self employment tax
Christian Reeves

How self employment tax works when you’re offshore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Panama financial services license
Christian Reeves

Panama Financial Services License

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A Panama Financial Services Company is a licensed but unregulated financial entity which allows you to hold and manage client funds in Panama. The Panama financial services license is issued by the Panamanian Ministry of Commerce (Ministerio de Comercio and Industrias). It’s much easier to keep in compliance than a license issued by the banking authority (Superintendencia de Bancos de Panamá).

Here’s a summary of the benefits of a Panama financial services license:

  • These licensed Panama corporations are most commonly used by offshore financial services companies and international banks that handle third-party funds. For example, cash management and investment services for an offshore bank licensed in another jurisdiction or for providing electronic payments services, credit and debit cards, or other similar payment processing activities.
  • If you will manage client money, you must have a of license. The lowest cost and most efficient licensed but unregulated entity is the The Panama Financial Services Company.
  • These financial services companies can work effectively with other foreign structures – for example, to outsource services for tax efficiency (because Panama won’t tax foreign sourced profits) and/or to set up a trading desk in a more reputable jurisdiction than your country of licensure.

A Panama financial services license allows you to conduct the following types of transactions on behalf of your financial institution (in addition to the normal business functions of the company):

  • Open corporate bank accounts and accept client funds, usually on behalf of a licensed and regulated entity operating in another jurisdiction.
  • Operate as a basic correspondent account managing and transferring funds on behalf of clients of a bank licensed in a separate jurisdiction.
  • Act as a payment Intermediary.
  • Currency / FX and Bitcoin accounts.
  • Conduct precious metal trading (gold, silver, platinum, etc.).
  • Factoring.
  • Leasing.

Capital and Office Requirements

In most cases, a Panama Financial Services Company will not have a capital requirement (a minimum amount of paid in capital). The only major exception is leasing services, which requires special permission and capital of $100,000.

While it’s not required, I recommend clients contribute as much capital as possible if they’re  going to operate as a correspondent bank account. Starting with $100,000 to $250,000 paid-in shows prospective banks your commitment to your Panama Financial Services Company.

I also recommend correspondent banking desks open an office in Panama with one or more employees. Turn your offshore corporation into a domestic operating company. It’s not required under the law, but it will improve your chances of success.

A local presence will give you access to a wider range of banks in Panama. Many banks will only do business with local companies. Having an office and an employee will help you throughout the process and gives you someone on the ground to deal with issues as they arise.

You can get this done at a low cost by setting up a small executive suite and paying an employee for half of his or her time. For example, Regus has 6 office buildings in Panama City and provides excellent services. Click here to find a Regus office.

Remember what’s important here is what a local bank / correspondent partner wants to see, not the minimum requirements listed in the law.

Limitations of a Panama Financial Services Company

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

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

These services are regulated differently by the Panamanian government and all require their own license with minimum capital and audit requirements.

It’s also prohibited for the Panama Financial Services Company to offer any banking services. To be clear regarding “correspondent banking,” a Panama Financial Services Company may offer services to a licensed and regulated bank in another jurisdiction. It may not offer services to the clients of the bank, only to the bank.

Conclusion

The setup costs for a Panama Financial Services Company are $35,500 and the annual fees are about $1,250 depending on nominee directors and other factors. This does not include a registered or virtual office.

In most cases, a Panama Financial Services Company can be completed in about 15 days once all of the documents are submitted.

I hope you’ve found this article on the Panama Financial Services Company company to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

PFIC investment
Christian Reeves

What is a PFIC Investment – Passive Foreign Investment Company

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In this article, I’ll review the rules around PFIC investments and the Passive Foreign Investment Company statutes. Here’s everything you need to know about passive income in an offshore corporation.  

First let me define a few terms around PFIC.

Passive Income: Income from interest, dividends, annuities, capital gains, and most rents and royalties.

Passive Foreign Investment Company: An offshore company used primarily to hold passive investments rather than to operate an active business. The two tests to determine if a corporation or LLC is a Passive Foreign Investment Company are:

  1. Any foreign company where 75% of it’s is passive is a PFIC, and  
  2. Any foreign company where 50% or more of its assets are assets that produce passive income is a PFIC

PFIC Investment: A passive investment within a Passive Foreign Investment Company. Also, any investment in a foreign mutual fund, or in a corporation treated as a PFIC is a PFIC investment. Buying stock in company generating passive income, and not operating an active business, can be a PFIC investment.

Second, here are the consequences of investing in a PFIC.

I’ll start with a little commentary in saying that these punitive PFIC rules are a form of capital control imposed on Americans who want to invest offshore. The IRS is charging you a penalty for investing offshore. And, god forbid you make a mistake in reporting your offshore account. The penalties will be swift and severe.

These PFIC penalties where the brainchild of the U.S. mutual fund industry… not a political conspiracy. The industry didn’t want to compete with the better products available abroad, so they paid lobbyists and Congress to invent the PFIC. But, the result is the same as if the Illuminati were imposing capital control on average Americans.

As for the reporting, the IRS estimates it taxes up to 30 hours of work to complete Form 8621, which must be filed each year for each PFIC investment. Add to this forms for the corporation, foreign asset statement, FBAR, and maybe a trust, and you’re over 200 hours to report your offshore investment.

And most of these forms are required no matter the size of your investment and regardless of whether you made a profit. Having a single PFIC investment of $100 inside of an offshore corporation will trigger multiple filing obligations and cost a couple thousand in tax prep should you decide to hire a professional.

This, and the fact that the penalty for getting it wrong on that $100 investment is over $10,000 per year, and you see that average American’s can afford to go offshore. This effectively locks them and their cash in the United States.

All of this negativity and I haven’t even gotten to the PFIC penalties yet. Here they are:

Penalty 1: When you receive a dividend or sell a PFIC share, you must prorate the investment over your holding period and pay an interest charge in addition to the tax.

That’s right, where passive investments in the United States are taxed when sold, those same investments offshore pay tax for each year they are held plus an interest penalty. The purpose of the interest charge is to treat the gain as if it were earned and taxed each year over the holding period.

For example, let’s say you buy a PFIC investment in 2017. You hold it for 3 years and sell it for a gain of $300,000 in 2019. When you file your 2019 return, you’ll need to split the investment over the holding period and pay tax on it as if ⅓ was sold in 2017, ⅓ in 2018 and ⅓ in 2019. That is to say, report $100,000 in gains for each year, plus pay interest on the gains made in 2017 and 2018 (because you reported them “late.”)

Penalty 2: Capital gains from PFIC investments are taxed at the highest ordinary income rate plus the interest charge. Long term capital gains rates are NOT available.

While long term capital gains are taxed by the Feds at 20% to 23.8% (including Obamacare taxes as applicable), the top ordinary income rate is 39.6%. When you add up penalties 1 and 2, the tax and interest penalties for investing offshore can eat up 70% or more of your gain.

Penalty 3: Capital losses on PFIC investments can’t be used to offset capital gains on domestic investments.

While U.S. passive gains and losses offset each other, you can’t reduce your U.S. capital gains with offshore capital losses from PFIC investments. This means your offshore investments MUST turn a profit, or the penalties for going offshore will be severe.

Here are a few exceptions to the PFIC investment penalties…

You can opt out of the PFIC Investment rules with an LLC. If you form an offshore LLC and then make an election to be classified as a disregarded entity or partnership, you will not be considered a PFIC. Only a foreign entity with the ability to retain earnings, such as a corporation or an LLC treated as a corporation, is classified as a PFIC.

In most cases, the PFIC rules do not apply to investments of less than $25,000 (single) or $50,000 (joint).

  • My example above of a $100 investment was inside a corporation, which must always be reported no matter the size.

You can opt out of the PFIC investment rules by making a QEF Election. If a PFIC meets certain accounting and reporting requirements, and is FATCA compliant, you can avoid the PFIC penalties by treating the investment as a Qualified Electing Fund (QEF).

But a QEF election is very complex and difficult to use unless your offshore investment or fund is set up for QEF reporting. In my experience, only the very largest offshore funds have the ability to provide QEF reports that allow you to use the QEF election. This is because:

  1. You must report and pay tax on your share the ordinary gains and passive income of the PFIC investment each year. Your investment might not be able to provide (or willing to provide) such an annual report.
  2. You can elect to report but pay no tax on the QEF elected gains in a PFIC. In this case, you will pay interest on untaxed gains when the investment is sold. You are effectively “carrying over” your gains and losses year to year and paying the tax plus interest when the sale is made. This is best if the returns are uncertain or you have gains in some years and losses in others.
  3. If you don’t make the QEF election in the first year, it becomes difficult to make it later. You need to report a “deemed sale” and then begin with the QEF from that year.

The bottom line is that Passive Foreign Investment Company rules are complex and punitive. They’re a form of capital controls being imposed on Americans by the Internal Revenue Service.

And I haven’t even covered the more esoteric areas of PFIC investing, such as 1291 funds, or the mark-to-market election for stock under the PFIC and section 1296.

For this reason, it’s important to hire a U.S. expert to form ANY offshore structure. Whether you use it to buy real estate, invest in stocks, hold a bank account, or operate a business, a U.S. expert should be the one to quarterback your offshore adventure.

I hope you’ve found this article on the joys of PFIC investments and the Passive Foreign Investment Company Rules helpful. For more information on structuring your investments offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

stop paying payroll tax
Christian Reeves

How to Stop Paying Payroll Tax

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During the election,Trump claimed he’s paid “hundreds of millions of dollars” in taxes over the years. Yet, he probably didn’t pay any personal income taxes since 1995 because of a $916 million loss carryforward. How can both of these statements be true? Because most Americans pay more in payroll taxes than income tax!

In this article, I will explore how you can opt out of the US payroll tax and self employment tax systems by going offshore. How to stop paying into Social Security and other government programs that might not be there when you need them. How to create your own security blanket offshore that’s under your control.

Federal payroll tax is about 15%, with half being paid by your employer and half being deducted from your check. In addition, most states charge a payroll tax of 1.5% to 7.5%, again with half coming from the employee and half from the employer.

Self employment tax is basically payroll tax for small business. If you operate without a corporation, and report your income and expenses on Schedule C of your personal return, you will pay 15% of self employment tax. This is intended to match up with the 7.5% paid by an employer and the 7.5% withheld from every paycheck.

  • I’m using round numbers to keep it simple. For the precise cost of hiring an employee in California, see this great infographic.
  • For purposes of this article, I’ll use the terms self employment tax and payroll tax interchangeably.

When the Donald says he’s paid hundreds of millions in taxes, he’s probably counting employment taxes paid by his many companies, plus payroll and other taxes he’s paid personally. Assuming a payroll tax cost of 10% for each employee, the numbers add up quickly and his boast is probably correct… even if he paid zero in personal income taxes.  

About 66% percent of households will pay more in payroll taxes than they will in income tax. Only one in five households will pay more in income taxes than employment taxes. Those who do pay more income taxes than payroll taxes are at the very top of the wage scale. Middle income and low income taxpayers are paying far more in payroll than income tax.

Only 18% of US households pay neither payroll nor income tax. Of these, half are retirees living on their Social Security and have no other taxable income. The rest have no jobs and not much income.  (source: T16-0129 – Distribution of Federal Payroll and Income Taxes by Expanded Cash Income Percentile, 2016, Tax Policy Center)

If you’re a business owner or an independent contractor, here’s how to stop paying payroll taxes… and income tax on your first $102,100 of salary in 2017.

Live outside of the United States, qualify for the Foreign Earned Income Exclusion, operate your business through an offshore corporation in a zero tax jurisdiction, and you will pay no payroll taxes of any kind.

In order to qualify for the Foreign Earned Income Exclusion, you must be out of the United States for 330 out of 365 days or be a legal resident of a foreign country and out of the US for 7 or 8 months a year. Any income earned while in the US will be taxable here.

As a legal resident, your new country should be your home base for the foreseeable future. If you move somewhere for a short term job, you’re not a resident for purposes of the FEIE. You need to move to a foreign country with the intent to live there indefinitely.

If you don’t want to go through the hassle of getting a residency visa, you need to be out of the US for 330 out of 365 days. While this version of the test doesn’t give you much time with friends and family in America, it’s far easier to prove should the IRS challenge your tax return.

If you live abroad and qualify for the FEIE, but don’t operate your business through an offshore corporation, you will still pay payroll taxes! You will eliminate income tax on your first $102,100 in 2017, but self employment tax will apply at 15%. So, a business that net’s $100,000 is basically paying a penalty of $15,000 for failing to incorporate offshore. A husband and wife who net $200,000, could pay a $30,000 penalty.

  • If you run your foreign business through a US corporation, you will pay payroll taxes. If you don’t have any corporate structure, you will pay self employment tax.

What happens if you make more than $100,000 (single) or $200,000 (both spouses work in the business)? Any excess salary you take out of the business will be taxed at about 32% by the IRS. Still, no payroll or self employment taxes will apply.

If you’re operating through an offshore corporation, you may be eligible to hold those profits in the company and not pay tax on them until they are distributed. That is to say, you can hold income over the FEIE amount as retained earnings in your offshore corporation.  

These retained earnings will basically create a giant retirement account or security blanket. Like money contributed to an IRA, this cash is untaxed until you take it out of the corporation. Unlike an IRA, there are no rules or age requirements forcing distributions.

So, if you want to stop paying payroll taxes and self employment taxes, move out of the United States, qualify for the FEIE, and operate your business through an offshore corporation.

For help on setting up a tax compliant structure, please contact me at info@premieroffshore.com or call us at (619) 483-1708. I will be happy to assist you to set up offshore.

money management accept client funds
Christian Reeves

Offshore Money Management Business: How to Accept Client Funds and Deposits

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If you want to receive client funds into your offshore account, you must have a license or set up a specially designed offshore structure. Whether you’re raising money or managing money, if you’re not the owner of the cash in your offshore bank account, you will need an offshore money management license.  In this article, I will describe how to accept client funds and deposits offshore.

First, let me explain what I mean by client funds. It’s money that doesn’t belong to you, the owner of the offshore company. The most common examples of “other people’s money” in offshore accounts are brokerage firms, FX or Bitcoin exchanges, and anyone who manages or invests money for other people.

This does not include income from selling a product or a service. Nor does it include money invested by shareholders of the offshore company. So long as those shareholders are disclosed and provide due diligence documents to the bank, and you’re operating a business, not an investment pool, the account will be in compliance.

I should point out that most offshore banks will limit the number of shareholders… not for legal reasons, but for practical ones. No bank will want to put in the time and effort to research 50 shareholders investing $5,000 each. That doesn’t make economic sense for a bank. In most cases, you will be limited to 2 to 5 shareholders per offshore company.

Also, even if all of your shareholders are approved, no offshore bank will allow you to operate a money management business without a license. You can’t combine client money into a pool and invest it for their benefit, even if they’re all shareholders of the corporation.

With that in mind, here’s how to accept client money as an offshore investment advisor.

Power of Attorney Model

In my opinion, the most efficient offshore solution for private wealth managers is the Power of Attorney model. I’ve seen the POA model work well for investment advisors with over 2,500 clients, all with managed accounts in Switzerland, and for smaller firms with accounts in Asia and the Caribbean.

You simply form an offshore company for each and every client. That offshore company is in the name of the owner (your client) and opens an account at the bank you wish to trade through. Then the client gives you (the investment advisor) a Power of Attorney over his or her company’s bank account.

With that Power of Attorney, you can invest the client’s funds per your agreement. You have full control without the need to be licensed as a broker or as a brokerage in the country where you’re trading.

The POA model completely eliminates licensing and regulation issues. It also allows you to bring client money together in an omnibus account or into a hedge fund. When combined with a white label trading platform, available from major international banks, you will present a solid image and back office to your clients.

The limitation of the POA model for managing client funds is obvious – the cost. You will need to form a separate LLC or corporation for every client and go through the account opening process at your trading bank for each.

Depending on your jurisdiction, an offshore company might cost $2,000 to $3,500 to setup and $850 per year to maintain. This cost is typically borne by the trader, so this model only makes sense for those managing larger accounts.

Bottom line: if you want to open accounts at major banks in Europe without setting up a fully licensed brokerage, the POA model is the way to go.

Bank License

Let’s jump from the easiest and most efficient option to manage client money offshore to the most complex and burdensome. If you want to go big into offshore, consider forming a fully licensed and regulated offshore bank.

An offshore banking license from a country like Dominica, St. Lucia, or Belize might cost $70,000 to $300,000+ and require capital of $1 million to $5 million. In addition, you will need a solid board of directors, 5 year business plan, an office with employees on the island, and licensing will take 6 to 16 months to complete.

Once you have your bank license, you will need a correspondent bank account. As no bank will bother to open a correspondent account for a bank with only $1 million in its coffers, you will need significantly more capital at this stage.

There’s one interesting hybrid license available to U.S. investment managers. You can form an “offshore” bank in the U.S. territory of Puerto Rico with only $550,000 in capital. U.S. Federal laws apply on Puerto Rico, but U.S. tax laws do not. This allows you to operate a bank from the island and pay only 4% in corporate income tax.

For more on Puerto Rico’s offshore banking statute, checkout: Lowest Cost Offshore Bank License is Puerto Rico.

For more information on offshore bank licenses in general, please review my articles below.

Brokerage License

Brokerage licenses are available from a number of jurisdictions. The lowest cost and capital requirements are in Belize, Anguilla, St. Lucia, Nevis, Seychelles and St. Vincent. The top offshore jurisdictions are Panama, Cayman and BVI.

The cost to secure a brokerage license in Belize is around $35,000 and the capital required is $50,000 to $150,000 depending on a number of factors.

Licenses from the countries above do not require you pass an exam or receive a personal license (like a Series 7). The corporate brokerage license will require you demonstrate proficiency and standing in the industry, but not in your country of licensure.

Before selecting a jurisdiction for an offshore brokerage, a review of local rules should be undertaken to ensure your client base is compatible with FATCA and other island requirements.

Fund License

The next level down from a brokerage license would be a licensed or registered hedge fund. The best jurisdictions for a fund are Cayman and BVI, but licenses are also available from Nevis and Belize.

There are four options for an offshore fund in Cayman:

  1. You can form a licensed fund, involving a rigorous investigation by the Monetary Authority of the fund documentation and promoters. These are rare (about 10% of Cayman funds) and allow you to accept investments of any size.
  2. You can form a registered fund, which requires only a form setting out the particulars of the fund, together with a copy of the offering document and consent letters from the Cayman licensed auditor and Cayman licensed administrator. This is available to funds that require a minimum initial investment per investor of US$100,000. The majority of funds in the Cayman Islands are registered funds.
  3. You can form an administered fund if you will have 15 or more investors. To be approved as an administered fund, you must have a Cayman fund administrator providing your principal office. The regulatory responsibility (and, thus the risk and liability) for the administered fund, which has more than 15 investors and which is not licensed or registered, is placed largely in the hands of a Cayman licensed fund administrator.
  4. You can form a non reported fund in Cayman if you have 14 or fewer investors. Cayman will allow you to form a company and launch a fund without much regulation or oversight. Once you reach 14 investors (call it a proof of concept), you’ll need to step up to an administered, registered or licensed fund.

To set up a Cayman licensed or regulated fund, one would first form a Cayman company, then open a Cayman office or have a local registered office, and then file an application with the government. In order to be approved, the manager must have a net worth of at least US$500,000 and the manager and prove himself competent as a based on past work experience. The application process can take 3 to 6 months.

Most of the funds we set up are master / feeder structures for U.S. and international investors. Note that tax preferred investors, such as offshore IRA LLCs, come in through the offshore feeder.  

For more on master / feeder funds, please contact me at info@premieroffshore.com for a confidential consultation.

Licensed but not Regulated Offshore Entities

In addition to funds, the Cayman Islands offers a licensed but not regulated option for FX and BitCoin firms. If you’re in the currency exchange or money transmission business, you might find Cayman one of the most marketable options… a jurisdictions that your clients will be comfortable with.

For a licensed Forex Brokerage operating in the Cayman Islands, see: Xenia.ky

For a licensed and regulated brokerage firm in the Cayman Islands, see: OneTRADEx.com

Note that, if you’re going to run a full-service brokerage, you must be a regulated entity. The licensed but unregulated option is available to FX and Bitcoin operators.

Another licensed but unregulated entity is a Panama Financial Services Company. This structure can be used to hold third-party funds or to operate an FX or Bitcoin business.

These structures are popular for holding client funds on behalf of a regulated entity from another jurisdiction. For example, you want to manage client money in Panama on behalf of your bank or brokerage licensed in Dominica. This is a way to outsource your investment management activities to a low-cost jurisdiction like Panama without setting up a full brokerage.

A Panama Financial Services Company is a cost-effective structure to accept client funds as an offshore money manager. Compliance is light because Bitcoin and FX are regulated by the Ministry of Commerce and Industry and not the Banking Commission.

The following activities require a banking or brokerage license in Panama, and thus may not be offered through a Panama Financial Services Company:

  • Securities broker-dealer activities including investment funds, managed trading etc.
  • Savings and Loan (financiera)
  • Fiduciary (trust company) services
  • Any banking services including credit and debit cards
  • Cash money transmittal services or money exchange (e.g. bureau de change)

For an example of a BitCoin exchange operating in Panama under this license, see: Crypto Capital

Belize Licensing Options

You can generally expect Belize to be the lowest cost reputable jurisdiction for licensed businesses. Licenses available in Belize include:

  • International money lending license
  • Money brokering services
  • Money transmission services
  • Money exchange services
  • Mutual and hedge funds
  • International insurance services
  • Brokerage, consultancy, and advisory services
  • Foreign exchange services
  • Payment processing services
  • International safe custody services
  • International banking license
  • Captive banking license
  • General banking license

For a list of applicable legislation, see: International Financial Services Commission, Belize

Conclusion

I hope you have found this article on how to accept client funds and deposits in an offshore money management business to be helpful. For more information on how to setup an offshore investment management firm, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

offshore bank license in dominica
Christian Reeves

How to get an Offshore Bank License in Dominica

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The most active low cost offshore bank license jurisdiction is Dominica. If you’re in the process of selecting a country to incorporate and license an offshore bank, give the Caribbean Island of Dominica a look.

You’ll find that the capital required for a bank license in Dominica is a fraction of it’s competitors. You will also find that the government and regulators want you to succeed… that they’ll work with you to build your brand and your bank… the opposite of what you’ll experience in competing financial centers like Belize, Panama and Cayman.

  • This article is about Dominica, one of the Windward Islands, the southern group of the Lesser Antilles in the West Indies, and a leader in the financial services industry. Please don’t confuse Dominica with the Dominican Republic.

An offshore bank license from Dominica will allow you to offer all manner of banking services. This includes deposit taking, wealth management, lending, credit cards, secured cards, debit cards, certificates of deposits, tax and business planning, currency exchange, and correspondent banking services.

The only limitation on an offshore bank licensed in Dominica is that it’s prohibited from offering services to locals. You may not sell banking services to residents or citizens of Dominica.

An offshore bank in Dominica might also offer company formation, asset protection structures, business and tax planning, tax efficient loans for corporations holding retained earnings in your bank, and wealth management. By maximizing the tax and privacy benefits of Dominica, you might leverage an offshore bank license several fold.

As an enticement to bring jobs and grow the financial sector, you (the owner of an offshore bank in Dominica) may qualify for a second passport or citizenship in the country. Shareholder can apply for immediate citizenship and a second passport. In most cases, the cost will be $130,000 to $180,000 for a single applicant.

An offshore banking license from Dominica has the lowest capital requirement of any offshore jurisdiction. While Belize and others are demanding $5 million, Dominica will allow you to license a bank with only $1 million in capital.

With $1 million in capital, you will get your bank license. You’ll then need to search out a correspondent banking partner.  It will be challenging to find such a partner for a small bank with minimal capitalization. Thus, many apply for the license with $1 million and then raise more money after the provisional license is granted.

Technically, the lowest capital requirement is the U.S. territory of Puerto Rico. That bank license can be had with $550,000 in capital. While Puerto Rico is “offshore” for tax purposes, it’s “onshore” for other Federal agencies.

Dominica is also the lowest cost license to procure. In fact, the cost of Dominica is a fraction of competitors such as Cayman and Belize. Assuming you have a business plan and a board of directors in place, a bank license from Dominica should cost around $100,000, including government and legal fees.

  • This estimate does not include due diligence fees on shareholders and directors. These will vary greatly depending on your country of citizenship. The typical range is $3,000 to $10,000 per person. The average is $7,500 for the primary applicant.


This would compare to $300,000+ in the Cayman Islands. The annual license fee alone in Cayman is about $85,000 compared to only $8,000 in Dominica and $5,000 in Puerto Rico.

In Cayman and Dominica, licensed banks are exempt from tax on their net income. The tax rate in Puerto Rico is 4% if you have at least 5 employees in the territory. If you don’t qualify for the Puerto Rico tax holiday, income will be taxed at about 35%.

Your offshore bank in Dominica will require an office, registered agent, and employees on the island. Compliance (FATCA, OECD, DAC, AML, etc.), account openings, information technology and security, and some basic services should be provided in Dominica.

It will be possible to manage bank assets outside of Dominica. For example, you might form a Financial Services Company in Panama as the management agent. This will allow you to work around some of the correspondent banking issues and manage client capital in a larger jurisdiction.

The typical annual fee for a registered agent in Dominica is $10,000. They will be your liaison to the government, agent for service, and local representative of the bank on the island.

In addition to the agent, employees, and office overhead, you will need to retain an audit and accounting firm to prepare quarterly reports to the government. The average cost of these services is $20,000, though fees vary widely from provider to provider.

The final major expense will be your banking software. We recommend Mobile Earth and
Temenos T24 Retail Banking Software Systems for Dominica. I won’t estimate prices here because of the variety of configurations available. Feel free to contact them directly for a quote.

Because of our long history and relationships on Dominica, we offer a turn-key offshore bank license in this jurisdiction. Everything required to be up and running in 3 to 6 months: government negotiations, board of directors, business plan, financial projections, office space, employees, etc.

If you’re considering forming an offshore bank, I suggest you take a look at Dominica. It’s the lowest cost and most efficient jurisdiction actively issuing licenses.

I hope you’ve found this article on how to get an offshore bank license in Dominica to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation on incorporating an international bank.

For more information on offshore banking licenses, please review my articles below.

OECD tax exchange
Christian Reeves

European OECD Tax Exchange Agreements

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As of November 2016, most offshore jurisdictions have signed on to the Automatic Exchange Agreements demanded by European governments and the Organisation for Economic Co-operation and Development (OECD). All but Panama has agreed to share information with European tax authorities.

On paper, the OECD defines itself as follows: “the mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world.The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems.”

In practice, the OECD has simply followed behind the US IRS and our Foreign Tax Compliance Act (FATCA), demanding information on the offshore transactions of EU citizens. Both sets of laws require banks, either directly or through their local government agents, to report ownership, control, and banking activity. The focus of FATCA is account size and transactions while the OECD is tax data (gross sales, profits, taxes paid, employees and assets of each entity).

  • A history of the OECD’s information exchange program can be found by clicking here.

For a list of countries that have signed on to the agreement, click here. The list is a real eye opener. As I said, the only offshore jurisdiction that hasn’t signed on is Panama.

You’ll find that most offshore jurisdictions have agreed to begin sharing data by 2018. Some, such as Cayman and Seychelles will begin in 2017, while Cook Islands, Belize and Andorra will implement in 2018.

You’ll also find that the list of compliant countries includes all but one… the largest tax haven in the world for everyone but it’s citizens… the U.S. of A.. While Russia, Switzerland, the United Kingdom, Mexico, China, Canada, Singapore, Japan, etc., have all signed on, the United States is nowhere to be found.

The fact that the US has refused to join will create some interesting challenges for US banks operating in compliant countries. How our global banks will coordinate compliance in one country while hiding assets based in America, will open the door to all manner of disputes.

As we international entrepreneurs move into 2017, we do so with the knowledge that privacy in our financial transactions is a thing of the past.

But these new rules shouldn’t dissuade you from protecting your assets offshore. Whether you live in the United States or the European Union, the key to solid asset protection is building a structure that no civil creditor can knock down.

In most cases, offshore asset protection should be tax neutral. It should not increase or decrease taxes in your home country. An offshore asset protection structure should do exactly what it’s name implies… protect your assets.

The key to asset protection is putting up impenetrable defenses, not hiding what you have. Even if a creditor has a road map to your offshore structure, it should be impossible for them to breach the walls of your fortress and get to the gold therein.

In fact, hiding your assets, and not being tax compliant in your home country will put your savings at risk. If you’re caught cheating on your taxes, the penalties will be severe and the value of your trust will be destroyed.

Considering how much effort governments are putting into ferreting out tax cheats, hiding assets should be the last thing on the mind of anyone looking to protect assets. All this does is add risk and pits you against both your creditors and your government.

Hiding assets offshore possible back in the day. Those days are long gone for Americans and Europeans. Now, the industry is all about tax compliant planning.

If you’re reading this and have a non-compliant offshore structure, you should take action immediately. Europeans should shut down, get in compliance, and rebuild a properly reported offshore trust.

We U.S. citizens have significantly more risk than our European counterparts. The US government is aggressively pursuing non-compliant citizens, putting them in jail, and levying mind boggling fines.

If the IRS is not on to you yet, it’s not too late. You can join the Offshore Voluntary Disclosure Program, get into compliance, pay what you owe (if anything), and then rebuild offshore.

If you are living or working abroad, you might be able to get into compliance and pay zero in taxes and penalties. If you’re living in the US and have an unreported account, the penalties will be high, but you can minimize risk and fines by coming forward now.

I hope this post on the OECD tax reporting initiative is helpful and puts offshore asset protection in perspective. For more information on legal and tax compliance asset protection techniques, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Christian Reeves

Offshore Asset Protection for Affiliate Marketers

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Affiliate marketers face unique asset protection, privacy, and tax planning challenges. This article will review your options and point out some of the pitfalls to watch out for. We’re specialists in offshore asset protection for affiliate marketers and can help you to grow your online business in an efficient and compliant manner.

At the end of the day, www.premieroffshore.com, and our lifestyle site www.escapeartist.com, are internet based businesses. I write SEO optimized posts like this one to drive traffic and bring in leads. We’re a remote business with our publishing group based in San Diego and fulfillment in Belize and Panama City.

As the editor and chief marketing guy, I spend my days on the road, tapping away on my laptop. Our in-house attorneys are chained to their desks, but I made sure the marketing team was portable.

We’ve been providing offshore asset protection to affiliate marketers via the web since 2003 and understand the unique needs of your business model. We’re the only firm that provides offshore structures and U.S. tax compliance… at least, the only one in the middle of the market. Our price points are a bit lower than Deloitte, PwC, and E & Y.

  • Our offshore protection structures are positioned in the middle of the market. Less than big name CPA firms and higher than offshore incorporation mills that provide no guidance or support.

This post will focus on asset protection for affiliate marketers. As I said above, we also provide tax planning for offshore businesses, as well as for those in the U.S. territory of Puerto Rico. For more on Puerto Rico, see: Puerto Rico is the Top Offshore Jurisdiction for Americans.

To summarize Puerto Rico, if you move your business to the island, and hire 5 employees, you’ll cut your U.S. tax rate to 4%. To compare that tax deal to moving offshore, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

The remainder of this article will focus on offshore asset protection. Offshore asset protection for affiliate marketers is generally tax neutral – it should not increase nor decrease your U.S. taxes. It’s meant to keep your transactions private and your cash safe from future civil creditors.

You can combine offshore asset protection with an office or division offshore that helps to manage your worldwide tax obligations. But, your asset protection plan is independent of your international tax plan. Thus, you might start with an offshore asset protection plan for your affiliate marketing business and grow it into a business tax savings plan.

Issues in Asset Protection for Affiliate Marketers

When planning an offshore asset protection structure, affiliate marketers face a number of interesting challenges. For example, the need for privacy and the ability to diversify with  subsidiaries are more urgent than with other business models.

Affiliate marketers value their privacy. For this reason, we created the Panama max privacy structure. We use a Belize LLC as the founder of a Panama foundation and a Panama corporation under the foundation to run the business. We can add corporations from other jurisdictions, as active business subsidiaries of the foundation, where necessary.

For more on our max privacy structure, see: The Bearer Share Company Hack

The Panama foundation provides estate planning and asset protection for your business units… and acts as a holding company to bring them together under one umbrella.

Panama offers great asset protection and banking facilities. The problem is that they have a public registry of ownership. That means the founder of a foundation, along with the shareholders and directors of corporations, are public record. We work around this with a Belize LLC because Belize doesn’t maintain a registry and Panama allows the founder to be a person or a foreign company.

That’s all a fancy way of saying that the Belize LLC maximizes privacy by acting as the founder of your Panama Foundation. When someone searches the Panama registry, all they find is the name of your Belize company.

I believe you’ll find that the Panama foundation is the best choice when planning an asset protection structure for your affiliate marketing business. It’s primary competitor, the offshore trust, is a great tool, but not recommended for managing an active business.

An offshore asset protection trust is the solution for someone who wants to build a nest egg offshore out of the reach of future civil creditors. You can add money managers as trustees and maximize protection with a “protector” in case you (the settlor) come under duress.

That is to say, an international trust is perfect for someone who wants to put cash away for the future. A trust is not the structure to hold an active business where you want to maintain control and maximize privacy.

Many of our clients move a portion of their after tax net profits out of the Panama structure and into an offshore trust. You can combine both for the best of both worlds while diversifying your holdings.

Offshore Merchant Accounts

Specializing in offshore asset protection for affiliate marketers means working with many banks and acquirers around the world. We’re experienced in merchant account issues as described here: How to Get an Offshore Merchant Account.

For example, many of our clients run multiple MIDs and require subsidiaries from a variety of jurisdictions to hold those accounts.  This allows them to maximize privacy, diversify risk, and build systems that spread chargebacks among their portfolio.

To support this requirement from affiliate marketers, we’ve built a network of agents around the world. We can incorporate subsidiaries in a different countries quickly and at a reasonable cost.

We also understand that subsidiaries must be formed in countries which are acceptable to your processor. For this reason, we have U.K., Hong  Kong, E.U., Caribbean, and Panama solutions. We also advise on U.S. accounts for companies in Puerto Rico.

  • A comapny incorporated in the U.S. territory of Puerto Rico can open bank accounts at just about any U.S. bank.

Another option for a business with no office or employees in the United States, is to form a subsidiary in the U.S. That subsidiary will hold only bank and merchant accounts and pass profits to the parent company.

This solution is recommended for entities with no U.S. source income. You will likely need a U.S. person to open the account… it’s become difficult for foreign persons to open U.S. accounts… and nearly impossible for non-U.S. persons without U.S. credit scores to get a low cost merchant account.

Why Hire a U.S. Provider?

Internet marketers know how to outsource. How to leverage low cost labor around the world to get things done. Why should you pay U.S. prices for your international tax or offshore asset protection plan?

Simple: only a U.S. expert can build an offshore asset protection structure that’s U.S. compliant.

When you outsource  your offshore structure, you will get answers to your questions and solutions based solely on the laws of that country. For example, contact an offshore trust promoter in Cook Islands and they’ll answer inquires based on Cook Island law.

But, when you’re a U.S. citizen, your compliance risk and liability from lawsuits is in the United States. Thus, the focus should be on how the laws of your asset protection jurisdiction interact with those of your home country.

Since this is a post on asset protection for affiliate marketers, here’s a tech example…

You, the IT professional, can outsource website design because you’re an expert in website design. You know exactly what you want to accomplish and how to get there. You write the text and manage the process from start to finish.

What if you weren’t an expert in design or SEO issues? Should you hire someone to quarterback the project or should you outsource? Knowing what you know now, would you have gone it alone or hired someone to guide you in those early days?

You’d hire a quarterback because you don’t know what you don’t know. As an an expert, you understand how complex a major design or redesign can be. You know that a layperson will likely screw it up terribly, putting the entire project at risk.

This knowledge has come over years in the industry. Through trial and error, you know where the pitfalls are. You know how to drive traffic and optimize your sites. You know what works and what doesn’t.

I have a friend who’s new to the online world. He was tasked to redesign a 10 year old website with 15,000 pages and a solid Google reputation. The owners of the site didn’t want to spend any money, so he was on his own and outsourced design.

While updating the site, he thought it would be a good idea to restructure the URLs. To create a few different categories and make the permalinks more descriptive.  Yeh, he decided to change the URL structure and break the thousands of inbound links for an authoritative site… the links that gave the domain much of its “reputation.”

As an internet professional, you know what a bad idea it is to change the URL structure of an authoritative website with years of history. But my friend had no idea what he didn’t know. Had he hired a quarterback, the expert would have stopped him from falling in this obvious trap.

It’s the same when planning an offshore asset protection structure. You need someone to manage the process and keep you in compliance. Outsource and the promoter will tell you what you want to hear (sure, we can restructure your URLs). Hire an expert and they will tell you “no,” when you need to hear it!

For example, when you want to use a nominee singor on your offshore bank account, you need to hear no. When you, a U.S. resident with no employees offshore, want to setup a company to hold foreign profits and only pay U.S. tax when you bring the money into the U.S., you need to hear hell no!

As with internet marketing, there are many risks in going it alone. Unlike online risks, the penalties for getting out of compliance or using an offshore structure incorrectly can cost you hundreds of thousands of dollars in penalties or even land you in jail. The U.S. government has become extremely hostile to non-compliant offshore structures and you must have an expert in your corner to keep you from becoming a target.

The world of offshore is ever changing, complex, and fraught with risks you can’t see. We can guide you the maze and quarterback your offshore structure, all with a focus on your internet based business.

I hope you’ve found this article on asset protection for affiliate marketers to be helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

software development
Christian Reeves

Research and Development and Intangible Property Tax Breaks in Puerto Rico

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Puerto Rico has the best tax deals available to Americans… period. No offshore jurisdiction can compete with the US territory of Puerto Rico when it comes to cutting your taxes.

This post will focus on Puerto Rico’s research and development and intangible property tax breaks. Act 73 is for those who develop licensed or patented software that may be reproduced on a commercial scale and those who license intangible property.

I’ve also written on the more traditional business tax breaks available under Act 20. Basically, if you set up a business in Puerto Rico with at least 5 employees, your corporate tax rate on Puerto Rico sourced income will be 4%. For more, see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans in 2016.

I focus on the the software development and intangible property or intellectual property development components of Act 73. These are 2 of the 12 industries covered by the Act. For example, tax breaks are also available to large scale manufacturing, scientific experiments and laboratories, recycling, hydroponics, etc.

Software developed under Puerto Rico’s Act 73 must be for commercial distribution. You may license or sell it, but it must be widely available. Software developed under the Act should not be for your company’s internal use or custom work done for a particular client.

Act 73 applies to any and all forms of intangible property. Intangible property is defined as something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but which has no physical substance. For example brand identity, knowledge, and intellectual property are forms of intangible property . Copyrights, trademarks, and patents are also forms of intangible property.

It doesn’t matter how the intangible property came to be owned by the Puerto Rico company. You may have developed it on the island within the corporation, or you can buy it from a related or unrelated company.

If you do develop the intangible property in Puerto Rico, you may receive additional tax incentives. Also, developing the IP in Puerto Rico rather than the United States will avoid a taxable event and transfer pricing issue when you sell / transfer the property to the Puerto Rico company.

Tax Exemptions Under Puerto Rico’s Act 73

Once you have your IP offshore, or begin selling your software, here are the applicable tax benefits. Remember that these replace the US federal income tax rates of 35% + your state (0 to 12%). In many cases, you can exchange a 40% tax rate for 4% or less.

The base tax rate for an Act 73 business in Puerto Rico is 4%. This rate is guaranteed for 15 years from the date your company is approved.

You might be thinking, wow, a 4% corporate tax rate is just too high. “Pioneer” activities in Puerto Rico are taxed at only 1%. Pioneer businesses are typically those who create or develop intangible property on the island.

If you’re still thinking this is too high, I say come on, give me a break… and it can still go lower. If you setup your business in an approved low income area, your corporate rate will be between 0.5% and 0%. Combine this with the tax credits below and you could have a net positive tax rate.

If you’re not a pioneer, you can get to a 3% tax rate. Any business where at least 50% of the shareholders are residents of Puerto Rico, the rate is lowered from 4% to 3%. The same goes for any small to medium sized software or IP development business operated from the island (where average gross income is $10 million or less during the previous three years).

Still not convinced? You will also find a 100% tax exemption on dividend distributions and a 2% or 12% withholding tax on royalty payments to foreign entities for intangible property used in the exempt business. The lower rate includes a 12% matching tax credit for royalties paid to foreign entities, so your rate may vary depending in your situation.

When you sell the business, you’ll pay a 4% fixed income tax rate on the gain. This tax on capital gains trumps any other Puerto Rico income tax code section. The 4% rate is guaranteed under Act 73 for 15 years, so you should have an exit strategy in place prior to this term expiring.

Other tax breaks include:

  • 90% tax exemption from personal property taxes.
  • 90% tax exemption from real property taxes.
  • 90% tax exemption on municipal license taxes.
  • 100% tax exemption on municipal construction taxes.
  • 100% tax exemption on excise taxes.

Remember that this article is focused on IP and software development businesses. I do not discuss accelerated depreciation, sales and use, and other tax benefits.

Puerto Rico’s Act 73 Tax Credits

The Act provides various tax credits, including:

  • 25% tax credit on purchases of products manufactured in Puerto Rico;
  • 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;
  • Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development. In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job;
  • 50% tax credit on eligible research and development activity costs; and
  • 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

When comparing Act 73 to Act 20, note that there is not a minimum number of employees attached to Act 73. Act 20 requires at least 5 employees. Both Acts 73 and 20 can be combined with Act 22 for a personal tax exemption.

Act 22 gives a Puerto Rico resident a 0% tax rate on capital gains and dividends. If you’re living in the United States, you will pay US tax on distributions from your Puerto Rico corporation. You are not required to take any distributions, but when you do, they will be taxed in the United States.

I hope you’ve found this article on Puerto Rico’s Act 73 research and development and intangible property tax breaks helpful. Click here for a list of my other articles on Puerto Rico’s tax deal.

For more information, and a confidential consultation on moving your business to Puerto Rico, you can reach me at info@premieroffshore.com or (619) 483-1708.  

Foreign Earned Income Exclusion for 2017
Christian Reeves

Foreign Earned Income Exclusion for 2017

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The Foreign Earned Income Exclusion for 2017 has finally been released and we expats get an increase of $800 this year. The U.S. government has increased the Foreign Earned Income Exclusion for 2017 to $102,100, up from $101,300 in 2016.  

You can attribute this big time increase of the Foreign Earned Income Exclusion for 2017 to the “robust” U.S. economy. That’s because the FEIE is indexed annually for inflation. The official inflation rate for 2016 was 1.4% and it’s expected to between 1.5% to 1.6% for 2017.

Note that this article is about the 2017 FEIE. For the 2018 Exclusion, see: Foreign Earned Income Exclusion for 2018

The Foreign Earned Income Exclusion for 2017 is the amount of salary or business income you can exclude from your United States taxes while living abroad. If you qualify for the FEIE for  2017, and you earn $102,100 or less in wages, you will pay zero Federal income taxes.

To qualify for the FEIE, you must be out of the United States for 330 days during any 12 month period, or a legal resident of a foreign country for a full calendar year. The 330 day test is simple math… be out of the U.S. and you’re golden. It doesn’t matter where you are in the world, so long as you’re not in the U.S.

For more on the 330 day test, see: Changes to the FEIE Physical Presence Test Travel Days

To apply the FEIE for 2017 over two calendar years, see: How to Prorate the Foreign Earned Income Exclusion

The residency test is more complex and based on your intentions. You must move to a foreign country for the “foreseeable future.” This new country should be your home and your home base. When you travel, it’s where you return too. It’s where you lay down roots. It’s where you file taxes and where you’re a legal resident (with a residency permit).

  • You should be filing taxes in your new home. It doesn’t matter if you’re paying taxes… just that you are following their laws as a legal resident. If your country of residence doesn’t tax your income earned abroad or in an offshore corporation, all the better.

In most cases, you will use the 330 day test in your first year abroad. That will give you time to secure residency, find your home base, and do all the things necessary to break ties with the U.S.  Beginning January 1 of year two, you will file for the Foreign Earned Income Exclusion using the residency test.

The reason you want to use the residency test when eligible is that it will allow you to spend more time in the United States. Under the 330 day test, you can spend all of 36 days a year in the land of the free. If you qualify for the residency test under the Foreign Earned Income Exclusion for 2017, you can spend 4 or 5 months a year in America.

Someone with no home base, and no residency visa, will never qualify under the residency test. A perpetual traveler will need to use the 330 day test. Likewise, someone on temporary assignment for a year or two, who intends to return to the U.S. when their job runs out, will need to use the 330 day test.

Just remember than any income earned in the USA is taxable here. The FEIE doesn’t apply to U.S. source income. If a U.S. citizen works for 10 days in the U.S., the income from those days is U.S. source and Uncle Sam wants his cut.

The FEIE for 2017 applies to married persons individually. A Husband and Wife working in their own corporation, or drawing salaries from a foreign company, can earn $204,200 combined this year and pay zero Federal income tax.

If you earn more than $102,100, you’ll pay U.S. income taxes on the excess. For example, if you earn $202,100, in salary, you will pay U.S. Federal income tax on $100,000 at 28% to 33%.

Note that your expat tax bracket begins at 18%. This is because the full $202,100 counts towards the bracket. Thus, you are paying a rate on your last $100,000 as if you had earned $202,100 in wages, not just $100,000.

If you pay tax in the country where you work, your U.S. tax on this $100,000 over and above the Foreign Earned Income Exclusion for 2017 will be reduced. Every dollar you pay in foreign income tax should reduce your U.S. rate by one dollar.

  • A dollar for dollar credit is the theory behind the foreign tax credit. You will see some variance on your return when you account for deductions, credits, etc.

Another tool for high earners who are self employed is to hold earnings over the Foreign Earned Income Exclusion for 2017 amount in their corporation. Pay yourself a salary of $102,100 and keep the rest in the corporation as retained earnings. For more on this, see: How to Manage Retained Earnings in an Offshore Corporation.

Be aware that the Foreign Earned Income Exclusion doesn’t apply to income that’s not  “earned.” So, the FEIE doesn’t cover passive income like rents, royalties, dividends, or capital gains. Income which is earned is money made from paid work / labor.

For more on tax planning for foreign real estate, see: US Tax Breaks for Offshore Real Estate

Most clients who contact us about the FEIE are business owners or self employed. They want to form an offshore corporation to retain earnings, maximize the value of the FEIE, and eliminate Self Employment tax.

Note that the Foreign Earned Income Exclusion does not apply to Self Employment tax, only income tax. So, a self employed person living abroad and qualifying for the Exclusion will still pay 15% in SE tax. That means about $15,000 on your salary of $102,100 for FICA, Medicare, Obamacare, etc.

If you don’t want to contribute to Social Security, you can opt out of Self Employment tax by forming an offshore corporation. Incorporate in a country that won’t tax your income, get your clients to pay that company, draw a salary from your foreign corporation reported on U.S. Form 2555, and you’ve eliminated U.S. social taxes.

For more on the tax benefits of living abroad, see: Tax Benefits of Going Offshore

For more on setting up a business offshore, see: Benefits of an Offshore Company

If you’re reading this article on the Foreign Earned Income Exclusion for 2017 and planning to set up a large business offshore, you might consider Puerto Rico. If $102,100 is a small portion of your net profits, think Puerto Rico. If your take home is closer to $1 million than $100,000, think Puerto Rico. If you have at least 5 employees, Puerto Rico might be for you.

The Puerto Rico tax deal, referred to as Act 20, is the reverse of the Foreign Earned Income Exclusion. With Puerto Rico, you pay U.S. tax rates on your first $100,000. Then you pay 4% profits over this amount and distribute those profits to yourself as a tax free dividend.

The Puerto Rico tax deal requires you live on the island for 183 days or more, significantly less than the 330 days required by the FEIE. If your net business income is well over the FEIE of $102,100, consider Puerto Rico.

The catch in Puerto Rico is that you must hire 5 employees on the island. You and your spouse can be 2 of those 5, and then you need 3 more. When setting up offshore, there’s no minimum number of employees required.

For a comparison of the Puerto Rico deal with the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For more on who qualifies as a Puerto Rico employee, see: Who is a Resident of Puerto Rico for US Tax Purposes

To read more about Puerto Rico and the Foreign Earned Income Exclusion, see: How to Maximize the Tax Benefits of Puerto Rico

For more on setting up a one man or one woman business offshore, see: Move Your Internet Business to Cayman Islands Tax Free

The bottom line is that the FEIE is great for those earning $100,000 from a business (or $200,000 of both spouses are working). If you are earning well over this threshold, and you can benefit from 5 employees, take a look at Puerto Rico.

I hope you’ve found this article on the Foreign Earned Income Exclusion for 2017 to be helpful. For more information on taking your business offshore, to Puerto Rico, or for a referral to a U.S. tax preparer, please contact me at info@premieroffshore.com or call (619) 483-1708.

retained earnings
Christian Reeves

Watch Where You Invest Those Retained Earnings – IRS Tracking Luxury Home Purchases from Offshore Companies

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According to the N.Y. Times, The IRS has begun tracking homes bought through offshore companies and shell corporations in the United States. If you’ve setup an offshore structure, and used your retained earnings to buy real estate in the United States, you’re probably a target of the IRS.

Even if your offshore company is tax compliant, you still may be in trouble with the tax man for using those retained earnings for your personal benefit. You may be living in the property at below market rent or taking the rents as personal income.

If you’ve managed to avoid the worst of the pitfalls, investing retained earnings in the United States might have converted them to taxable distributions to the parent company. For more information, see: How to Manage Retained Earnings in an Offshore Corporation

The bottom line is that offshore retained earnings are best held offshore. Unless you have a tax plan and written opinion from a reputable firm, leave the money alone and allow it to build up inside your operating company.

And now, here’s the rest of the story:

As I said above, the IRS is targeting luxury home sales involving offshore companies. Because buying US real estate is a common, if risky, use of retained earnings, this investigation is likely to net many offshore entrepreneurs.

The first stage of this investigation is now complete. It was focused on Miami and Manhattan, where over 25% of the all-cash luxury home purchases made using offshore companies or shell corporations were flagged as suspicious.

Today, officials said they would expand the program to areas across the country. The IRS will target luxury real estate purchases made with cash in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco, and the county that includes San Antonio.

The IRS says that the examination, known as a geographic targeting order, is part of a broad effort by the federal government to crack down on “money laundering and secretive offshore companies.” As we know, “money laundering” is basically code for “tax cheats.” For every one drug kingpin caught in their net, they’ll land 1,000 tax cases.

Cases will be selected based on the purchase price of the property. Only all cash sales will be targeted in this round of audits. The dollar values involved are as follows:

  • $500,000 in and around San Antonio;
  • $1 million in Florida;
  • $2 million in California;
  • $3 million in Manhattan; and
  • $1.5 million in the other boroughs of New York City.

You might be thinking, that the IRS doesn’t have data on every real estate purchase in the United States. How the heck are they going to audit every single transaction over these amounts.

Never fear, the IRS thought of that. All they needed to do is issue an order to every title insurance company in the United States. Basically, they’ve drafted title insurance agents into the IRS army (unpaid, of course), to search through their records and select those who should be investigated.

  • Title insurance companies are involved in just about every residential and commercial real estate transaction in the United States.

And these insurance agents aren’t just providing information on the home in question. They’re identifying the escrow agent, the US and offshore banks involved, all paperwork from the offshore company, etc.

Once the IRS has the bank account information, they’ll summon your account records. This will enable them to chase down all inbound and outbound wires.

Here’s the bottom line: investing retained earnings into the United States opens up a pandora’s box of trouble. I’ve been telling clients this for years and now it’s come to fruition.

If you have an active business offshore, keep your retained earnings offshore. Don’t make you and your cash a target for the IRS. Even if you’re 120% tax compliant, avoid the audit, avoid the battle, and protect your hard work from the Service.

I hope you’ve found this article on the IRS’s targeting of offshore retained earnings to be helpful. If you have questions on structuring a business offshore, you can reach me at info@premieroffshore.com for a confidential consultation.

Pre-Immigration Tax Planning
Christian Reeves

Pre-Immigration US Tax Planning for Future US Residents & Citizens

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If you’re moving the the United States, get ready for our crazy tax system. Most importantly, if you will become a US resident, be prepared for US tax on your worldwide income. You need to do your pre-immigration US tax planning before you arrive to minimize these taxes.

Let me begin by defining what I mean by a US “resident.” Then I’ll review your pre-immigration tax planning options and what you need to do NOW before landing in the United States.

The United States taxes its citizens and it’s green card holders on their worldwide income. It doesn’t matter where you live or where your business is located. So long as you hold a blue passport or a green card, you will pay US tax any income you earn.

Likewise, the US taxes its residents on their worldwide income. A US resident is anyone who spends 183 days or more in the US in a calendar year. If you spend more than 183 days in one year, and then fewer days the next year, you might be a US resident for both years because a weighted average is used to determine residency.

  • I won’t bore you with the details of how to calculate the average. Suffice it to say, if you spend significant time in the United States, Uncle Sam wants his cut.

A US tax resident is ANYONE who spends 183 days a year in the country. Even if you are here on a tourist visa, or illegally, you are a tax resident and expected to pay US tax on your worldwide income. Your legal or immigration status is separate from your tax status.

US Pre-Immigration Tax Planning Techniques

If you plan to become a US resident, green card holder or citizen, you need pre-immigration tax planning before you move to the America. Some of these strategies require you to plan years in advance. So, if you are working towards residency in the United States, stop and think about taxes NOW.

Minimizing US Tax on the Sale of a Foreign Business

When you sell a foreign business after you become a US resident, you pay US tax on the gain from that sale. This means you’ll pay US tax on all of the appreciation and value that has accrued in your business over the years.

For example, let’s say you started a business in Hong Kong 10 years ago. You invested $100,000 and now the business is worth $1 million. You move to the US and sell this Hong Kong company the following month. The IRS expects you to pay US capital gains tax on $900,000.

Obviously, the simple way to avoid this tax is to sell your business before you move to the United States. I suggest you sell the business and then wait a month or two before traveling to the United States to make sure there are no issues.

But, what if you’re not ready to sell today? What if you want to move to the United States for a year or two and then sell? Serious planning and US filings are required to minimize your US tax obligations.

You can basically sell the business to yourself by making certain elections in the United States for your Hong Kong business. By converting the business from a corporation to a partnership or disregarded entity, you are selling it to yourself for US tax purposes. Do this before moving to the US, and you will have no US taxes due on the phantom sale.

Then, when you sell the company again in one or two years, you will only pay US tax on the appreciation in value from the day you sold it to yourself. This is called Stepping Up Basis. Here’s an example:

You plan to move to the United States on January 15, 2017. So, you file forms with the US IRS to treat your Hong Kong company as a partnership on December 15, 2016.  This triggers a sale of the assets to you, but no tax is due in the US because you are not a US resident for tax purposes. The value of the business on December 15, 2016 is $900,000.

Then, on December 15, 2018, you sell the business for $1 million dollars to a third party. Because of the pre-immigration tax planning you did along the way, you will only pay US tax on the $100,000 of appreciation that accrued from December 15, 2016 to December 15, 2018.

Another business income tax planning tool is to recognize as much income as possible before you move to the United States. You pay yourself as much in salary and bonuses as possible to deplete the value of the Hong Kong company before you move to the United States.

Note that salary from a foreign corporation will be taxed at about 35% Federal plus your State (maybe 12%). So, taking as much in salary before moving to the US can save you big time. Even if it requires borrowing money from banks or other sources, accelerating your income can be beneficial.

Offshore Trusts in Pre-Immigration Tax Planning

When you move to the United States, you need to worry about business tax, personal income tax (salary and capital gains) and death taxes. High net-worth residents pay a tax on the value of their worldwide assets when they pass away.

  • United States death tax applies to residents, green card holders and citizens with assets of more than $5.45 in 2016 and the tax rate is 35% to 40%.

You can minimize or eliminate the US estate tax by giving away your assets before you move to the United States. Most transfers after you become a resident will be subject to US gift tax, which is 40% plus your state.

This form of pre-immigration tax planning can also reduce your US personal and business income taxes. If you give your assets to family who will not be residents of the United States, America can’t tax those assets when sold or as business income is generated.

Most clients want to maintain control over their assets while they are alive. They don’t want to pay US income or estate taxes, but they do want to manage the assets or business for the benefit of their heirs.

This is where offshore trusts come in to pre-immigration tax planning.

When you setup an offshore trust to manage your assets, they’re removed from your US estate and the death tax doesn’t apply. Also, gains or income from these assets can be removed from your US income tax if you plan ahead.

If you set up and fund an offshore trust at least 5 years before becoming a US resident, the income generated in that trust will not be taxable to you in the United States.

Thus, if you are thinking about becoming a US resident, or moving to the United States is a possibility (even a remote possibility), you would do well to create an offshore trust and engage in some pre-immigration tax planning now.

If you can’t meet the 5 year threshold, there are several benefits to creating an offshore trust before moving to the United States. For example, an irrevocable offshore trust can reduce transfer tax, estate / death tax, and protect your assets from creditors. Considering that the United States is the most litigious nation on earth, asset protection is an important part of pre-immigration planning.

I hope that you have found this information on pre-immigration tax planning to be helpful. For more information, and to consult with a US attorney experienced in these matters, please contact me at info@premieroffshore.com. 

asset protection puerto rico
Christian Reeves

Asset Protection for a Puerto Rico Act 20 Business

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Once you have your Act 20 business in Puerto Rico up and running, you need to think about protecting its retained earnings or distributed profits. Asset protection for a Puerto Act 20 business  becomes urgent because of the amount of capital held in the company tax deferred.

There are two levels of asset protection for Puerto Rico Act 20 companies. The first is retained earnings within the Puerto Rico LLC or corporation and the second is asset protection of dividends taken out under Act 22.

When you operate an Act 20 business based in Puerto Rico from your home in the United States, you get tax deferral at 4%. That is to say, if the business owner is living in the US, you can hold  Puerto Rico sourced profits in the corporation tax deferred.

You will pay 4% tax on the net profits earned from work done in Puerto Rico. This cash must stay within the Puerto Rico corporate structure to continue to be tax deferred year after year. When you distribute those profits as a dividends to the US based owner, you will pay US tax on the qualified dividend at 20% to 23.5% + your state.

If you’re operating a business in Puerto Rico under Act 20, and living in Puerto Rico while qualifying for Act 22, then you can withdraw the corporate profits from the corporation each year. This is because residents of Puerto Rico pay zero tax on dividends from an Act 20 Puerto Rican business.

When it comes to protecting the assets of your company, remember that Puerto Rico is a US jurisdiction. Any US judgement will be enforceable in Puerto Rico just as it is in any other State. As a result, you must take steps to protect your cash without changing its status as tax deferred “offshore” profits.

The best asset protection for Puerto Rico Act 20 businesses is to move your cash out of Puerto Rico and into a safe and secure bank. We have relationships with a number of banks in Switzerland, Germany and Austria that will open accounts for your Act 20 company and allow you to hold retained earnings offshore and out of reach of civil creditors.

The next level of asset protection for a Puerto Rico Act 20 company is incorporating offshore subsidiaries. This is done to put a layer of insulation between the Puerto Rico company and the assets held offshore. We can form a corporation in Panama, Cook Islands, Cayman Islands, or any other solid asset protection jurisdiction to manage your corporate capital.

In order to maintain the tax benefits of tax deferral, these offshore companies must be wholly owned subsidiaries of the Puerto Rico Act 20 company. For example, we form a Panama Corporation owned by the Puerto Rico company. This gets us access to all of the banks and asset protection benefits of Panama and allows us to maintain our tax deferral status.

For this reason, we can’t use other more advanced techniques. It would not be possible for the owner of the Act 20 business to create a Cook Island Trust and fund the trust with retained earnings. Once those profits moved from the Puerto Rico company to the Cook Island Trust, they would become taxable in the United States as a distribution.

This limitation applies only to retained earnings. Residents of Puerto Rico operating under Act 22 may use any means necessary to protect their personal after tax assets from future civil creditors. Remember that, unlike a business based offshore, once you have paid your 4% corporate tax and withdrawn the dividends tax free, this is “after tax” money. You can invest and do with it whatever you like, just as you can with money taken from a US business after paying 40% in taxes.

If you’re new to the Puerto Rico tax holiday, and would like to compare it to traditional offshore tax plans, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion and Move Your Internet Business to Cayman Islands Tax Free

One of the best asset protection systems is to have capital paid directly to a Cook Island Trust. This will maximize the asset protection afforded your dividend distribution and keep it out of the reach of any civil creditor.

We can make arrangements for the dividends to pass directly to the Trust and bypassing any risk of a civil creditor reaching them. We can also setup a subsidiary of the Puerto Rico company in the Cook Islands to facilitate this transfer and the related cash management.

Another offshore asset protection strategy for Puerto Rico Act 20 business will allow you to carry forward the tax benefits of Puerto Rico once you move away from the island and no longer qualify for Act 22.

Let’s say you’ve been operating your Act 20 business for 5 years and have been living in Puerto Rico all of this time. You’ve taken out $10 million in tax free dividends, with the only tax paid being 4% to the government of Puerto Rico.

You’ve had enough of island life, your business has run its course, and are want to return to the United States. Once you make the move, all capital gains, dividends and passive income earned on that $10 million will become taxable by the IRS and your State.

One option is to invest this money into an offshore single pay premium life insurance policy. Money held in the policy will be protected from future civil creditors as well as the US taxing authorities.

This is because capital gains earned within the US compliant offshore life insurance policy are tax deferred. You only pay US tax on the gains if you close out the policy or otherwise remove the cash. Of course, you are free to borrow against the life policy with no tax cost.

If you hold the policy until your death, then the total value will transfer to your heirs tax free (or with a step-up in basis). If you put in $10 million, and it’s grown to $20 million, you’re heirs get $20 million tax free… and the only tax you ever paid on any of that cash is the 4% to Puerto Rico. Quite an amazing tax play.

I hope you’ve found this article on asset protection for a Puerto Rico Act 20 business helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on setting up your business in Puerto Rico or on protecting your retained earnings within that structure.

E-2 Treaty Investor Visa
Christian Reeves

US E-2 Treaty Investor Visa Tax Strategy

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Moving to the US on with the E-2 Treaty Investor Visa comes with a very big hidden cost. You are by definition a US tax resident and required to pay US tax on your worldwide income AND report your foreign assets to the US government each year. Here’s how to reduce or eliminate that tax cost for the E-2 Treaty Investor Visa.

First, a few words on the E-2 treaty investor visa. This US residency program allows you to live in the United States so long as you are operating a business that employs a few American citizens. If the business shuts down, you will be asked to leave.

The E-2 treaty investor visa requires two things: 1) you must be from a treaty country, and 2) you must make an investment in the US by starting a business here. For a list of treaty countries, see the US Department of State website. I think you will be surprised with who’s in and who’s out.

The E-2 treaty investor visa is not a path to a green card nor US citizenship. It’s a residency visa that allows you and your family to live in the US while you are working here and employing a few people. Most investors start a business with about $200,000 and hire around 5 employees including the owner (you, the E-2 treaty investor).

The E-2 treaty investor visa doesn’t have a minimum investment amount nor a minimum number of employees. In my experience, businesses that are well funded through break-even with $200,000, and which will add 4 jobs to the economy (5 including the owner) are likely to be approved.

A person in the US on an E-2 treaty investor visa is expected to be running the business on a day to day basis. This is not a program for passive investors. It’s for those who want to start a small business in the US and work in that business each and every day.

  • Passive investors should go with the EB-5 Investor Visa. Here’s a tax strategy article for that program: Coming to America Tax Free with the EB-5 Visa and Puerto Rico. The EB-5 visa gives you a green card and US citizenship within 5 years but requires 10 employees and an investment of $500,000 to $1 million.

The E-2 treaty investor visa is a “temporary” residency visa that needs to be renewed every few years. Basically your case officer will check to see that the business is operating and the you are employing the agreed number of persons.

Because of its temporary status, you should have a plan to return to your home country once the business has run its course. As a practical matter, these companies can operate for decades. So, as long as the business is profitable, or you can keep it going by adding more cash, you can reside in the US. But, during the application process, we need to show a plan to return home.

E-2 Treaty Investor Visa Tax Issues

Because you are operating the business from the United States to qualify for the E-2 visa, all income earned in that corporation is US source income taxed at about 35% Federal plus your State (0% to 12%). This is to be expected when operating from the US.

What’s often not expected is US tax on your worldwide income.

Here’s an example of the E-2 visa tax trap: Let’s say you bought a house in Colombia in 1995 for $100,000. You move to the US in January of 2016 on the E-2 treaty investor visa and sell the home for $1 million in March of 2016 (yes, Colombia has an E-2 visa treaty).

You pay 10% in capital gains tax to Colombia on the sale, which is that country’s standard tax rate. In addition, you report the entire sale on your US tax return for 2016. The US capital gains rate is about 23.5% and you get a tax credit for the 10% paid to Colombia using the Foreign Tax Credit.

As a result, you owe the US Federal government 13.5% x $900,000 gain or $121,500 on the sale of your home in Colombia. If you’re living in a high tax State like New York or California, you’ll pay an additional 10.5% in capital gains. A very expensive tactical error which could have been avoided by selling the home before becoming a US tax resident.

Note: Had the capital gains tax rate in Colombia been 24% rather than 10%, you would owe nothing to the US Federal government and only paid State tax on the gain. That is to say, if the taxes paid in your home country are higher than the US rate, the Foreign Tax Credit will step in and prevent double taxation. ‘

The same tax expense will apply as long as you are in the US on the E-2 treaty investor visa program. All capital gains, interest income, income from businesses operated outside of the US, and income from any source, will be taxed in the US less any foreign taxes paid.

E-2 Treaty Investor Visa Tax Strategy

Careful tax planning is required before the E-2 visa applicant moves to the United States. Once you’re a tax resident, many planning opportunities are closed. For a high net worth individual, the tax costs of moving to the US can far outweigh the costs of starting the business and complying with the requirements of the E-2 visa.

For example, our Colombian could have sold his home before moving to the US and saved a lot of money and reporting hastle. Other possibilities are that he could have gifted his home to a family member or his heirs, sold it to an offshore trust, or otherwise disposed of it before coming to America.

And the same goes for brokerage accounts and other passive investments. There are a variety of offshore trusts, life insurance structures, and tax strategies that will allow you to manage assets for the benefit of your heirs and avoid US capital gains on any sales.

Also, special consideration should be paid to the US death tax. In certain circumstances, an E-2 visa holder is a US resident for income tax purposes but not for estate tax purposes. If someone was to die in that situation, they would be taxed in the US on all of their US assets and allowed only a $60,000 exclusion. US citizens get a $5.2 million estate tax exclusion.

US trusts and other planning tools should be considered to ensure the E-2 visa holder gets the full $5.2 million exclusion. None of us like to talk about death, but it’s an important conversation to have prior to moving into the United States.

As for an active businesses, different rules apply depending on whether the company is controlled by the US resident or whether it’s a joint venture with a nonresident partner. “Control” means ownership or control of more than 50% of the business.

If you, the E-2 visa applicant, sell or transfer half of their foreign business (not the E-2 business) to a family member who will operate it while you are in the US, you may realize significant tax savings in the US. Note that I am referring to an active partner and not a nominee director.

There is one way to enter the US on an E-2 treaty investor visa and pay zero tax to the US government. If you setup your business in the US territory of Puerto Rico, you will pay only 4% in corporate tax on the profits earned from that endeavor.

Next, if you are a resident of Puerto Rico, and spend 183 days a year on the island, you will pay zero capital gains taxes and zero tax on dividends from your Puerto Rico company.

Combine these two tax strategies together and you get a 4% tax rate on business profits and zero tax on passive income, dividends and capital gains. Compared to the 45% rate some Americans in high tax states pay, this is an amazing offer.

And, as a US territory, an E-2 visa from Puerto Rico is identical to an E-2 visa from New York or California (except for the tax rate of course). You’ll have full access to the United States and the right to come and go as you please. Travel between Puerto Rico and the United States is a domestic flight and there’s no immigration checkpoint.

The tax holiday in Puerto Rico for businesses is Act 20. The holiday for personal income and capital gains is Act 22. For more on this, see: How to Maximize the Tax Benefits of Puerto Rico

Note that my articles on Act 20 and 22 are focused on US citizens moving their businesses to Puerto Rico. We can also combine Act 20, 22, and the E-2 treaty investor visa to get you residency in the US without the tax bill.

I hope you have found this article on US E-2 Treaty Investor Visa Tax Strategy helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information. I will be happy to assist you to build a business in the US or Puerto Rico and qualify for residency.

taking your business offshore
Christian Reeves

Step by Step Guide to Taking Your Business Offshore

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If you are going to take your business offshore in 2016, your offshore structure must have substance. No more shelf companies, no more nominee directors, no more trying to fake out the IRS. Taking your business offshore today demands a real office, employees, and work being done offshore.

Here is a step by step guide to taking your business offshore. I’ve assisted hundreds move their businesses abroad over the years and we’ll be happy to work with you to take your business offshore is a tax compliant and efficient manner.

Step 1: Develop a tax and business plan

We always say taxes shouldn’t drive the business… don’t let the tail wag the dog. But, most clients take their business offshore because they want to lower costs – both tax and overhead. If you didn’t want to cut costs and improve the bottom line, you would stay where you are in the United States.

When considering your overhead, focus on employees. Most countries will have lower wages than the US. The issue will be finding quality English speaking workers. How difficult that will be will depend on the level of work you require.

If you’re running a call center, then finding workers will be easy. If you are moving a software development business abroad, or require skilled engineers, finding the right people will be a challenge.

Then there are two types of tax plans. One for small businesses focused on the Foreign Earned Income Exclusion and a second for larger businesses that uses a transfer pricing model.

The Foreign Earned Income Exclusion plan is relatively simple: live outside of the US for 330 out of 365 days, or become a resident of another country, and you get up to $101,300 in salary from your offshore business tax free. If a husband and wife both operate the business, then you get up to $200,000 free of Federal Income Taxes.

Taking a large business offshore is a complex matter. Companies with net profits of $1 million and up need a more robust tax plan. This is especially true if you will have offices in the US and offshore.

These companies go offshore using a transfer pricing model that assigns income to the foreign subsidiary based on the amount of value added by that division. Likewise, the US group is taxed on value they create.

Let’s say you’re selling a widget for $100 that costs you $10 to make. Of this $90 profit, half can be reasonably attributed to the work done offshore and half to the US team. Thus, $45 of the profit is “transferred” the the low tax jurisdiction and half remains in the US.

If you would like me to create a custom tax plan for your business, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to work with you to build a comprehensive and compliant tax strategy.

Step 2: Select your country of operation

Now that you have a tax plan, select the best jurisdiction to implement that plan. Your country of choice should have a compatible tax scheme that doesn’t tax foreign sourced profits. When done right, you can operate tax free in many jurisdictions.

As I said above, your country of operation must have low cost and qualified labor, especially if you will use the transfer pricing model and not the FEIE model. If you will be the only employee in the FEIE, then this doesn’t matter – live wherever you like that won’t tax your profits.

Balanced against tax and overhead is the quality of life. We chose to build our business in Panama for the reasons described above. However, Panama City is horribly humid and congested. If big city life is not for you, then look elsewhere.

For example, Cayman Islands is a beautiful place to live. However, labor is very expensive, as is housing and everything else. Cayman is great for a one man online business but horrible for a call center looking to hire 50 workers.

Spend some time making a list of possible jurisdictions, noting the positives and negatives of each. Everyone’s priorities will be different, so this is on you. Also, keep in mind that I’m talking about minimizing tax in you country of operation and incorporation here in Step 2.

Step 3: Form a corporation in your country of operation

Now that you have prioritized and found where you will take your business offshore, it’s time to form a corporation. Do not use an LLC or other structure – you need a corporation so that you can retain earnings offshore.

This corporation will also handle your payroll, office rent, and local expenses.

Step 4: Form a corporation in a second tax free jurisdiction

You want to setup a second corporation in a second country. This entity will bill clients and may help minimize your taxes in your country of operation. Depending on your nation’s tax system, they may only tax profits you bring in the country. So, if your corporation breaks-even at the end of the year, you will pay no taxes there.

This second offshore corporation in a tax free jurisdiction is a key component to minimizing your worldwide taxes. It won’t make a difference for the US, but it should reduce or eliminate taxes in your country of operation.

Step 5: Move your intellectual property offshore and into a separate structure

If you have intellectual property, move that offshore as soon as possible. Doing this will provide asset protection and significant tax benefits, especially for non-US sales.

The catch is that IP built in the US must be sold to the offshore company at fair market value. This means you must value the IP and pay taxes in the US on the sale.

So, if you are in the beginning stages of taking your business offshore, setup an IP holding company and build the IP outside of the US. This eliminates the transfer tax issue.

For some of the considerations that go into transferring IP offshore, you might read this post about the IRS investigating Facebook’s Irish IP transfers.

Step 6: Setup banking and credit cards

You’ll need multiple bank accounts, including one in your country of operation for local expenses, one in your billing country, and possibly in the United States.

I also strongly recommend you get more than one e-commerce or merchant account. Once you move your business offshore, your life’s blood will be payment processing and the procedures offshore are very different than in the US. Spend time to build redundancies into these systems.

For a detailed post on offshore credit card processing, see How to Get an Offshore Merchant Account.

Step 7: In-house bookkeeping and accounting

When Americans take their businesses offshore, they often ignore bookkeeping and accounting. They figure they aren’t in the US any longer, so time to relax.

Unfortunately, the US IRS has every right to audit your offshore business. Likewise, when you file your foreign corporation return(s) on Form 5471, you must apply US accounting standards.

For this reason, I suggest that you have an in-house bookkeeper so that you stay on the straight and narrow. Maybe he or she is a full time employee, or maybe someone who comes in once a week to do the books. Either way, this is a key position to get right from day one.

Step 8: Find local professionals

When you take your business offshore, finding honest local professionals is key. Hook up with the wrong people and they’ll hit you with “gringo pricing” and take advantage of you at every turn. Get this right and you will have a supportive and efficient relationship for years to come.

I would have put this as step 2, but I wanted you to think through the above items first and then look for outside support. Take my advice and learn from my mistakes – don’t try to go it alone in an offshore jurisdiction.  

Step 9: Find US tax compliance

Now that your business is offshore, make sure you keep up with your US tax filing obligations. You’ll need to report your foreign corporations and international bank accounts to the IRS each and every year.

The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form FinCEN 114, referred to as the FBAR. Anyone who has more than $10,000 offshore will need to file this form.

The penalty for failing to file the FBAR is $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations.

In addition to filing the FBAR, you must report the account on your personal return, Form 1040, Schedule B.

Other international tax filing obligations include:

  • Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
  • A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity.
  • Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
  • Form 3520 – Annual Return to Report Transactions With Foreign Trusts.
  • Form 3520-A – Annual Information Return of Foreign Trust.
  • Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation.
  • Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation.
  • Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States.

Failure to file these forms can open you to all kinds of penalties and risks, so do it right and don’t fall behind. The penalties for failure to file an offshore form are much higher than for failing to file a typical domestic form late.

Of course, I hope you will select Premier Offshore to handle your US compliance needs. But, no matter who you choose, be sure it’s done right.

I hope you’ve found this article on taking your business offshore to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 if you would like assistance in planning and implementing your international business strategy.

Puerto Rico Act 20
Christian Reeves

What is Puerto Rico Sourced Income for an Act 20 Business

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Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. Maximizing Puerto Rico sourced income in an Act 20 business, and thus minimizing US sourced income, is the key to unlocking the 4% tax rate offered in Puerto Rico.

The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. Likewise, income sourced to the United States is taxable in the United States at standard rates, even if you run it through a Puerto Rico Act 20 company.

If you’re new to Puerto Rico Act 20, the basics are this: set up a business on the island that employees at least 5 people and pay only 4% in tax on your corporate profits. The balance can be held tax deferred if you live in the US or taken out as a tax free dividend if you live in Puerto Rico.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. Especially for those who want to live in the United States and operate a business based in Puerto Rico. The same goes for US companies that open divisions in Puerto Rico to get that 4% corporate tax rate on a portion of their profits.

If you move you and your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico.

Another reason all income in an Act 20 business will be Puerto Rico sourced income is the type of activities that qualify for Act 20. A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Only service based income will qualify for Act 20.

Service based income is profit from work done in Puerto Rico. Compensation for labor is always taxed where the work is performed. It doesn’t matter where the customer is located… only where you and your employees are when doing the work.

Note that wholesale distribution of products can qualify for Act 20. This is because you are performing the service of sourcing, manufacturing, and/or importing goods that will be sold outside of Puerto Rico.

This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. Retail sales, such as selling online to buyers in the US, is not Act 20 income and will be fully taxed in both the United States and in Puerto Rico.

Of course, there are many types of income that could be earned in Puerto Rico. But, only service based income will qualify for Act 20 tax benefits.

Here is a list of the various types of income and where they are sourced.

Item of Income Where Income is Sourced
Salaries, wages, and other compensation for labor or personal services Where labor or services are performed. This is the heart of Puerto Rico’s Act 20 for businesses.
Pensions Contributions: Where services were performed that earned the pension
Investment earnings: Where pension trust is located
Interest Puerto Rico if you are a legal resident of the island under Act 22
Dividends Where corporation or LLC is incorporated. Dividends from an Act 20 corporation will be tax free in Puerto Rico to a resident of the territory who qualifies under Act 22.
Dividends from US states are taxable where the company is formed.
Rents Location of property
Royalties on patents, copyrights, trademarks, etc.: Where property is used. If used by the Puerto Rico company, then taxed in Puerto Rico. Special benefits can apply to intellectual property created in in Puerto Rico.
Sale of business inventory—purchased Where sold. If you sell a physical good (inventory) in to the United States, you have US sourced income. For this reason, all Puerto Rico Act 20 businesses must offer a SERVICE and not sell inventory.
Sale of business inventory—produced Allocation if produced and sold in different locations
Sale of real estate Taxed where the property is located
Sale of personal property Seller’s tax home. Personal property includes such things as cars, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, etc.

Above, I gave you the example of the perfect client – someone who moves herself and her business to Puerto Rico, breaking all ties with the United States. Such a person will maximize Puerto Rico sourced income and thus minimize her total taxes.

For more on this topic, see: How to Maximize the Tax Benefits of Puerto Rico

If you want to live in the United States and operate through a Puerto Rico company, determining Puerto Rico sourced income becomes much more difficult and contentious.

The rule is simple enough: Any value added in Puerto Rico is Puerto Rico sourced income and any value added in the United States is US sourced income. So, if you’re selling an online service for $50, and $25 of the value of that service comes from your 5 employees in Puerto Rico, then half your net profits can be attributed to Puerto Rico.

When you’re attributing income between the US with its 35% Federal + state taxes and Puerto Rico at 4%, you will want to maximize the perceived value of the work done in Puerto Rico.

For small businesses, you can look at the amount of hours spent in Puerto Rico vs the US. You can also estimate the value of work done in Puerto Rico by how much you would be willing to pay an independent and unrelated firm to provide those services to your US company.

When income sourcing between Puerto Rico and the US is a major issue ($1 million or more), then you need to hire a professional. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited.

The cost for a transfer pricing study will vary widely the the firm selected and the type of business you are operating.  I’ve seen quotes of $6,000 to $65,000 by big name firms in California and New York, as smaller providers in Puerto Rico.

I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to help you structure your business in Puerto Rico.

eb-5 visa
Christian Reeves

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

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If you are thinking about coming to America, get ready for high taxes on your worldwide income. In this article, I will explain how to become a US citizen using the EB-5 Visa and Puerto Rico to pay near zero US taxes.

The US taxes its citizens, as well as green card holders and residents, on 100% of the money they make from all sources around the world. If you are living in the United States, America wants her share… and that share is often over 40% of your total earnings.

If you are operating a successful business from Hong Kong, and you move to the US, all profits of that Hong Kong business become taxable. If you move to America and then sell your home in Singapore, you will pay US tax on the capital gains realized.

There is one, and only one, way to get US citizenship without paying these taxes. That is to come to America tax free with the EB-5 Visa from Puerto Rico.

Because Puerto Rico is a US territory, US Federal immigration laws apply but US tax laws do not. The tax laws of Puerto Rico supersede the US tax rules for residents of the island. Because of this hybrid legal system, you can immigrate to the United States through Puerto Rico using the EB-5 visa and qualify to live tax free under Puerto Rico’s tax laws.

  • Resident: A “resident” of Puerto Rico is someone who spends at least 183 days a year on the island. Travel between Puerto Rico and the US is a domestic flight with no immigration checkpoint.  As an EB-5 visa holder, you may spend the rest of your time (180 days a year) in any part of the US you choose.

Once the EB-5 visa process is complete, you will be a US citizen with all of the rights and privileges of someone born in the US and who pays 40%+ in taxes. You will have a US passport and the right to live and work anywhere in the country.

The same is true of children born in Puerto Rico. Anyone born in Puerto Rico is a US citizen at birth, just as they are if born in a State. The only difference between Puerto Rico and the US in this case are its tax laws.

Here is a description of the EB-5 Investor Visa, a summary Puerto Rico’s tax laws, and how to maximize the benefits of both to become a US citizen tax free.

What is the EB-5 Investor Visa

The EB-5 investor visa is a path to US citizenship. Unlike many other US immigration programs, the EB-5 visa has no waiting lists, quotas, or lottery. The terms are simple – make the investment, wait five years, and become a US citizen by going through the naturalization process. If you follow the steps, citizenship and a US passport are guaranteed.

The investment required for the EB-5 investor visa is far higher than any other program. You must invest in a business that creates at least 10 new jobs and maintains those jobs for about 6 years (the total time to complete your citizenship process).

The amount of money you are required to invest will depend on where the business is located. Most cities in the US require an investment of $1 million. If you set up the business in a distressed region of the country, the investment is reduced to $500,000.

Basically, all of Puerto Rico is designated as a distressed region for the EB-5 investor visa. Any business created on the island will qualify for the discounted investment amount of $500,000.

Of course, you will need to keep the business operating and profitable for at least 6 years with 10 employees. If you can do that with $500,000 in capital, great. If it requires more, then you will need to invest more.

What is Puerto Rico Act 20 and 22

When the EB-5 investor visa is combined with the tax benefits of Puerto Rico, you may be able to immigrate to the United States, obtain a green card, and finally citizenship with a US passport, all without paying a dollar in tax.

In order to accomplish this feat, we combine the EB-5 Investor Visa with Act 20 and Act 22 in Puerto Rico. I will briefly summarize them here.

Act 20 is the business tax holiday that gets you a 4% corporate tax rate on any profits earned by your Puerto Rico company. The requirements are simple:

  1. The minimum number of employees required for Act 20 business is 5. However, to qualify for EB-5, you need 10. So, we setup an Act 20 company with 10 employees.
  2. The company must be providing a service from Puerto Rico to persons or companies outside of Puerto Rico. Internet marketing, call centers, import / export, sales teams, and any online business are good candidates for Act 20. Retail businesses, franchises and restaurants do not qualify for Act 20. They do qualify for the EB-5 visa, but not for the tax deal.

For more detailed information on Puerto Rico’s Act 20, see: How to Maximize the Benefits of Puerto Rico Act 20

Act 22 is the personal tax holiday. A legal resident of Puerto Rico, who purchases a home, spends at least 183 days a year on the island, and signs up for Act 22, will pay zero capital gains tax and zero tax on dividends from his or her Puerto Rico company.

When you combine Act 20 with 22, you get a corporate tax rate on profits of 4% and zero tax on distributions of dividends from those profits. The only tax paid is the 4% corporate rate.

I also note that salaries in Puerto Rico are lower than anywhere in the US and that they might be going lower. Minimum wage is $7.25 and a recent House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years.

For more information on recent legislation, see: Good News from Congress for Act 20 Business in Puerto Rico

How to Combine the EB-5 Investor Visa with Puerto Rico Act 20 and 22

In order to combine the immigration benefits of the EB-5 investor visa with the tax benefits of Puerto Rico, we can setup an internet business or other service based company for you on the island.  That company will have 10 employees and qualify under Act 20 and EB-5.

For example, the business might provide content, design, advertising, and SEO services to persons and companies outside of Puerto Rico. Alternatively, the business might import goods from China and sell them to a distributor in the US (may operate as a wholesaler but not a retailer).

For a complete list of services that qualify for Act 20, please send an email to info@premieroffshore.com.

You may fund the business with $500,000 to $1 million in capital. Remember that the business must be self sufficient for at least 6 years and that your investment should cover costs until break-even. Your business plan must show a stable and profitable business will be operating from the United States with at least 10 employees.  

As I said above, profits of this business will be taxed at 4%. Dividends to you, a resident of Puerto Rico, will be tax free.

What if you Don’t Want to Live in Puerto Rico?

You are not required to live in Puerto Rico to qualify for Act 20 or for the EB-5. Only Act 22, the personal tax holiday, requires you be a resident of the island.

If you immigrated to the US with an EB-5 investor visa, and setup an Act 20 company, but did not live in Puerto Rico, you would pay 4% in tax on Puerto Rico sourced income. You could then hold net profits from Puerto Rico sourced income in the corporation tax deferred.

If you are living in the US, you would pay US tax on any dividends or distributions from that Puerto Rico company. You would also pay US tax on income from your investments outside of the US.

So, Act 20 will get you tax deferral in your EB-5 business. Act 22 gets you tax free distributions from that EB-5 business. Act 22 also cuts your US tax rate to zero on capital gains on assets acquired after your move to Puerto Rico.

How to Use an E-2 Visa to Expedite an EB-5 Visa Application

The EB-5 visa process is a long one. Remember that it comes with guaranteed US citizenship and green card.  As such, the process is demanding.

It will take well over a year to have your EB-5 visa approved. If getting into the United States as quickly as possible is important to you, then you might apply under the E-2 visa program first.

We can setup an Act 20 business with an E-2 and get your temporary visa in 30 to 90 days. This gets you and your family into the country.

You then operate the business with 5 employees under E-2 until your EB-5 is approved. When you get your green card under the EB-5, you hire 5 more employees for a total of 10. This is because the E-2 and Act 20 require 5 employees. When you are ready to upgrade to the EB-5, you can add 5 more for a total of ten employees in Puerto Rico.

Note that the E-2 visa is only available to those from treaty countries and has different requirements from the EB-5. For more information, see E-2 Treaty Investor Visa

How I can Help

We can assist you from start to finish in setting up an EB-5 and Act 20 compliant business in Puerto Rico. This includes writing the business plan, financial analysis, and everything related to applying for the EB-5.

Next we will incorporate your business, lease office space, hire and train employees, and get the business operating. This will include an Act 20 contract with Puerto Rico that will guarantee your tax holiday for 20 years.

We provide a turnkey solution in Puerto Rico that will maximize the benefits of the EB-5 and tax benefits of Puerto Rico. For more information, you can reach me directly at info@premieroffshore.com or by calling (619) 483-1708.

act 20 business in puerto rico
Christian Reeves

Good News from Congress for Act 20 Business in Puerto Rico

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Good news out of Washington for Act 20 businesses in Puerto Rico. It appears that the US has decided to allow Puerto Rico to reorganize its debts in some manner… not formal bankruptcy, but a restructuring with court oversight.

The rules would be similar to Chapter 9 for municipal bankruptcies, with a few sections more favorable to creditors. The House was careful to avoid the term “bankruptcy,” and to avoid the stigma of a bailout. No cash is being sent to help Puerto Rico, only new rules.

The bill has two main provisions:

  • It creates a seven-member fiscal oversight board with members appointed by the president and congressional leaders that will have to approve Puerto Rico’s future fiscal plans.
  • It allows the island to legally pay less than 100 percent of what is owed on old debts.

This appears to be a one time deal. Had Puerto Rico been granted bankruptcy protection, they could have used it for future debt. Puerto Rico gets special consideration one time and then returns to its status as a Territory, along with the US Virgin Islands and Guam.

This is big because it means that Puerto Rico won’t lose its special tax status. It also means that the island won’t be torn asunder by its $70 billion debt, an amount approximately equal to 68% of Puerto Rico’s gross domestic product. The island defaulted on $2 billion of these obligations May 1, 2016 and says it’s unable to pay upcoming installments.

The reason Congress must act is that Puerto Rico is barred from the US bankruptcy courts. Because it’s not a State, Puerto Rico can’t declare bankruptcy like so many US cities and municipalities have done. Without intervention from Washington, the only option would have been years of court battles and uncertainty.

For an example of what could have been, consider Argentina. They defaulted in 2001 and 2010 on their bond obligations. The case was fought in the US courts for over a decade, finally being resolved in 2015. For many of those years Argentina was unable to borrow from the world markets, which put its economy in turmoil.

We were beginning to see signs of this in Puerto Rico. On May 4, 2016, Puerto Rico bondholders sued the Development Bank to stop payments of salaries and other distributions. They sought to freeze all transactions on the Island until they got paid… essentially holding the Puerto Rico economy hostage until their demands were met.  Exactly what the vulture funds did to Argentina.

With decisive action from the US Congress, these issues will be resolved in an orderly manner. Bondholders will take a haircut – and probably a substantial one to the tune of 70% – but business will go on  and money will flow.

This offers stability to Act 20 companies who hold bank accounts on the island. When you have a disorderly, hostile, and litigious situation, you are concerned about the reliability of local banks. Will the government seize funds in those accounts as they did in Cyprus? You never know  and don’t want to put your money at risk by keeping substantial sums in Puerto Rico banks.

Fortunately for Americans operating in Puerto Rico, your Puerto Rico company can open a bank account anywhere in the United States. You can take your PR company documents to your local Wells Fargo or Bank of America and open an account in a few minutes – something that is not possible with an offshore corporation.

But, now that the banking risk has passed, I suggest clients hold their operating capital and retained earnings in Puerto Rico. This minimizes your contact with the United States and can be a positive factor in an audit.  I am now recommended Scotiabank in Puerto Rico as the best business bank available to Act 20 companies.

This is all good news for Act 20 companies. As is the fact that Act 20 and 22 were not mentioned in the House bill. There is no attempt to put an end to these tax holidays. In fact, the US Treasury suggested that Puerto Rico should be required to do more to increase investment in the region, a suggestion that the House failed to include.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Even better news is the minimum wage moratorium included in the House bill. While US tax laws don’t apply to Puerto Rico, Federal minimum wage does. This is why the minimum salary in Puerto Rico is currently $7.25.

While Federal minimum wage is, by definition, the lowest wage allowed in the nation, it appears to be going up under Mr. Obama.  Any increase of the Federal wage is sure to be far lower than the 13 states and cities, including California, New York and Washington, D.C., who have passed $15 per hour minimum wage laws to be phased in over the next few years.

The moratorium contained in the House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years. So, no matter what the US does with salaries, they will be locked in at $7.25 for the next 5 years in Puerto Rico.

  • Technically, the oversight board (not the government of Puerto Rico) has the ability to lower its wage below the Federal minimum wage. Don’t expect it to drop below $7.25 without riots in the streets.

The bill also exempts Puerto Rico from Obama’s overtime rules. Combine this with a fixed minimum way, and you, the Act 20 business owner, see some cost savings and permanence in the House bill.

Add to this the fact that Act 20 comes with a 20 year guarantee on its 4% tax rate, and you have a uniquely low cost and stable situation in Puerto Rico.

If you’ve read this far in the article and have no idea what Act 20 is, I think you for your perseverance. Allow me to briefly summarize the offer here.

Act 20 is a statute in Puerto Rico that allows you to operate a business on the island with a minimum of 5 employees and pay only 4% in tax on corporate profits on Puerto Rico sourced income.

That business should be providing a service from Puerto Rico to persons and/or companies outside of Puerto Rico. Good candidates are internet marketing, loan servicing, import of goods for sale in the US, sales, website design, and just about any other portable service business.

Net profits of the business can be held in the corporation tax deferred. If the owner of the company moves to the island and qualifies under Act 22, he or she may withdraw profits as tax free dividends.

If your net profits are $500,000 or more, and you need 5 employees, you will find that the tax deal offered in Puerto Rico is far superior to anything available offshore. If your profit is less than $500,000, then you might get a better deal in a zero tax offshore jurisdiction like Cayman. For an article on this topic see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

If you can’t use 5 employees in Puerto Rico, then stick with Panama, Cayman Islands and other jurisdictions. The purpose of Act 20 is to increase employment on the Island, so the minimum number is non-negotiable. For more information on Cayman, see Move Your Internet Business to Cayman Islands Tax Free.

I hope you have found this article helpful. For more information on moving your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to structure your business and negotiate an Act 20 license with the government of Puerto Rico on your behalf.

tax benefits of puerto rico
Christian Reeves

How to Maximize the Tax Benefits of Puerto Rico

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The tax benefits of Puerto Rico for Americans are incredible. Puerto Rico is by far the best deal available if you’re willing to move you and your business to the island for a few years. Even if you move only the business, while you remain in the United States, the offer is hard to pass up. Here’s how to maximize the tax benefits of Puerto Rico.

First, here’s a summary of the tax benefits  of Puerto Rico.

Act 20 is the business tax holiday offered by cash strapped Puerto Rico. Under Act 20, a service business with 5 employees on the island will pay only 4% tax on Puerto Rico sourced income. Good candidates include businesses (or divisions of a business) which provide sales and support, internet marketing, graphics design, product research, financial advisory, loan servicing, website and network design and support, call centers, and almost any other “portable” business.

The catch is that you must have 5 full time employees in Puerto Rico. These workers can be at any salary or skill level, but they must be working full time and creating Puerto Rico sourced income. The purpose of Act 20 from the government’s perspective is to offer training and jobs to its people.

It’s possible for the owner of the Puerto Rico business to live in the United States and operate the business remotely. In that case, you (that owner) will draw a salary at fair market value from the Puerto Rico corporation and pay tax in the US on your income.  Only profits attributable to the workers in Puerto Rico is Puerto Rico sourced income.

If the owner of the business is living in the US, you get to defer US tax on the profits of your Puerto Rico company (less the 4% tax paid to Puerto Rico). When you take the money out of the company you will pay US tax on the dividend. If you are a resident of Puerto Rico, you won’t pay tax on that dividend.

Act 22 is the personal tax holiday. If you move to Puerto Rico, become a legal resident, buy a home there, and sign up for Act 22, all dividends from a Puerto Rico corporation to a resident of Puerto Rico are tax free. In addition, you will pay zero tax on capital gains. That’s right, the tax rate on assets acquired after you move to Puerto Rico will be zero.

Those are the basics and there are a number of additional Puerto Rico tax holiday programs that are beyond the scope of this article. For example, Act 73 covers IP development and holding companies. Using this statute, you can get to a tax rate of 4 to 8% on income from IP. Also, a number of tax credits are available.

For an article on this, which briefly compares Act 73 to Act 20, see PWC Summary of Puerto Rico Tax Credits and Incentives. Also, here’s an article about Microsoft using Puerto Rico for IP  (from 2013) and another on Puerto Rico and the Pharmaceutical Industry.

Then there’s Act 273 that allows you to setup an “offshore” bank in Puerto Rico and pay only 4% in tax on profits. This is by far the lowest cost offshore banking license available. For more information, see Puerto Rico Offshore Banking License.

This is all to say that Puerto Rico is working hard to become the offshore center for American entrepreneurs. If your business provides a service or is portable, you should give Puerto Rico a look.  

Here’s how to maximize the tax benefits of Puerto Rico.

To truly maximize the tax benefits of Puerto Rico, you need to move you and your business to the island. If you can combine Act 20 with Act 22, you will have a tax deal unmatched by any other jurisdiction.

You will pay only 4% on your business profits (Puerto Rico sourced active business income) under Act 20. Then you will then withdraw those profits as a tax free dividend at the end of the year under Act 22.

So, Act 20 gets you tax deferred profits held in a Puerto Rico corporation. Act 22 allows you to take those profits out of the corporation tax free.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Above I said that the tax benefits of Puerto Rico are unmatched by any other jurisdiction. The reason for this is simple: even fiscal paradises like Cayman and Panama with zero tax rates can’t come close to duplicating the benefits for Americans available in Puerto Rico.

Yes, I know that a 0% tax rate in Panama and Cayman Island is less than 4%. But, because Puerto Rico is a US territory, it can offer a deal on dividend distributions that foreign countries can can’t match.

So long as you are a US citizen you will pay US taxes… unless you live in Puerto Rico.

An American living in Cayman or Panama will pay US taxes on all capital gains and dividends received. They will also pay US tax on any salary earned over the Foreign Earned Income Exclusion Amount of $101,300. They won’t pay tax to Panama or Cayman, but they will owe the IRS big time if they make more than $100,000 a year.

That same person living in Puerto Rico will pay tax on any salary earned, 4% on business profits, and then be eligible to withdraw those retained earnings from the corporation as a tax free dividend.

Let’s say you have a business with net profits of $2 million. You can set up in Cayman or Panama and take out a salary of $100,000 per year tax free. The rest of the money will stay in the corporation tax deferred. When you withdraw the $1.9 million, you will pay US tax at about 40% (Fed and State), or $760,000. You get tax deferral by operating offshore, but, one of these days, you must pay the piper.

If that same business were operated from Puerto Rico under Act 20 and Act 22, you would pay PR tax on your salary of $100,000 at about 30%. Then 4% corporate tax on $1.9 million for a total of $106,000. Your net effective rate is 5.6% and goes down towards 4% as income increases.

To sweeten the pot further, Puerto Rico’s Act 20 comes with a 20 year guarantee. Considering how the political winds are blowing against offshore tax structures, a guarantee from a US territory is very valuable.

As I said above, Puerto Rico requires 5 full time employees. If you don’t need that many people, or your profits are closer to $100,000 than $1 million, then a tax free jurisdiction offshore might be more efficient. Here’s an article on Moving Your Internet Business to Cayman Islands Tax Free.

I’ll close by considering how you might carry the tax benefits of Puerto Rico forward once you leave the island.

Ok, you’ve setup your business with 5 employees in Puerto Rico under Act 20. You also took the plunge and moved to Puerto Rico under Act 22. A few years have passed and corporation has $5 million dollars in retained earnings.

You’ve had enough of island life and this business venture has run its course. It’s time to stop the carnival, take your winnings, and return to the US of A.

As I said above, you can take out that $5 million in retained earnings tax free. This is because you are living in Puerto Rico, qualify under Act 22, and the dividends are coming from a Puerto Rico company. The only tax paid was 4% to Puerto Rico for the right to operate your business from their jurisdiction.

You can now return to the US with your $5 million in hand with no taxes due to the IRS. The money is free and clear.

Of course, once you move back to America, giving up your Act 22 status, any interest or capital gains you earn from this $5 million in savings will be taxable by the Feds and your State.

There is one way to carry forward the benefits of Puerto Rico…

Invest some of that $5 million in to a single pay premium offshore life policy before you abandon Puerto Rico.

By moving your savings earned under Act 22 in Puerto Rico in to a tax deferred single pay premium life insurance policy you can continue to defer US tax on any capital gains generated by that money. Basically, you can create a multi-million dollar tax deferred savings account or a massive defined benefit plan without any of the retirement account rules.

Your cash will grow tax deferred inside the life insurance policy, just as it did in Puerto Rico. If you need to use some of that money you can borrow against the policy. Of course, your focus should be on building a tax preferred investment portfolio.

Should something happen to you, this life insurance policy will pass on to your heirs tax free (with a step-up in basis). In this way, it’s possible for you to provide a family legacy without ever paying more than 4% in US taxes.

I hope you have found this article on maximizing the tax benefits of Puerto Rico helpful. Please note that we at PremierOffshore.com are not investment advisers nor do we sell insurance products. I will be happy to introduce you to an expert in this area.

For more information on moving you and/or your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to work with you to build a tax efficient operation in Puerto Rico.