me, you start your day by watching the financial channels (I go with CNBC).  The news is often hostile to gold and gold ownership as an investment class.  They are too busy pushing viewers towards the U.S. stock market… it is at all time highs don’t you know!  That means it’s time to buy!!

Well, regardless of this BS, and the industry news you get from the brokerage firms, the investment in physical gold (not paper gold), remains strong.  I suggest that physical gold is one of the most important elements in your onshore or offshore portfolio.

The demand for physical gold has never been higher.  TV viewers would be shocked to learn that investment in 2013 was up 28% from 2012… some people must know something the talking heads on TV don’t.

This represents about 44% of the total gold market of $170 billion and compares favorably to the paper gold market for exchange traded funds, which saw a loss of $40 billion.  That’s to say, $40 billion moved out of paper gold and in to physical gold in 2013.  There is now more money in physical gold than in ETFs by a factor of 8 to 1 (the last two paragraphs are according to the World Gold Council).

What you will find in the industry is that paper gold and hypothecation of gold is manipulating the price… pushing it down.  If these are eliminated from the market, such as during a realignment of the dollar or demand in gold because of hyper inflation, the price of physical gold will skyrocket.

* This is because gold doesn’t correlate to any investment class.  It went up in value during the 2008 recession.

You will also see that those who invest in physical gold take the long view.  They recognize it as the ultimate hedge.  Buyers see it as a superior asset allocation… not just seeking to buy low and sell high, as is attempted in the EFT market.  Investors in physical gold buy to provide support for their other investments.  The price they buy in at should be of little consequence.  Yes, it’s low today, but if it were to double in the next few months, my advice would be the same:  buy physical gold and hold it outside of the United States.

That’s right, you can buy physical gold offshore.  It can be held in a vault or you can take possession.  We work with a number of offshore providers and will be happy to make introductions.

You can even purchase physical gold in your IRA.  You first form an offshore LLC in a country like Belize, or a Panama Foundation, and move your retirement account in to that structure.  From there, you can write the checks and make any permitted investment you like… which means you can buy physical gold in Panama and hold it in a vault.

* You can buy gold in an onshore or offshore IRA LLC structure, though we only offer international formations.

Once you have physical gold in your IRA, you can take required distributions in gold, rather than cash… keeping the investment in gold without the need to convert to cash.  If any tax is due (traditional IRA rather than a ROTH), you will need to make those payments with good ole American greenbacks.

In fact, about 50% to 60% of our clients now take distributions in physical gold rather than USD.  This is becoming one of the most interesting uses of offshore IRA LLCs, and one of the highest demands, in the industry.

Physical gold will also allow you to maximize privacy and asset protection.  Gold held in a vault outside of the U.S., and outside the reach of the U.S. courts, has little risk of being seized by an aggressive creditor.  More importantly, you are not required to report physical gold held in your name.

While you have probably heard much of the new IRS laws that require just about anything you have offshore to be reported to the U.S. government, physical gold is exempt.  You may hold gold in an offshore vault and are not required to report it to any agency.

From here, you can pass physical gold down to future generations, keep it outside of your U.S. estate, minimize estate taxes, and do as you like without interference from the IRS or creditors.

I hope you have found this post on why physical gold is the ultimate investment interesting.  For more information on taking your retirement account offshore, or buying gold in Panama, please give us a call or send an email to info@premieroffshore.com.  We will be happy to work with you to structure your affairs in a tax efficient and compliant manner.

I think you will find physical gold to be a unique and valuable addition to your international portfolio.  I also believe the price is set to jump.  Quantitative easing, and other factors, have been holding down the price of gold since 2011, but this is going to change.  QE will be stopped this month and a number of forces are coming to bare on the U.S. dollar (take a read through my posts on the USD vs. Russia and France).

When the flooding of markets with cash, the artificial support received by the U.S. stock market, and other fakery ends, we’ll come back to physical gold.  It will increase in price and we will all benefit from our offshore portfolios.  Remember that physical gold is where the stability lies.  It is the one and only hedge against a significant market correction or currency realignment.

Panama Foundation
Christian Reeves

The Panama Foundation for Asset Protection

/in , /by

The Panama Foundation provides the best asset protection and estate planning available… hands down, no questions asked.  Here’s why the Panama Foundation is the ticket for those wanting to move assets out of the United States and eliminate the U.S. estate tax.

First, let me take a moment to summarize the Panama Foundation as an asset protection tool.  The Foundation, as defined in the Panama law in 1995, and as updated and improved over the years, is now a separate and distinct entity from its owners.  As a result, the Panama Foundation is now recognized, not only by Panama, but by the United States and other countries as one of the most efficient tools out there.

For example, the Panama Foundation is one of the very few foreign structures approved in the Cayman Islands, and is a recommended vehicle for holding investments there.  The very conservative country of Cayman (regardless of what you see in the movies, Cayman is extremely conservative) has approved the Panama Foundation to open accounts in its banks and funds without any extra due diligence required.  Try to open an account under a Belize corporation and you will be shown the door or told to form a local company.

* Being recognized around the world gives you better access to foreign banks, currencies and investments.  It also means you can move quickly out of Panama if sued there.

I also note that the Panama Foundation does not require members or shareholders.  All that is needed is the Founder (settlor), the Foundation council, and a beneficiary.  You may act as both the Founder and the beneficiary, and may appoint any three people or any one company as the counsel.  It is usually this counsel that manages the assets should you become unable or unwilling to do so (such as if you are in litigation or your assets are otherwise under attack).

This is the basic structure.  I usually recommend that larger Panama Foundations 1) don’t list the settlor as the beneficiary and 2) appoint an asset manager as the protector or foundation counsel.  While it is not required, if the primary purpose of the Foundation is asset protection, taking these steps early can save you in the long urn.  Of course, you can add the protector or investment manager later if an attack on your assets is not imminent.

Benefits of a Panama Foundation

There are many benefits of a Panama Foundation for asset protection and I will take many of them in turn here.  The first is that the Foundation won’t be taxed in Panama… and no local accounting or audit will be required.  I never recommend a jurisdiction for asset protection that requires audited financials, the filing of tax forms, or any other compliance.  For example, Hong Kong has a number of these rules so I avoid that jurisdiction.

*So long as the income is from outside of Panama, it will be tax free.  Of course, if you open a business (such as a bar) in Panama, you will pay Panama tax on the profits.

Next, the Panama Foundation is a hybrid entity in between a trust and a corporation.  Therefore, it may act as an offshore trust, but it is far more cost effective to form and operate than many international trust arrangements.

For example, the Panama Foundation is about 1/3 the cost of a Cook Island Trust and you need not pay for a Protector or asset manager unless you elect to have one.  Most trusts require one of these two persons and charge a few percentage points on the assets of the trust (assets under management) to provide them.  I’ve seen a CI trust that cost $6,000+ to maintain per year move to Panama and cut these costs down to about $950.

Of course, if you desire advanced fund management services, they are available to you in Panama, Cayman Islands, or elsewhere.  All of the major financial service providers are in Panama and we can make introductions to banks and brokerages at all account sizes.

Next, the Panama Foundation is a separate entity and, as such, may enter in to contracts and agreements on behalf of its Founder (you) and as the manager of its underlying assets.  The ability to contract and operate as a company separate and distinct from its owner, is why we call the Panama Foundation a hybrid structure.  While a trust is one with its settlor, a Panama Foundation is a legal entity like a corporation or LLC (which is why I refer to it as a company).

The only limitation is that a Panama Foundation may not own an active business.  If you want to hold a business in a Panama structure, your Foundation may incorporate a Panama corporation, but may not own the business directly.

I note that real estate is usually not an active business… unless you own many units or buy land, divide it, and sell parcels.  Your Panama Foundation may own a rental, or you may decide to purchase the condo in a corporation for maximum local asset protection… if something happens to the condo, liability in Panama won’t reach the assets of the Foundation.

A Panama Foundation may be established for the benefit of any third party, or the Founder/settlor may be the beneficiary.  As stated above, I don’t recommend the Founder be the beneficiary, but it is possible.  You may also list anyone or any company as the beneficiary.  If you want to leave your estate to the Red Cross, no problem.

*Beneficiaries may be any person or company.  They are not public information.

In fact, your estate plan may be as simple or complex as you like.  You might decide to work with the U.S. gift tax exclusion, or the Foreign Earned Income Exclusion for a business in Panama, create a charitable remainder structure, a generation skipping Foundation, or any variation thereof.

The bottom line is that you may control the disposition of assets by lodging a simple or complex list of instructions with the Foundation council.  This “letter of wishes” will tell the banks, brokerages, and property managers what to do with your assets upon your passing and may be changed or updated as often as you like… usually at no cost.

Also, the Panama Foundation requires no annual meeting or formalities.  With a U.S. structure, if you fail to keep up appearances, creditors may pierce the corporate veil and get to your assets.  In Panama, no such laws apply and your assets are secure.  As stated above, no audit, accounting, or tax filing will be required.

Structure of the Panama Foundation

A Panama Foundation may use any name available.  You’re not required to use your last name, as is the custom with a trust.  Though, you do need to include the name “Foundation” in the name.  So, The Reeves Private Interest Foundation, Reeves Foundation, or Great Panama Foundation would all be acceptable names.

A Panama Foundation must have a local address and local agent for service of process.  Just as when you form an out of state company or LLC, you need to have a local representative to receive legal correspondence.  We provide this for you at no cost.

The Founder of a Panama Foundation may be any person or entity (a foreign or domestic corporation, trust, LLC, etc.).  In fact, it can be your U.S. retirement account.

* We are currently working on a U.S. compliant IRA Panama Foundation structure, to be released in the next few months.

The most common uses of a Panama Foundation are:

–  To hold shares, patents, collect royalties, manage trademarks and other passive activities;

–   Offshore asset protection for those who want to diversify out of the U.S.;

–   Offshore estate planning for those with more than $5 million in assets (assuming the estate tax amount doesn’t go down, as it has in decades past… then, anyone at risk of qualifying for the U.S. estate tax);

–   Investment management and private asset management by firms or outside of the United States, especially where the provider is unwilling to do business with a U.S. person directly.

Panama Foundation Council

As I’ve said, your Panama Foundation may be as simple (cost effective) or complex as necessary.  One of the reasons for this flexibility is the Foundation Council, which is unique to Panama.  It is this council that allows you to maximize asset protection and, should you come under duress, allows you to separate yourself from the structure and the assets.

* You may manage the Panama Foundation directly until or unless you have an issue (come under attack by a creditor).

You may elect to retain a professional trust company or lawyer to act as your trustee/protector.  This person would be appointed by your foundation council and act at your direction.

We provide your foundation council at no additional charge.  You may then add an investment manager or lawyer as you see fit.  Alternatively, you can manage your Panama Foundation and then seek additional council if you come under duress or litigation becomes likely.

Your Panama Foundation Council may consist of three or more persons or one legal entity (a corporation or LLC).  These people or company may be from any country… they need not be Panamanians.  Though, I would not use U.S. persons or a U.S. company, as this would eliminate the asset protection benefits of the Panama Foundation.  U.S. persons would be subject to the control of or whims of a U.S. court.

So, if you want to create an advanced structure, we can provide a Panama attorney, or an offshore LLC to act as the Foundation Council… maybe a limited liability company from Belize, for example, so as to maximize privacy.

Taxation of a Panama Foundation

As I said above, foreign source and passive income are not taxable to a Panama Foundation owned by a U.S. person.  So long as the foundation is not operating a business in Panama, you will pay no local tax.

Of course, if you do operate a business, or sell local real estate, you will pay tax to Panama.  The Foundation does not affect local transactions.

If you are living in the United States you (the Founder) are the beneficial owner of those assets for U.S. tax purposes.  In other words, the Founder is the owner of the assets which are held by the Foundation and any income generated there from will be taxable in the U.S.

As you know, the U.S. taxes its citizens on their world wide income.  The fact that you are using a Panama Foundation for asset protection purposes does not change the tax rule.  The U.S. will want its cut of passive income so long as you hold a blue passport and its share of business income so long as you are living in the U.S.

There are a number of tax planning options with a Panama Foundation that are outside of the scope of this article.  For example, you might hold an active business in a Panama corporation owned by the Foundation, qualify for the Foreign Earned Income Exclusion, and draw a salary from that corporation of up to $99,200 each (husband and wife) free of U.S. income tax.  Then, you may retain earnings over this amount and defer U.S. tax for as long as you like.

You might also decide to create sub-Foundations and transfer portions of the assets in your primary Panama Foundation to your heirs over time using the gift tax exclusions.  This may reduce your U.S. tax and have other estate planning benefits.

You may decide to purchase precious metal or physical gold within your Panama Foundation.  This can be done in Panama by leasing a local vault and we can introduce you to reputable sources for bouillon if you like.

Finally, you might invest in an offshore life insurance policy through your Panama Foundation.  These investments usually of $2 million or more and assuming they are U.S. compliant, may allow you to avoid U.S. tax on passive income and then obtain a step-up in basis upon transfer to the beneficiaries of the Panama Foundation.

For more information on offshore life insurance, the Foreign Earned Income Exclusion, or how to acquire gold in a Panama Foundation, please see my various articles.  These are complex topics and I have just touched on them here.

If you would like to form a Panama Foundation, please give us a call or send an email to info@premieroffshore.com.  We will be happy to work with you to structure your affairs in a tax efficient and compliant manner.

Best Offshore Company Jurisdiction
Christian Reeves

Which is the Best Offshore Company Jurisdiction?

/in , /by

Want to know which is the Best Offshore Company Jurisdiction for your business or your assets?  Are you considering living, working or investing abroad?  Then this offshore company guide is a must read.

Please note that, when I refer to the Best Offshore Company Jurisdiction, I mean the best jurisdiction for your offshore structure.  An offshore company can be a corporation, LLC, Foundation, or the manager of an offshore trust.  Please see www.premieroffshore.com for a detailed article on whether an offshore corporation or offshore LLC is better for your situation.  “Offshore Company” is a general term while “Offshore Corporation” and “Offshore LLC” refer to specific types of entities with specific uses and benefits.

In order to determine the Best Offshore Company Jurisdiction, you should consider a number of factors, including:  (1) privacy and protection, (2) professional services and investment management options available, (3) international banking options, (4) for a business, available work force, (5) tax filing and payment obligation, (6) locals audit or reporting requirements, (7) world image/perception, and (8) countries that offer specialized structures (niche markets).  I will consider each of these in turn.

Best Offshore Company Jurisdiction for Privacy and Protection

When new clients ask me which is the Best Offshore Company Jurisdiction, they usually mean which is the most secure – which offers the most privacy and protection for their assets.  As you will see throughout this article, privacy and protection are important, but certainly not the only consideration.

After 10+ years in the industry, it’s my opinion that Belize and Nevis offer the best offshore company laws for the basic corporation or LLC.  Both of these countries have one year look-back statutes, so, after the year is up, it becomes near impossible to attack a structure in these jurisdictions.

Belize and Nevis both have laws which are “client” or “business” friendly rather than “creditor” friendly.  In the U.S. legal system, the emphasis is on paying any creditor who can come up with the most basic excuse to separate you from your savings.  In Belize and Nevis, laws protect you from all claims except those where the transfer is deemed fraudulent.

  • A fraudulent conveyance is when you transfer money or assets out of the U.S. to keep them out of the reach of an existing or reasonably anticipated creditor.  If you injure someone with your car today, and send all of your assets out of the U.S. tomorrow, that is probably a fraudulent conveyance.  If you setup and fund an offshore company in Belize today, and injure someone six months from now, that transfer should be respected/protected.

I say Belize and Nevis are the Best Offshore Company Jurisdictions for basic formations because nominee directors and other advanced planning are not required.  You can form an offshore corporation or LLC in these countries with one person – the beneficial owner.  This makes them perfect for single member offshore companies, as well as for LLCs owned by U.S. IRAs or other types of retirement accounts.  This also means these formations are less expensive to form and maintain lower government fees and no nominees to pay.

The benefit Nevis has over Belize is that anyone wanting to sue a Nevis company must put up a $30,000 bond before they can get in to court.  If the plaintiff loses, this is used to pay the defendant’s legal fees.

While Belize doesn’t require a bond, they have the most modern corporation, LLC and trust statutes available.  Also, lawyers are not allowed to work cross on contingency (getting paid only when they collect from the defendant).  High retainers and legal fees in Belize have much the same chilling effect on litigation as bonds do in Nevis.

Another advantage Belize has over Nevis is a quality offshore banking sector, lead by Caye Bank and Belize Bank.  While it is often recommended that you plant multiple flags offshore, and thus use a bank in a country other than where you are incorporated, I prefer to begin with a structure and bank from Belize and then expand from there.  This is especially true of IRA LLCs and structures owned by U.S. persons because the laws and banks of Belize are very experienced in these areas.

Note that I said Belize and Nevis provide the best in basic privacy and protection without the use of nominees.  If you require max privacy regardless of cost, then I prefer a Panama corporation owned by a Panama foundation.  Both the corporation and foundation may have nominee directors and the beneficial owner (you) is not listed in any public registry.  The only people who know your identity are your incorporation (premier) and your banker.

An added benefit of the Panama corporation/foundation hybrid is that the foundation may act as a trust to deal with any estate planning, bequests and charitable giving you wish to do with your foreign assets.  Depending on your age and the size of your estate, this may provide significant estate tax benefits and giving options.

One drawback of Panama is that it does not have an LLC statute.  This means U.S. retirement accounts can’t incorporate these.  However, you may form an IRA LLC in Belize and then invest in to a Panama corporation.  This corporation now can open accounts or buy rental real estate in Panama.

Best Professional Services for Offshore Companies

If you are looking for more than a checking account offshore, quality professional services may be important and often hard to find.  Here is how I divide up the offshore investment management industry:

The best low risk higher return CD rates are in Panama.  So are some of the best real estate, gold storage and mid-market investment management services.  CDs at 3.25% are common from solid banks and loans are readily available to facilitate real estate investment.

In most cases, banks in Panama offer private banking services to accounts of over $500,000.  I call this mid-market because other jurisdictions like Cayman start these accounts at $2.5 to $5m.

Don’t get me wrong.  Panama does have some excellent high dollar private banks.  In my opinion, the best of these is Andbanc where accounts begin at $2.5m and, while the parent bank is in Andora, the trading desk is in Panama, and thus provides maximum diversification and protection.

For the rest of us non-millionaires, Belize offers a wide range of investment products, multi-currency accounts, gold and metals, as well as investments that lead to residency in a variety of countries.

I’ve found the best of these is Caye Bank and Georgetown Trust.  This bank does not have a minimum account size and Georgetown has investments at all price points.  I suggest managed accounts should begin at $250,000, but some of their best returns are on items like Teak that requires about $15,000 to get in the game.

At the other end of the spectrum is Cayman Islands.  Banks and investment advisors in this jurisdiction focus on the largest trusts, hedge funds, and high dollar private wealth management/family offices.  I won’t take up space here rambling on about Cayman, but I can assure you they offer the best offshore investment management services.  Please see my recent article on Cayman for additional information and baking information.

I note that not all banks and countries treat companies from other jurisdictions fairly.  For example, I believe that the best offshore company jurisdiction in most situations is Belize.  Well, Cayman makes it very difficult for offshore companies from Belize to open accounts at its banks.  Preference is given to countries who make it into Cayman’s “Category III” list.  This includes the U.S., U.K., and Cayman companies (obviously), along with Panama.  While other countries make the list, I’ve found that, if you don’t want to pay the fees to incorporate in Cayman, the Best Offshore Company Jurisdiction to do business in Cayman is Panama.

Other countries have taken similar steps to protect their incorporation industries from low cost competitors like Nevis and Belize.  For example, the make a Belize LLC eligible to do business in Panama costs thousands of dollars and requires a lot of effort.  For this reason, Belize LLCs usually form Panama corporations if they wish to do business there.  (IRAs require and LLC, so the Belize/Panama combo is common for retirement accounts).

Best Offshore Company Jurisdiction for Businesses with Employees

When selecting the Best Offshore Company Jurisdiction from which to operate a business, give very careful consideration to the cost, quality and availability of labor.  I’ve seen many set up in beautiful tax havens or in the very lowest cost markets available only to find out it isn’t the right place for them.

Let me start with an example of what not to do:

I once had a high net worth client who wanted to start an offshore call center business.  Money was no object and he was debating between Cayman Islands and Panama.  He chose Cayman because it’s one of the most beautiful places on earth (certainly true).  I advised him in the strongest terms possible that this was the wrong offshore company jurisdiction for a call center but he decided to go his own way.

After buying a home for $1.5m, leasing expensive office space, investing significant money in IT, and hiring a few employees, he began to understand how difficult it is to open a business in Cayman as a foreigner.  First, the employment laws require a certain number of Cayman citizens per foreign employee.  These locals come at a high cost and, in my client’s experience, low productivity.  Next, he found that the cost of labor in Cayman was higher than the equivalent hire in Los Angeles.  Finally, he quickly learned that lower cost call center sales people are just NOT available.

Combine this with requirements to have local partners and that operating costs turned out to be 35% higher than in California, and he was back at my door licking his wounds within six months of opening his doors in Cayman.

At the other end of the spectrum, several large and experienced companies in the offshore world have found it more efficient to move out of the lower cost regions, such as India, and in to Panama.  For example, Dell, a pioneer in outsourcing tech support, has moved much of its operation to Panama Pacifico, which is about 40 miles outside of Panama City.

While wages are higher in Panama (call center workers earn about $13,000 per year), Panama offers a number of tax incentives to cover the difference.  Also, it’s very easy to get work visas for foreign workers, qualified local labor is plentiful, and you get to operate in the same time zone as your U.S. clients.  Gone are the days of working until 3AM only to have Americans get angry when they hear an Indian accent on the other end of the tech support line.

As you’ve probably figured out by now, I believe Panama is the Best Offshore Company Jurisdiction for a new business with employees.  And I’m not alone in this opinion.  Companies like Citibank, HSBC, MasterCard, and too many bio-tech firms to count, have all made the same choice – move to Panama City for quality lower cost labor, business friendly laws, and tax incentives.

Of course this influx of jobs has pushed up the cost of labor.  What would cost you $800 per month two years ago is now about $1,000 per month (with an annual bonus of one month’s salary, this becomes $13,000 per year).  You will be also find that office space in the best parts of the city will cost about the same as a large U.S. market.  In fact, rents in Panama are higher than in my home city of San Diego.

Even with these higher rents, the cost of operating in Panama can be 50% or less than in the U.S.  One client of mine, also in Panama Pacifico, traded U.S. salaries of $135,000 per year for high-end computer programmers in Los Angeles for Panamanians earning $4,500 per month or $58,000 per year.  After running the Panama office for a year, he tells me his quality and efficiency is the same or better than it was in Los Angeles.

Tax Issues for Offshore Company Formations

When looking for the Best Offshore Company Jurisdiction, a country with low or no tax should be at the top of your checklist.  For U.S. tax purposed, it matters little where you incorporate, where you hold your investments, and where you operate your business from.

The bottom line on U.S. taxation is:

  • If you are living in the U.S., offshore company formations are generally tax neutral.  They should not increase nor decrease your U.S. taxes.
  • If you move an IRA offshore, profits should be tax free (ROTH) or deferred (traditional), just as they would be in the U.S.  For advanced IRA investors, a VBIT blocker corporation may provide significant planners opportunities.
  • If you live outside of the U.S., qualify for the Foreign Earned Income Exclusion, and operate a business through and offshore corporation, you may be able to defer or eliminate all U.S. tax on active business profits.  Significant planning is required.

So if you’re living in the U.S. and investing abroad, you want the most efficient structure that will ensure you pay no local (non U.S.) tax on profits.  As I’ve said before, I believe Belize and Nevis provide the best protection with zero tax and the most efficiency available in an offshore company.

  • If you do pay tax in your country of incorporation or country where you are investing, the U.S. Foreign Tax Credit should eliminate any double tax.

If you are buying real estate in an offshore company, you probably require a company where the property is located.  Want to buy land in Columbia?  Trying to do this with a Belize LLC can be a nightmare… you need a Columbian company.

If you want to invest abroad with your IRA, you must use an LLC.  The only countries I know of with compatible LLC statutes are Nevis, Belize, Anquilla, and Cook Islands.  Of these, Belize is the best suited to the management of retirement accounts.

What if you want to buy real estate in Columbia with your offshore IRA?  You will need both an offshore IRA LLC from Belize and a corporation from Columbia.

This extra entity will make life much easier and provides other benefits.  For example, you can distribute out the share of the Columbian companies, rather than the underlying real estate, when you hit age 70 ½.  This can reduce U.S. tax on a traditional IRA in an offshore LLC.  Please see my various offshore IQA LLC articles for more detailed information on this, as well as how the corporation can act as a UBIT Blocker if you buy the property with IRA money and a non-recourse mortgage.

For the active business, I’ve made the case for Panama.  However, the Best Offshore Company Jurisdiction for a business in Panama, especially one with employees, might not be Panama.  (Confused yet?)

Let’s say you are running a website in Panama that sells books to people living in the U.S.  We can call this business Amazonian.com.  If all the income and profits come in to a company incorporated in Panama, local tax authorities may want to tax your business income.

To eliminate tax in Panama, form an offshore company in Belize and a company in Panama.  The Belize IBC will bill your Amazonian clients and earn most of the profits.  The Panama company will invoice the Belize IBC for its expenses such that it breaks even in Panama and minimizes taxes there.  Of course the Belize IBC will pay no tax in Belize.

Now you are maximizing the benefits of both of the Best Offshore Company Jurisdictions… one for zero tax (Belize) and another to the best business laws and quality lower cost labor (Panama).  You have also maximized the U.S. tax benefits of the Foreign Earned Income Exclusion and the ability to retain profits over and above the Exclusion in a tax free country (Belize).

Local Reporting Requirements

When I plan structures in the Best Offshore Company Jurisdictions, I try to avoid those with local reporting requirements.  For example, all companies in Hong Kong must file audited financial statements each year.  While this is an easy source of revenue for local accounting firms, I don’t see any benefit to the client.  Therefore, I only incorporate in Hong Kong if I need an account on that island, want to do business in China, or to trade in RMB.

In most countries, such as Panama, Cayman and Belize, you are only required to file local (tax) returns if you have employees or are otherwise running a local business.  Of course, of you open a bar on the beach in Belize, or operate a corporation in Panama with 20 employees, you will have local filing obligations.  Otherwise, as an offshore company, you have no reporting requirements.

I note that, as an American living and working abroad, if you are using the residency test to qualify for the Foreign Earned Income Exclusion (as defined in various articles on this site), you should be filing a tax return in your country of residence.  That doesn’t mean you need to pay tax, but you should be filing something.

World Image

There are times when the world image of your offshore company makes a difference.  For example, someone doing business in Singapore, Taiwan and Hong Kong, might find their clients are more comfortable with a Hong Kong corporation than with a Nevis entity.  This is especially true when the jurisdiction of your offshore corporation must be disclosed in contracts or marketing materials.

The same principles apply in the asset protection industry to large family trusts.  Because of the availability of high-end asset managers, the largest and most complex trusts are created in Cayman Islands.  Because Cayman does not have the strongest privacy and protection laws, many of these trusts have a “flight clause” that allows them to escape Cayman for a more secure jurisdiction, such as the Cook Islands, should they come under attack.

For those of us not in the 1%, not named Romney, and not running a business where world image matters to our clients, I again suggest that the Best Offshore Company Jurisdiction in which to plant that first flag offshore is Belize.  If you are concerned that Belize may limit your choices for banking and investment advisors, I suggest that a Panama corporation owned by a Panama Foundation provides maximum privacy and is the most cost effective of the Category III countries.  I also believe the Panama Foundation is the best asset protection entity available.

Offshore Company Specialists

A number of offshore company jurisdictions have become specialists in one niche or another of the incorporation industry.  For example, the offshore asset protection trust, at least for Americans, was “invented” by the Cook Islands.  This tiny country, just off of New Zealand, started the move offshore and out of the reach of U.S. judges who gave such deference to allegedly injured creditors.

To this day, the Cook Islands are the preeminent jurisdiction for asset protection trusts… not the largest in trusts by dollar value, but the best offshore trust jurisdiction for those focused on asset protection.

Side note:  I’ve been working with Cook Islands Trusts for a decade and hold them in the highest regard.  They’ve been thoroughly vetted through the U.S. legal system and are best for those expecting trouble or litigation.  One reason for this assessment is that Cook Islands cases are heard in New Zealand courts.  Therefore, you have legal experts and systems applying Cook Islands law, which means better quality legal representation and processes.

For those not anticipating imminent legal action, a Panama Foundation or Belize Trust may offer similar levels of protection at about half the formation cost and 1/3rd the annual maintenance.

In the niche of Offshore Foundations, the only options are Panama and Liechtenstein.  Of these, Panama offers many advantages in term of banking, privacy and protection.

The Panama Foundation is a hybrid asset protection tool that provides many of the same benefits as a trust, including estate planning, privacy tools, such as the nominee foundation council, and of a corporation, such as the ability to open bank accounts and manage assets directly.  Especially when combined with a Panama Corporation for further diversification and risk segmentation, the Panama Foundation is one of the best offshore company options for after tax investing abroad – I say “after tax” because a U.S. retirement account or IRA can’t be placed in a Foundation, only an offshore LLC.

Another offshore company niche is the captive insurance company.  These are usually based in the Bahamas (the largest) or Cayman, and basically allow a U.S. business to self insure and deduct up to $1.2m per year on their U.S. taxes.

Offshore captives are a complex topic and are best suited to doctors or other self-employed high-net worth individuals who can put away at least $800,000 per year.  If you would like more information on Offshore Captives, please send us a message to info@premieroffshore.com.  All consultations are confidential and free.

Another niche is the Offshore Hedge Fund.  In this vertical, the Best Offshore Company Jurisdiction is the British Virgin Islands (BVI) followed by Cayman.

An offshore hedge fund is setup to allow foreigners (non U.S. persons) and tax preferred investors (IRAs, retirement accounts, pension funds, etc.) to invest in the United States without paying tax here.

For example, if a German citizen and resident were to invest in a U.S. fund or a small business, he would likely need to file and pay U.S. taxes as a result.  If that same person invests in a fund structured in BVI, and the fund invests in the U.S. business, the foreign individual has no U.S. tax obligations.

The same is true of U.S. pension funds and retirement accounts.  If they invest directly in U.S. funds, they will probably have to pay U.S. taxes on the profits.  If they invest in a Cayman hedge fund that then invests in the U.S. business, they can eliminate these tax headaches.

  • If you are wondering how big these “niche” segments are in dollar volume, take a read through my Cayman Islands business guide.

The last niche market segment I will mention is credit card processing and merchant services.  By far, the Best Offshore Company Jurisdiction for merchant accounts is the United Kingdom.  If you form a U.K. corporation, you will be able to access a much larger pool of credit card processors, including those in Europe and Australia, than you will with a Belize or Panama entity.

  • If your business is based in Panama, and you have employees there, you will have access to many local merchant account options.  If you have no presence in Panama, you will be limited to a few rather expensive providers, such as Multibank.

Of course, no one can compete with the low cost providers, including Pay Pal, of the United States.  It might be said that the Best Offshore Company Jurisdiction for credit card processing is right here in America.

Yes, an account in the U.S. can be “offshore.”  Let’s say you are living and working in Panama.  Your parent company for billing purposes is in Belize (to minimize taxes in Panama).  If you are a U.S. citizen with decent credit, have a U.S. mailing address and a U.S. bank account, you should be able to open a U.S. merchant account for about 1/2 or 1/3  of the cost of the same service offshore.

The proceeds of the credit card transactions will flow in to your U.S. bank account.  You then invoice the U.S. Corporation that holds this account from your Belize IBC and wire the funds each month or quarter to Belize.

  • Note that a U.S. corp. is required for the system above because no one will open an account in the U.S. for a foreign entity.

So long as the U.S. company has zero profits at the end of the year, you file your U.S. corporate return, you qualify for the Foreign Earned Income Exclusion, and you have no employees in the U.S. or other issues which create U.S. sourced income, this merchant account is basically an offshore tool.  For additional information see my article on offshore merchant accounts.

I hope you have found this guide to the Best Offshore Company Jurisdiction to be helpful.  Feel free to call or email for a confidential consultation on moving your assets or business offshore.

Offshore Captive Insurance Company
Christian Reeves

The Mini Offshore Captive Insurance Company

/in , /by

The Mini Offshore Captive Insurance Company (sometimes referred to as a pure offshore captive) is a powerful and unique way to cut both your business and estate taxes while moving your assets out of the reach of future business and personal creditors.  If you are operating a business with $500,000 to $1.2m per year in profits you want to eliminate from your U.S. tax return, and move in to an offshore asset protection structure, you should consider a Mini Offshore Captive Insurance Company.

Note:  This article describes the Mini Offshore Captive Insurance Company.  It is intended for those who wish to deduct up to $1.2m per year.  The full sized Offshore Captive Insurance Company is a very different and more complex animal.

Let’s start from the beginning.  The Mini Offshore Captive Insurance Company was created by Congress in 1986 and can be found in IRC S 831.  This section of the U.S. tax code and the related safe harbor provisions, allow you to form an Offshore Captive Insurance Company to underwrite all types of business property or casualty risk.  Your U.S. company may then pay up to $1.2m to this Offshore Captive Insurance Company, taking a 100% deduction in the year paid.  This should result in a tax savings of about $420,000 per year.  However, you must pay U.S. taxes on all passive income these premium payments/retained earnings generate.

I note that this savings is only available to those who form a licensed Captive Insurance Company.  While you can self-insure using a sinking fund, you may not deduct transfers to a fund.  Only payments to an insurance company are excluded from income when paid.

In order to be classified as a Mini Offshore Captive Insurance Company, you must agree to be taxed as a U.S. C Corp, make an irrevocable election with the IRS, and file U.S. returns on the calendar year in most cases.  While this election is irrevocable, it is automatically terminated if you pay more than $1.2m in a year to the Captive Insurance Company.  Thus, if you want to play in the big leagues for a year, you can do so and then file a new election to return to the minors.

Because a captive is taxed as a C corporation, distributions as dividends from a Mini Offshore Captive Insurance Company are considered “qualified” dividends and taxed at the long term capital gains rate.

Also, because of the Mini Offshore Captive Insurance Company’s unique standing in the U.S. tax code, you can move significant wealth out of your U.S. estate and away from the U.S. estate tax (which applies to U.S. assets in excess of $5m) as well as gift and generation skipping taxes.  Assuming the offshore captive operated for 10 years, you could move as much as $12m offshore.  To take advantage of these tax benefits, offshore trusts should be the owners of the offshore captives and your children and heirs should be the beneficiaries of these trusts.  One trust per heir is suggested.  And these returned earnings enjoy the highest level of offshore asset protection available.  Because the premium payments are considered ordinary and necessary business expenses, there should be no risk of a claw-back from a U.S. court on issues of fraudulent conveyance.  In fact, if the offshore captive was formed before a problem arises, I expect these transfers will be allowed to continue during and after litigation.  You should consult an attorney prior to forming and offshore captive if this applies to you.

One additional benefit of the Mini Offshore Captive Insurance Company is that it provides a tax efficient way to compensate key employees.  To use the captive in this way, you might operate a (second) offshore captive for their benefit or issue preferred shared from your primary offshore captive.  These key employees would redeem these shares upon retirement and pay tax at long term capital gains rates, which should be lower than the tax on any other form of deferred compensation.

Above, I suggested you can form a second Mini Offshore Captive Insurance Company.  In fact, you can from as many mini captives as you like, so long as they have different shareholders.  This is a good way to accommodate shareholders with differing retirement and investment goals, multiply the tax benefits, and ensure you make the most of the estate planning options… especially when the partners are not related.

  • Watch out for the attribution and constructive ownership rules under IRC S 1563 that might combine offshore captives, thereby exceeding the $1.2m limit and crashing the system.  Advanced planning is required if you wish to deploy multiple Mini Offshore Captive Insurance Companies.

If you do not have at least $500,000 to move offshore (I suggest this arbitrary amount as being cost effective), but have a group of entrepreneurs that want to plant that first flag offshore and begin building towards a full captive, you might consider a series LLC Mini Offshore Captive Insurance Company.  In this case, a master LLC is formed in a state that allows for this and each partner forms his or her own LLC as part of the series… basically a subsidiary of the master LLC.  The master LLC will obtain a mini captive license and each series LLC will pay in premiums as they see fit, up to a combined total of $1.2m.  These series LLC will insulate the partners from each other’s assets and liabilities, allow them to pool resources to cover costs, and to insure much lower amounts of risk.  Such an arrangement might be best suited to a group of professionals who wish to deduct around $250,000 per year each.  By forming an offshore trust for each LLC member, investors will also receive the estate planning benefits.

Offshore Captive Insurance Company Must Provide Insurance

Because a Mini Offshore Captive Insurance Company must actually provide some type of insurance, and premium payments must be reasonable, at fair market value, and ordinary and necessary expenses of your U.S. business, forming an offshore captive is a rather complex and costly undertaking.  These costs are the main reason I suggest a minimum annual principal payment of $500,000, or a series LLC to get your group to $1.2m.

In order to be classified as an insurance company by the U.S. tax code, you need 1) and insurance license from an offshore jurisdiction like Cayman, Bahamas, BVI or Vanuatu, and 2) to shift risks from the operating company or its affiliates to the licensed insurance company.  In order to meet this requirement, you must show that the Mini Offshore Captive Insurance Company you formed is insuring specific risks of your business in exchange for a reasonable premium.

These requirements make the formation of an Offshore Captive Insurance Company a long process.  Feasibility studies, capitalization, financial projections, risk analysis and premium value analysis, and the retention of a qualified insurance manager are all required before you can apply for a license.

The amount of capital required (capitalization) of the captive insurance company is based on the type and level of risks being insured and varies by jurisdiction.  Capitalization may provide you with an opportunity to move after tax retained earnings or personal savings offshore for asset protection purposes.  Alternatively, you might qualify for an irrevocable letter of credit to satisfy this requirement.

As a Mini Offshore Captive Insurance Company must provide insurance (insurance is in the name by gosh, but many ignore this aspect), a complete risk analysis is required.  You must determine which risks you will cover “in-house,” which you will leave with your current provider, and the fair market value of these premiums.

The key to the risk analysis for a mini captive, compared to a full captive, is that you should insure only risks that have a low probability of occurring.  For example, you might insure against product liability, war, major currency devaluation, labor strikes, workers comp, product recall, pollution liability, group pension plan liabilities, a nuclear explosion, and property theft from the office (usually minor claims only).

  • If you decide to insure risks with a higher probability, you may be able to purchase reinsurance at a lower rate than is available onshore.

Note that an insurable risk is one that might occur, not one that will occur.  If an event will occur, even if the amount/cost of the event can’t be determined, it’s not an insurable risk.  Payments in to an offshore captive for an event that will occur are considered deposits in to a sinking fund and are not deductible.  (IRS rev. Rule 2007-47)

The last requirement I’ll cover here for Mini Offshore Captive Insurance Company is that more than 50% of its total revenue must come from premium payments (IRC S 816(a)).  If interest, dividends or other passive income from investing premiums and initial capital exceeds income from premiums, you may lose your insurance company status and be considered a passive foreign investment company.

  • Remember that the owner of a Mini Offshore Captive Insurance Company gets to deduct 100% of his/her premium payments but must pay U.S. tax on all passive income.  Treatment of premiums and passive income is much more complex for an offshore insurance company that doesn’t make the “mini” election and those with more than $1.2m in premiums.

The 50% of revenue requirement is not a problem during the first few years of operation.  You might even expect to run for 10 years without hitting this PFIC limit.  In later years, assuming your investment returns are significant, you may need to shut down the captive and form another, invest capital in more conservative products, or distribute out sufficient funds as qualified dividends.

Uses of a Mini Offshore Captive Insurance Company

So long as you make the proper election, adhere to the principles of risk shifting and insurable events, avoid excessive loan backs and anything that might look like self dealing, do not provide life insurance, and keep up with your IRS obligations, a Mini Offshore Captive Insurance Company is a very powerful international tool.  It provides significant tax savings, unparalleled asset protection, and offshore estate planning not available elsewhere.

Now that you have a solid understanding of what a Mini Offshore Captive Insurance Company can do, let’s talk about who should consider forming one.  An offshore captive is best suited for those with:

  • A profitable business that can deduct up to $1.2m from its U.S. taxes.
  • A business with multiple entities, or that can divide itself in to multiple operating subsidiaries – (if you have only a single entity, don’t worry, we can set these U.S. affiliates up for you).
  • A business with at least $500,000 per year in sustainable operating profits.
  • A business owner who wants personal and business asset protection and/or estate planning.
  • A group of independent professionals who want to go in together on a Mini Offshore Captive Insurance Company using a series LLC.

A few examples of potential clients are medical doctors, lawyers, investment advisors, hedge fund operators, family offices, and anyone with a mature business and a few million in profits each year.

For example, let’s say you are an investment advisor with $3m in profits P.A., 4 children, and a significant personal net worth.  Your objectives for a Mini Offshore Captive Insurance Company might be to maximize wealth accumulation, reduce current income taxes, protect assets from personal and business creditors, and devise a tax efficient system to transfer wealth to your heirs.

You might decide to from a Mini Offshore Captive Insurance Company in Cayman.  You might then form four offshore trusts in Belize, one for each of your children, to own the captive.  In this way, the shares (and thus the assets) of the captive are lifted out of your U.S. estate and you can avoid both estate and generation skipping taxes.

During the formation state, the manager of the captive will need to perform a feasibility study and find a number of “real” or “insurable” risks to be covered by the offshore captive.  In the case of the financial advisor, the study might identify ten risks and therefore wire ten separate policies.  Each policy must apply the usual and customary insurance industry underwriting principles and must be reasonable in light of the risks being transferred to the offshore captive.

As a result, premiums paid by your investment advisory business are fully deductible in the year paid and the captive is not taxed on premium income.  Only the investment income on money in the captive is taxable as earned (no tax deferral available).  Also, distributions to the four trusts qualify as dividends and are taxed at 20% (was 15% in 2012).

I also note that the premiums paid to the offshore captive, as well as distributions to the four offshore trusts, are not subject to the claims of your personal creditors or the creditors of your investment management business.  Because these payments are deemed ordinary and necessary business expenses, the offshore asset protection is iron clad.

I hope you have found this article helpful.  The planning, formation, and management of a Mini Offshore Captive Insurance Company is a complex matter.  I’ve done my best to summarize the basics.  For additional information please send me an email to info@premeiroffshore.com or give us a call anytime.

Chile
Christian Reeves

Should I use an Offshore Corporation or Offshore LLC?

/0 Comments/in , , /by

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

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

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

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

Benefits of an Offshore Corporation

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

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

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

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

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

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

Benefits of an Offshore LLC

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

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

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

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

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

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

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

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

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

benefits of an offshore company
Christian Reeves

Benefits of an Offshore Company

/0 Comments/in , , , /by

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

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

Offshore Company for Those Living in the U.S.

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

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

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

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

Offshore Company for Those Living and Working Abroad

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Offshore Company Jurisdiction
Christian Reeves

Where to Incorporate Your Offshore Company

/0 Comments/in , , /by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore IRA
Christian Reeves

Is Your IRA Confiscation Proof?

/0 Comments/in , , /by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Foreign Assets
Christian Reeves

Offshore Asset Protection Scams and How to Avoid Them

/0 Comments/in , /by

If you are looking for the cheapest offshore asset protection, you are in the wrong place. If you are looking for an offshore asset protection and international structures founded in case history and reality, with guidance and US tax compliance, we can help.

The purpose of this article is to explain why you need quality representation when you go offshore and exposes the common schemes of online incorporators. The bottom line is that, if you can’t afford a quality offshore trust, don’t use a lesser structure which you can’t control. Instead, go with a simple offshore corporation to plant your flag offshore. If you don’t wish to pay for an offshore corporation from a reputable source, then you might not belong offshore.

Read the risks and costs of doing it wrong and then decide if the world of international banking and offshore asset protection are for you.

Offshore Asset Protection Scams

The internet is filled with scammers who promise to protect your assets for a few hundred dollars…a one size fits all document or company that will save your life. These online incorporators claim to have mastered the mysteries of US litigation and to have created some illusionary construct that no creditor can pierce. Well, I am here to tell you that no such construct exists and that most of the asset protection “gurus” are nothing but shysters.

These scams go by many names, such as “Self Managed Anonymous Offshore Trust” (just google this phrase for a list of purveyors) and Pure Trusts a/k/a Constitutional Trusts and Common Law Trust Organizations. For additional information, see Quatloos.

Then, there are the firms that charge low rates for an off-the-shelf, zero customized, offshore company formation with no support or tax compliance. These guys make up for their lack of quality and a low upfront price in volume (I may lose money on every sale, but I make up for it in volume). They will sell you four or five companies and a Panama Foundation when a Belize or Cook Island Trust was all that is required.

They convince you that all of these components add value, and, when they are done, the total fee is the about the same as a quality offshore asset protection trust, but with none of the supporting documentation, compliance, or guidance that a professional would include. They sell you a mini-monster that you have no idea how to take care of and won’t know what to do with when it grows out of control.

Why do online incorporators market like this? Because such a convoluted structure is more profitable to them in the long run. Because they can charge you a fortune in annual fees…they are betting on the residual income you will provide and selling you something you don’t need, and probably should not use, at break-even to lock you in.

Feed the Beast

Let’s go back to the mini-monster. Your new pet is comprised of a Panama foundation, one Nevis LLC, one Panama corporation, and four Belize IBCs, and you have paid $10,000 to take this bad boy home to cover your assets like a guard dog.

Well, this mini-monster must be fed.  Each year, your incorporator will send you a bill for about $1,200 per entity, for a total carrying cost of $8,400 per year. And, you can be sure there will be other costs…maybe you need a notary, a certificate of good standing, or you want to open a bank or brokerage account…this will cost you big time. Remember, they locked you in with a low price and are now going to get whatever they can.

Offshore Tax Issues

Now that this mini-monster is home, you will find that he is hungry. For example, every entity must file its own tax return with the US Internal Revenue Service, a fact that your offshore incorporator probably failed to mention when you signed up.

The Panama Foundation may need to file IRS forms 3520 and 3520-A, at a cost of about $1,700 per year. Also, each of the corporations must file IRS Form 5471, for which a qualified CPA will probably charge $1,100. This means your minimum US tax compliance bill to take care of this monster is $8,300 per year.

Finally, you will need to file a report with the US treasury of each bank account you have outside of the US is your cumulative balance during the year is more than $10,000. So, if you have four bank accounts outside of the US, each with $3,000, you have a total of $12,000 offshore and must file the FBAR.

So, you setup your structure and had no idea of these tax rules? Now the monster is angry!

The minimum fine for failure to file the FBAR is $25,000 per year per account, and up to $100,000 per year per account. And, don’t get me started on the possible criminal penalties…

The fine for failing to file Form 5471 for each corporation is $10,000 to $20,000, plus a reduction in the Foreign Tax Credit, if applicable. So, your annual penalty for failing to file for your various mini-monster’s corporate returns is $50,000 to $70,000 plus the foreign tax credit issue.

Failure to file the foundation or trust returns can result in penalties of $10,000 per year or 35% of the assets transferred offshore. This is a simplification and these penalties are more complex than I want to go in to here. Suffice it to say, not keeping a Panama Foundation in compliance can become very expensive very fast.

For additional information on your US filing obligations, see my article: US Tax Filing Obligations of ExPats.

Buy from a US Provider who Provides Tax Guidance

When dealing with an offshore incorporator, you must be cautious and take his answers to questions about your US obligations with a grain of salt. Many offshore incorporators phrase their claims and promises in such a way as to confuse you. Here is an example:

You call a firm in Nevis and inquire about forming an offshore IBC. You ask, “does this company need to pay tax?”

The sales guy will say something like, “as a Nevis IBC, there is no tax due and no tax return need be filed. Your corporation can earn money and never pay any tax to Nevis. It can also send money to you in the US, which you can report as income when received.”

This all happens to be true, and it is how so many US persons get in to trouble. You may have left that conversation with the impression that the Nevis IBC can retain earnings offshore and that you will only pay tax in the US when you repatriate that money.

What the sales guy really said is that Nevis will not tax your income and that you can wire from Nevis to the US. He made no comments about whether the US will tax your offshore company. And, from the perspective of Nevis, his statements are accurate.

But you, as a US citizen or resident, need to be concerned about the United States. It is great that Nevis will not tax your income, but that is a very small part of the offshore puzzle. The primary issue is how the big bad IRS will view your structure. If you do not live and work abroad, your corporation can’t retain earnings and all income is taxable in the US as earned.

For this reason, you must purchase your offshore asset protection plan or international corporation from a firm that provides US tax compliance and is capable of answering your US questions. Only US licensed experts can properly advise you on how to structure your business and keep you out of trouble.

Offshore Asset Protection is not Secrecy

Hiding assets is not a useful asset protection strategy.  If you have a judgment against you and you fail to disclose said assets, you might be found in contempt of court and end up in jail.  Hiding assets is not a valid tax reduction strategy.  If you hide assets and fail to report income from those assets, you might be found guilty of tax evasion.  Do things right and do things smart.

The quickest way to spot an offshore asset protection scam is look for those that focus on secrecy or privacy. While it may be helpful that your assets are hard to find in the beginning of a case, you must assume that a motivated creditor will find them.

A professional asset protection structure assumes the creditor has a roadmap to all of your dealings and, even in this extreme case, can’t break down your barriers and get to your assets. Your plan has moved your wealth out of the reach of the creditor and the US courts, placed them behind a few quality barriers, and provides the best protection available anywhere in the world.

Quality Offshore Asset Protection Plans

When done right, asset protection, which may be more properly termed risk management, places an appropriate number of barriers between you and your creditors making it difficult or impossible to reach your assets. How difficult it is to reach those assets will depend on the complexity and, most importantly, the quality of the plan. Always remember, it is about quality and preparation, not quantity. Quantity will get you nowhere with a judge!

For this reason, I will recommend a simple, easy to maintain offshore corporation to someone looking to protect $100,000 or less. The same is true for someone who just wants to plant that first flag offshore or to move their retirement account offshore. Keep it simple!

This single layer is cost effective to feed and keep in compliance, and moves the assets out of the reach of US creditors while placing one barrier between them and your money. While it is not perfect, it may be all that your situation requires.

  • And here is the key to this article: don’t be oversold! If one structure will suffice, don’t buy two…even if the price is right. Buy one and get one free is not a good idea when it comes to asset protection. It is a lot like TV ads selling cheap junk and promising a second unit at no additional cost – you will get a good deal but shipping and handling (carrying costs) will bury you.

If you have a much larger nest egg you wish to protect, a high risk of litigation, and/or wish to provide for estate planning and asset protection, than an offshore trust formed in Belize or Cook Islands is the place to start. The offshore trust is the foundation of any advanced asset protection plan and can be built up or expanded in a number of ways. For more information on offshore trusts, please see my International Trusts page.

No matter what structure you create to protect your assets, just remember that it must be maintained, that you need to be properly advised as to your US tax obligations, and that going offshore is a complex world fraught with challenges for the uninitiated. International asset protection is not for everyone!