Offshore Corporations and Offshore LLCs

What is a Mexican SOFOM

What is a Mexican SOFOM?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Foreign Earned Income Exclusion 2020

Foreign Earned Income Exclusion 2020

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

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

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

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

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

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

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

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

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

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

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

Maximize the Value of the Foreign Earned Income Exclusion 2020

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

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

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

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

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

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

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

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

Perpetual Travelers and the Foreign Earned Income Exclusion 2020

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

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

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

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

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

How to Live Tax Free as an American

How to Live Tax Free as an American

Here’s how to live tax-free as an American. If you’re willing to live, work, and invest abroad, it’s possible to live tax-free as an American – legally and without watching over your shoulder for the tax man.

First, note that this article is for US persons willing to live and work outside of the United States. It’s definitely NOT for those living in the US that have offshore accounts. If you want to live tax free as an American, you must move you and your business out of the United States!

Second, this article is focused on US persons. That is, US citizens and green card holders. Only the United States taxes its citizens on our worldwide income. Thus, only US persons need to go to these extremes to live tax free.

For example, a Canadian citizen can move to Panama, establish residency there, and live tax free. Simple enough. No need for complex structures or advanced planning described here.

If a US citizen does the same, they will pay US tax on capital gains and business income. Unless that US person follows the suggestions of this article, they’ll be stuck paying US tax while living in Panama.

Third, this post is about how to legally live tax free as an American. To accomplish this will require a lot of work and commitment on your part. It will also require you to hire a CPA or an international tax expert to prepare a plethora of tax forms required to keep you, the US expat, in compliance. For more, see: Offshore Filing Requirements.

Finally, unlike most articles on the web, this post takes President Trump’s tax plan into account. Trump did away with retained earnings in a foreign corporation, which really hurts medium sized businesses operated by US citizens abroad. For more on this, see: Use of an offshore corporation in 2018.

So, with all of that said, here’s how to live tax free as an American.

The premise of the US tax code is that US persons (citizens and green card holders) pay US tax on their worldwide income. No matter where you live, Uncle Sam wants his cut.

The first exception to this is the Foreign Tax Credit. You get a dollar for dollar credit for tax payments to foreign countries.

If you’re living in France with a 45% rate, and your US rate is 35%, you won’t pay tax to the United States. The Foreign Tax Credit eliminates double tax on your income, and, because France’s personal income tax rate is higher than the US rate, you pay zero to Uncle Sam.

If you were living in Argentina rather than France, you would pay a 9% rate to your local government. Thus, the amount owed to the United States would be 35% – 9% = 26%. If no other exception applies, you’ll pay the US 26% of your ordinary income to Uncle Sam for the right to hold a US passport or green card.

The only remaining exception to this after Trump did away with retained earnings is the Foreign Earned Income Exclusion.

If you qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 of salary or business income from your US return in 2018. If a husband and wife are both working in the business, you can exclude a combined $208,200 from Federal income tax.

To qualify for the FEIE you must be 1) out of the United States for 330 out of any 365 day period, or 2) a legal resident of a foreign country for a calendar year.

Of these, the 330 day test is the easiest to qualify for but the most problematic in practice. Everyone tries to maximize their days in the US and the IRS loves to audit those using this version of the FEIE. Because the FEIE is all or nothing, if you miss the 330 days by even one day, you lose the entire exclusion.

Thus, I recommend the residency test whenever possible. Build a “home base” in a foreign country and get a residency visa to qualify for the FEIE without worrying about your US days so much. Of course, this means you must move to a country that will give you residency.

While selecting a country for residency is a very personal decision, I suggest you look for one with a zero tax rate and an eazy residency program. For example, Panama doesn’t tax foreign sourced income (income earned from abroad). Also, you can get residency in Panama with an investment of only $22,000. Finally, you can use your US IRA or other retirement account to get residency in Panama. For more on this, see: Best Panama Residency by Investment Program.

So, with the FEIE, you can earn $100,000 (single) or $200,000 (combined) from a business or in salary tax free. Capital gains are still taxable as earned with only the Foreign Tax Credit available to avoid double tax.

What if your business nets well over $200,000 and/or you have significant capital gains? What if your business nets $1 million? Then the only way to live tax free as an American is to move to the US territory of Puerto Rico.

If you move to Puerto Rico, spend at least 183 days a year on the island, and qualify for Act 20 and 22, you can live nearly tax free. Yes, you can net $1 million or more from a business operated from Puerto Rico, and pay very little in tax. To make it better, you’ll pay zero in capital gains.

Here’s how to live tax free as an American in Puerto Rico.

Because Puerto Rico is a US territory, it has unique tax laws. US tax laws apply to all US citizens living abroad. The ONLY exception to this are US citizens living in the US territories. Puerto Rico can create whatever tax laws it wants for its residents and these laws supersede US tax law.

A resident of Puerto Rico is a US citizen or green card holder that moves to the island, makes it their home base, and spends at least 183 days a year there. Only those legally allowed to live and work in the United States can move to Puerto Rico and qualify for these programs. All US immigration laws apply in the territories.

Under Act 22, a resident of Puerto Rico will pay zero tax on capital gains from assets purchased after you move to the island. If you buy and sell cryptocurrencies and stocks while a resident of Puerto Rico, you pay ZERO in tax to the United States.

Note that his tax holiday applies ONLY to assets acquired after you move to the island. No, you don’t get buy stocks and crypto while in the US, hold them for a few years, move to Puerto Rico for a few months, and sell them at zero tax. Those gains would be taxable in the United States and would not qualify for Act 22.

Then there’s Act 20. This is basically the inverse of the Foreign Earned Income Exclusion. Move to Puerto Rico and pay 4% corporate tax on business profits. Dividends from an Act 20 business to a resident of Puerto Rico are tax free… so, this 4% rate is all you will ever pay.

And you will never pay US tax on these capital gains or these business profits. Even if you move back to the United States in a few years, you will not pay US tax on the earnings taxed in Puerto Rico while you were a resident of the island. The only tax a resident of Puerto Rico pays on net business profits from an Act 20 business is 4% in Puerto Rico (and zero on capital gains and dividends).

Business profits is income after you take out a fair market salary. If you would ordinarily earn $100,000 for the work you’re doing, then you must take a salary of $100,000 from your Act 20 business. You’ll pay ordinary rates on this salary and then the excess will be taxed at 4%. This is why I call Puerto Rico’s Act 20 the inverse of the Foreign Earned Income Exclusion.

Let’s say your reasonable salary is $100,000 and your net profits are $1 million. You pay 30% on $100,000 in personal income tax to Puerto Rico and 4% on $900,000 under Act 20 for a total of $66,000 in tax. Of course, this is an oversimplification, but you get the idea.

Now consider the FEIE. Earn $1 million offshore while qualifying for the Foreign Earned Income Exclusion and pay zero US tax on your salary of $100,000. Then you’ll pay about 30% on $900,000 because Trump did away with the ability to retain earnings offshore. Total tax paid using the FEIE is about $270,000 on $1 million in net business profits.

For those earning in excess of the Foreign Earned Income Exclusion, or active traders with significant capital gains, Puerto Rico’s Act 20 and 22 are far better tax deals than the Foreign Earned Income Exclusion.

For those netting $100,000 (single) to $200,000 (joint) from a business, living abroad in a country like Panama is the best tax choice. You probably need to reach about $500,000 net before Puerto Rico makes sense.

I hope you’ve found this article on how to live tax-free as an American helpful. For more on setting up an offshore business or qualifying for Puerto Rico’s Act 20 and 22, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

Use of an offshore corporation in 2018

Use of an offshore corporation in 2018

This article deals with the proper use of an offshore corporation in 2018. President Trump’s tax had a major impact on the use of offshore corporations. If you’re operating a business through an offshore corporation in 2018, you need to understand these changes.

First, let me define what I mean by an offshore corporation. This is an entity formed in a zero tax country such as Belize, Cook Islands, Nevis, etc. It’s an international business corporation that is incorporated in a country that won’t tax your profits and usually in a country different from the one where you live.

Even if you’re living in Belize, you probably would not form your corporation in Belize. You would want an “offshore” entity to protect your assets from local issues and creditors. So, you would incorporate in Nevis.

This is all to say that an offshore corporation is:

  1. In a zero tax country,
  2. That provides maximum privacy and asset protection, and
  3. In a country other than where you live.

There are two uses of an offshore corporation in 2018. You can use the structure to protect your personal after-tax assets/savings or you can operate an international business. The use of the corporation for asset protection has not change and has been the same for decades. The big changes under President Trump apply to those operating a business offshore.

When you form an offshore corporation for asset protection, you transfer your portable and liquid assets to the corporation. You then set up brokerage and crypto accounts in the name of the corporation and trade those accounts.

One of the most common uses of an offshore corporation is to hold foreign real estate. You pay the expenses of the property and receive rent into that corporation. Finally, you pay local taxes from the entity and are left with your net rental profits and capital gains.

Whether you’re trading stocks and crypto, or investing in real estate, all of the profits of your passive activities are going to be taxed in the United States as earned. It doesn’t matter where you live… in the states or abroad… so long as you hold a US passport you must pay Uncle Sam on your passive income earned in an offshore corporation in 2018.

If you’re holding passive income in an offshore corporation in 2018, you probably need to file IRS form 5471 and report your foreign bank account. Some will convert their offshore corporation to a disregarded entity (using Form 8832) and file Form 8858 rather than 5471.

Considering there’s no tax benefit to holding passive investments offshore, the above is straightforward. You get asset protection and your tax rate remains the same with an offshore corporation in 2018.

Operating a business offshore in 2018 is much more complicated. Here are my assumptions for this section:

  1. You, the owner operator of the business, are living and working abroad.
  2. You qualify for the Foreign Earned Income Exclusion.
  3. Your profits are ordinary business income and not passive income or capital gains.
  4. You’re operating your business through an offshore corporation formed in a zero tax jurisdiction.

If you don’t meet all of these criteria, the profits of your international business will be taxed in the United States. The tax benefits of offshore corporations apply to those living and working abroad.

Note: I am not considering partnerships where US person’s own 50% or less of the business. That means, I’m assuming your offshore corporation is a CFC (a topic for another day).

With all of that said, the big change under President Trump is that offshore corporations owned by US persons no longer get to retain earnings offshore. You’re not allowed to hold earnings and profits in an offshore corporation tax deferred.

This means that the primary tax benefit to operating a business offshore is the Foreign Earned Income Exclusion. You get to take out up to $104,100 per year in salary tax free. If both a husband and wife are working in the business, you can take out a combined $208,200 free of Federal Income Tax.

The other often overlooked tax benefit of operating a business offshore is that you don’t pay self employment tax or payroll / social taxes on the income. If you were operating this business in the United States, you would pay about 15% in self employment or other taxes on your salary. When you’re living abroad, qualify for the FEIE, and operate through a foreign corporation, you can eliminate these taxes.

If you net more than $208,200, this excess over the FEIE is now taxable in the United States as earned. If your offshore corporation has $500,000 in profits, you and your spouse would take out $200,000 tax free using the FEIE and pay US tax on $300,000.

I hope you’ve found this article on the use of an offshore corporation in 2018 to be helpful. For more information, or to set up such an entity, please email us at info@premieroffshore.com or call us at (619) 483-1708.

The Offshore ICO Scam and Cayman Islands Corporations

The Offshore ICO Scam and Cayman Islands Corporations

There’s an offshore ICO scam going on and it’s focused on Cayman Islands Corporations. If you’re planning an ICO, here’s what you need to know to avoid the offshore ICO scam and Cayman Islands Corporations.

First, note that I use the term “scam” very carefully and intentionally here. I truly believe there is an offshore ICO scam going on and it’s being perpetrated by lawyers and incorporation agents, many of them in the Cayman Islands.

Second, this article is about an offshore ICO scam that affects those issuing ICOs out of the Cayman Islands and most other offshore jurisdictions. I’ve seen this ICO scam in Belize, Nevis, Cook Islands, and in a number of offshore countries.

Third, this article is for those who are looking to fund their businesses with an “offshore” ICO. I’m not talking about ICOs in regulated jurisdictions such as the United States. Also, this scam does not generally affect ICO investors. I’m speaking only to those who wish to issue an ICO.

With all of that said, here’s the offshore ICO scam often found in the Cayman Islands:

Those hoping to issue an ICO call up a lawyer or an incorporator and say, “hey, I need an offshore corporation in the Cayman Islands to issue an ICO for my new business.”

The sales agent say, “sure, no problem. Send us $9,500 and we’ll set up your corporation.”

Buyer pays and gets his or her Cayman Islands corporation. Scam complete.

Now, you’re thinking, what the heck? The buyer got exactly what they paid for. How is this an ICO scam perpetrated by the lawyer or incorporator?

This is an ICO scam because the agent knows full well that the buyer won’t be able to get a bank account. They know that the buyer doesn’t have the legal structure or documents necessary to issue an ICO. They know that it will be a cold day in hell before this client gets a bank account opened for his ICO.

They know the Cayman Islands corporation can’t be used as intended. These lawyers are intentionally selling a useless structure to make a buck. They’re taking advantage of a buyer who has no idea what they’re doing and doesn’t have the financial backing to issue a proper ICO.

Even if the buyer could get a bank account opened, it would be closed after the first few deposits… and the ICO would probably be blacklisted by the industry.

The only way to open an account would be to lie to the bank about how you intend to use that Cayman Islands corporation. You say that the company will sell a service such as internet marketing or whatever. You won’t get an account in the Cayman Islands, but you’ll get one in a smaller offshore jurisdiction.

Now you issue the token and deposits start coming in. You’re converting bitcoin into FIAT and transferring that to your offshore account to fund your business.

Do this a few times and the bank will get suspicious. Send a large transfer, and the bank will get suspicious. They’ll want to know the source of funds and to see your sales agreements if you’re saying these are business transfers.

Let’s say you skirt past the bank’s KYC, AML and compliance systems (this won’t happen), what are the Cayman regulators going to say? If in some alternate universe, you somehow manage to raise a few million bucks, regulators will be all over you.

The bottom line is that these Cayman Islands corporations are useless for an ICO. At least, they’re useless without all of the legal and planning work that goes into a proper ICO.  

Sure, Cayman Islands is a top-tier jurisdiction for offshore ICOs and crypto funds. I recommend Cayman to clients all the time… clients who can afford the high costs associated with issuing a proper ICO from the Cayman Islands.

Back in the early days if ICOs, you might have been able to start in Cayman for $10,000. Today, you can’t get anywhere spending less than $50,000 on the front-end, and with most spending $100,000 on the back-end (success fees). Even low cost lesser jurisdictions are $35,000 in 2018.

The typical components of an offshore corporation in Caymans that will issue an ICO are as follows:

  1. Corporate entity,
  2. Financial Services Entity,
  3. Anti Money Laundering Manual (AML),
  4. Know Your Customers (KYC) procedures and systems,
  5. Dedicated Money Laundering Reporting Officer or Chief Compliance Officer with several years experience, and
  6. Sufficient capital to entice a correspondent bank to take you on as a client.

Setting up an ICO in 2018 is not cheap and any shortcuts will likely wind up causing massive headaches down the line.

Unfortunately, there are a lot of folks offering services in this area who haven’t got a clue or who know that what they’re selling is worthless. Sure, I can set up an offshore corporation for you in Cayman for less than $10,000, but it won’t be good for anything.

The choke points are the banks and international correspondent banks. They simply won’t accept anything that is not whiter than white in‎ the crypto arena.  That means proper licensing, approvals, and conformity with laws and regulations, especially US Securities laws if US persons are involved.

You’ll need to also address issues such as utility token or security coin right from the start. If a security, we’ll need to start as an exempt offering under 506(D) if any US persons are involved. Otherwise, we will still need a proper offering document wherever you want to set up shop that’s compliant with whichever countries you plan to sell into.

If you’re currently speaking with a promoter offering to form a cheap Cayman Islands company for your ICO, here’s what to do. Simply ask them to guarantee in writing that they’ll open a bank account in Caymans that will be allowed to receive ICO funds. Also, let them know you plan to visit the bank to discuss your ICO. This will shut them down very quickly.

I hope you’ve found this article on the offshore ICO scam and the Cayman Islands corporations. If you would like assistance with a proper and legal ICO out of Cayman, please contact me at info@premieroffshore.com or call me at (619) 483-1708  for a consultation.

We can also help you clean up your legal structure if you’ve already done some pre-sales. The only thing we can’t fix is sales of tokens or deposits accepted from non-accredited US investors. The only option there is to refund these buyers or face the ire of regulators.

And no, we can’t form an offshore corporation in the Cayman Islands for an ICO, allow you to do some pre-sales, and then get you into compliance. There’s way to much risk in that for you and us. Plus, the costs to fix a mess always outweigh the costs of doing it right the first time. If you’re already in trouble, we can help you get back on track, but we can’t go down that road with you.

US Expats and Retained Earnings in Foreign Corporations for 2018

US Expats and Retained Earnings in Foreign Corporations for 2018

The days of retained earnings in offshore corporations are officially over. No longer can those of us living and working abroad hold profits in excess of the Foreign Earned Income Exclusion inside of our corporations tax-deferred. Here’s what you need to know about US expats and retained earnings in foreign corporations for 2018.

Please note that this article is focused on offshore corporations owned by US persons in 2018. A US person is a US citizen or green card holder no matter where they live or a US resident. For a more detailed and code focused article on this topic, see: Bloomberg on Controlled Foreign Corporations.

Also, there’s some speculation in this post and things are subject to change. The IRS has not issued guidance on how Trump’s tax plan affects US expats and retained earnings in foreign corporations in 2018. Though, every expert I’ve spoken with agrees that the days of retained earnings in excess of the FEIE are over.

A few short months ago, we expat entrepreneurs were all excited about Trump’s tax plan. He was going to eliminate worldwide taxation and move the United States to a territorial tax system. The US is the only major country on earth that taxes its citizens abroad, so this sounded great.

Well, the final bill fell far short of President Trump’s campaign promises. While multinationals were converted to a territorial tax system, and no longer pay US tax on foreign-sourced profits of their international divisions, the small to medium sized expat entrepreneur got the shaft.

If you’re an American expat operating a business abroad, you’ll want to sit down before reading this post. My buddy Gary said it best, “Trump has cut the legs out from under the American expat in favor of the Apples and Googles of the world.”

Let me start by defining a few terms.

For my purposes here, an American expat is a US citizen or green card holder living outside of the United States. They qualify for the Foreign Earned Income Exclusion by being out of the US for 330 out of 365 days or by becoming a legal resident of a foreign country over a calendar year. A resident of a foreign country might spend a couple of months in the US, but never more than 183 days in a year.

Those who qualify for the FEIE in 2018 get to exclude up to $104,100 in ordinary income from their US tax return. That means they get up to $104,100 in salary or business income tax-free because they’re living abroad. All capital gains and salary in excess of the FEIE is taxable in the United States (I’ll leave the Foreign Tax Credit for another day).

US expat business owners have traditionally held profits in excess of the FEIE inside their foreign corporations as retained earnings. This allowed them to defer US tax on these profits until they took them out as dividends. For more on this, see my 2013 article, How to Manage Retained Earnings in an Offshore Corporation.

Then Trump’s tax plan came along and smashed American expat entrepreneurs. As with any tax overhaul, there are winners and losers. We expats apparently didn’t donate as much as the multinationals, so we’re the big losers.

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with foreign corporations.  Some of these changes may have an impact on the tax structure of US expats.  

As a result of the new international tax provisions, the US owners of a foreign corporation, which are controlled by US persons, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income earned abroad in excess of the FEIE may be lost.

To put that into English, The Tax Cuts and Jobs Act hits expats on two fronts:

  1. We must repatriate foreign retained earnings from prior years and pay US tax at 15.5% on those profits. This tax can be spread over 8 years.
  2. The ability of expats to retain profits in a foreign corporation is eliminated. We must now pay US tax on our profits in excess of the Foreign Earned Income Exclusion. A business owner can earn $104,100 tax-free, or a husband and wife both working in the business can take out a combined $208,200 in 2018 free of Federal income tax.

So, an American expat that nets $1 million a year in his or her business will pay US tax on about $897,000, no matter where they live. The ONLY exception and the only place on the planet where Trump’s tax plan can’t reach is the US territory of Puerto Rico. More on that below,

The new tax law eliminated retained earnings in offshore corporations with a very small change to the law. It put just about every income category under the Subpart F of the tax code. Interestingly, oil revenue was the only item removed from Subpart F… I wonder how that happened.

Subpart F income in an offshore corporation is not eligible to be retained tax-deferred. It must be passed through to the shareholders and taxed. Shareholders pay tax on Subpart F income whether or not they actually receive it, much like income in a US LLC.

As a result, if your foreign corporation is a CFC, ordinary business income is now Subpart F income and taxable in the United States as earned.

For an article on the previous definition of Subpart F in a CFC, see: Subpart F Income Defined. If you’re a glutton for punishment, or just nostalgic for the good old days of 2017, see: How to Eliminate Subpart F Foreign Base Company Service Income.

I should also note here that US tax breaks for “pass-through entities,” such as domestic LLCs and S-Corporations are not available to expats. We got all of the bad and none of the good from Trump’s tax plan.

If you’re an American living and working abroad, you have a few options in dealing with Trump’s tax plan and the burden it puts on expats.

The most practical step is to form a US C corporation and start over with a new offshore corporation. Pay the repatriation tax on previous years in your old corporation and start fresh with a structure designed for 2018.

Building out a new structure that includes a US corporation might cut your US corporate tax by 50%. The current US rate is 21% and this can be reduced to 10.5% with a 50% credit in certain situations. In 2026 and beyond, the rate rises to 13.1%. For a detailed article from Harvard, see: Tax Reform Implications for U.S. Businesses and Foreign Investments and scroll down to the section on Low-Taxed Intangibles Income.

This US corporate strategy is much more complex than it sounds. Expat entrepreneurs need to watch out for double taxation. When you take out retained earnings from your US corporation as a divided, you’ll usually pay US tax on the distribution (on your personal return). Careful planning should go into building this structure and a long-term tax plan that minimizes double taxation must be developed.

Another option for businesses with partners abroad is to change their CFC status. The tax laws described here generally apply to Controlled Foreign Corporations. A CFC is a foreign corporation owned by US persons (residents, citizens and green card holders). If US persons own or control more than 50% of the business, it’s a CFC.

If you’re working with non-US persons abroad, you might restructure your business so it’s not a CFC. For example, a US company and a foreign company are working together on deals as separate entities. They might decide to join together in one corporation with each party owning 50% of the shares and having 50% control over the business.

Another option is to buy a second passport from a country like St. Lucia and renounce your US citizenship. Note that it’s not sufficient to buy a second passport to avoid US taxation. You must also renounce your US citizenship and go through the expatriation process. This will take many months and can have a tax cost (exit tax).

In my opinion, every US expat entrepreneur that wants to maintain their citizenship, and is netting $500,000 to $1 million a year in a portable business, should move to the US territory of Puerto Rico. Puerto Rico is the only safe haven on earth not affected by Trump’s tax plan.

If you’re willing to move to Puerto Rico, and spend 183 days a year on the island, you’ll cut your corporate tax rate to 4%. If that’s not enough, you’ll also cut your capital gains rate on assets acquired after you become a resident to 0% (yes, that’s zero, nada, nothing). This zero percent tax rate also applies to dividends from Act 20 companies. ‘

For information on Puerto Rico’s Act 20 and 22, see: Changes to Puerto Rico’s Act 20 and Act 22.

As you read through the many articles on my website about Puerto Rico, note the following changes for 2018:

  1. Act 20 no longer requires you hire 5 employees. You can move to Puerto Rico and be the only employee of your business.
  2. Just like offshore corporations, Puerto Rican corporations can no longer retain earnings. This means that US shareholders of Act 20 companies who are living in the US no longer get tax deferral. To put in another way, after Trump’s tax changes, Puerto Rico’s Act 20 is only available to US citizens and green card holders willing to relocate to the island and spend 183 days a year there.

For an article that compares Puerto Rico’s tax incentives to the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

I suggest that Puerto Rico is best for portable businesses netting $500,000 to $1 million a year. I get to this number because of the fact that you, the business owner, must pay yourself a fair market salary. This salary is taxed at ordinary income rates in Puerto Rico. Then your corporate profits, which are net business income after you pay yourself a “reasonable” salary, are taxed at 4%.

You then distribute these profits to yourself as a tax-free dividend. Even if you move back to the United States, you’ll never pay personal income tax on the dividend. To see this is the US tax code, go to IRC Section 933.

So, Puerto Rico’s tax deal is basically the inverse of the FEIE. With the Exclusion, you get $100,000 tax-free and pay US tax on any excess. With Puerto Rico, you pay tax on your first $100,000 in salary and 4% on any excess.

If you don’t move to Puerto Rico, and remain offshore, your international businesses should be operated through a foreign corporation in a low or zero tax country. Operating your business without a structure or through a US corporation means you’ll also be stuck paying Self Employment tax at 15%. No matter your tax situation, an offshore corporation will almost always reduce your net IRS payment.

All expat business owners should be operating inside an offshore corporation to eliminate Self Employment tax and to maximize the value of the Foreign Earned Income Exclusion. You then report your salary from this company on IRS Form 2555 attached to your personal return, Form 1040.

I hope you’ve found this article on US expats and retained earnings in foreign corporations for 2018 to be helpful. This is sure to be a very hectic and confusing tax year. It’s in your best interest to seek planning advice from an international expert early in the year to minimize the impact of Trump’s tax plan on your bottom line.

For more information on restructuring your business, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to work with you to build a new and compliant international structure.

How to trade cryptocurrency and manage investments for others without a license

How to trade cryptocurrency and manage investments for others without a license

I get a number of emails from readers each week asking how they can manage money for friends and family offshore. They want to trade cryptocurrency and make investments for others without going to the expense of setting up a licensed and regulated exchange. So, here’s how to trade cryptocurrency and manage investments for others without a license.

When you want to trade crypto or other assets for anyone other than yourself, you need an account that allows you to hold other people’s money. Banks are very cautious when it comes to those trading on behalf of others or managing investments without a license.

First, banks don’t want to be fined for facilitating money laundering. Banks paid hundreds of millions in the last few years for “allowing” their customers to avoid taxes and launder illicit gains. The bank might not have had any idea what was going on, but their due diligence procedures weren’t stringent enough to catch the wrongdoers, so they were fined big time.

Second, banks and governments don’t want anyone without a license managing other people’s money. Brokerage and investment management licenses and regulation is big business. If you don’t want to pay, you won’t be allowed to play.

Third, banks must follow strict Know Your Client (KYC) rules. When you open an account, the bank checks you out and thereby knows you, their customer. If you then receive friends and family or customer money in your bank account, the bank doesn’t “know” the true beneficial owner of the money. The actual owner is one level removed from the person the bank “knows.”

Setting up an offshore corporation and hoping for the best is not a good idea in today’s world. Banks are watching for the source of funds on most wires. They will check outflows and for anyone using their account to manage OPM. If you try to hide, you’ll be caught and kicked to the curb.

Against that backdrop, here’s how to trade cryptocurrency and manage investments for others without a license.

When you don’t want to set up a regulated exchange, which can cost $35,000 to $250,000, depending on the country, you can use offshore LLCs and a trading corporation to accomplish your goals.

You, the trader form an investment corporation and a management LLC. Then, each and every client forms an offshore LLC. Yes, every single client, friend, or family, must have their own offshore corporation. Only a husband and wife can have a joint LLC.

Next, all of these structures open offshore accounts at the same international bank. In this way, the bank has done its due diligence on you and your customers. Everyone has been reviewed and approved by the bank and transfers will be permitted between the group of companies.

Once everyone has been approved, the client LLCs can issue a Power of Attorney to your management LLC. With this Power of Attorney on file with the bank, you will be allowed to manage the investments of these clients and transfer funds into your investment corporation.

This multi LLC offshore investment management structure ticks all the right boxes. It allows you to manage client funds and for the bank to do its KYC on everyone involved. Because all the accounts are at the same bank, transfer costs are minimized and the source of funds won’t be questioned.

A separate LLC system to trade cryptocurrency and manage investments for others without a license works well with large investors. Because of the setup costs, it’s not efficient for smaller clients or selling investments to the general public.

This practical limitation is positive for banks. They don’t want someone operating an unregulated offshore hedge fund selling to mom and pop investors. This will only bring trouble and litigation to the bank. They like larger accounts, larger deals, and sophisticated investors.

This system also allows sophisticated investors to put more advanced structures in place. For example, they might want to trade within an international trust for estate and asset protection reasons. High net worth investors might want to hold the LLC inside an offshore life insurance company to eliminate US tax on the capital gains.

You can also use this structures to create private entities in countries with public registries. For example, let’s say you want to invest in Panama. That country has a public registry of corporate shareholders and directors and a list of beneficial owners of foundations (their version of a trust).

To keep your name out of the registry, you can set up an offshore LLC in a country like Nevis or Belize that doesn’t have a public registry. Then, this LLC can be the founder of a foundation or the officer and director of a Panama corporation. In this way, the beneficial owner (you) won’t be listed in the registry.

When someone searches the Panama database, all they’ll see is the name of your Belize LLC. When they go to Belize for more information, they’ll hit a brick wall.

Whether this offshore LLC structure is cost-effective will depend on how many clients/friends and family you plan to manage. In most cases, the base corporation might cost $3,500 and each LLC $2,000 to $2,900 to set up (not including bank fees).

The largest structure I’ve seen like this was 3,400 LLCs and two management corporations in Switzerland. Why, you ask, would someone spend that kind of money on LLCs? Because they don’t want to go through all the compliance and regulation that comes with a fully licensed exchange.

Had they decided to operate as an investment manager in Switzerland, they would have had to hire someone with the necessary Swiss licenses and go through a very arduous registration process. The multi LLC model eliminated both of these requirements.

Plus, once you have a license, you have quarterly filing, KYC and AML compliance, and all manner of regulations to contend with. When you use separate offshore LLCs, it’s a private transaction between you and your friend/client.

Finally, this system allows some clients to move their retirement accounts offshore. They could form an offshore IRA LLC and transfer some or all of their vested retirement savings into that entity. Then, that LLC could issue a POA to you, the trader.

As you can see, this multi offshore LLC approach to trading cryptocurrency and managing OPM for others without a license can be a very powerful tool.

I hope you’ve found this article on how to trade cryptocurrency and investments for others without a license to be helpful. For more information on setting up a regulated or unregulated crypto trading business, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with an offshore structure and banking.

offshore corporation

Offshore Corporation and Trump’s Tax Plan

There are big changes coming from the Trump administration that will affect your offshore corporation. Republicans have made it clear that they must pass tax reform or they’ll be crushed in the next election cycle. Here’s how Trump’s tax plan is likely to affect offshore corporations and and international taxation.

There are three groups of small business owners that use offshore corporations. They are:

  1. those who live and work in the United States but operate through an offshore company,
  2. those who live abroad and run their business through an international corporation, and
  3. those who run an international division of their US business through an offshore corporation.

Each of these groups of business owners will see different results from Trump’s tax plan. I’ll review each in turn here.

First, keep in mind that this article is for those operating a business through an offshore corporation. Very different rules apply to American’s investing abroad using an offshore trust or an international LLC.

Likewise, not all aspects of this article apply to those operating a business through an international LLC. Nor does it apply to offshore IRA LLCs. Each of these is controlled a different section of the US tax code.

Keep in mind that all of these structures, including the offshore corporation, is governed first and foremost by the US tax code. Certain countries have written laws that help you maximize privacy, protection, and tax savings. However, these laws are intended to work together with US tax laws. Therefore, you should always have a US tax expert in your corner to quarterback your offshore structure.

With that said, here’s how the offshore corporation fits into Trump’s international tax plan.

Live and Work in the United States

If you’re living and working in the United States, and operating through an offshore corporation, you shouldn’t see much change from Trump’s tax plan. You’re already paying US tax on your foreign profits as earned.

In this section, I’m talking about those operating a business through an offshore company that have no office and no employees abroad. You’re operating through an offshore corporation for privacy or asset protection… or any number of other reasons. But, you get no tax benefit from this structure.

Of course, you will get a lower tax rate just like everyone else. If Trump reduces the tax rate on corporate income from 35% to 20%, you’ll receive the same benefit.

Living Abroad and Qualify for the FEIE

There’s some good news in Trump’s tax plan for those living abroad, operating through an offshore corporation, and qualifying for the Foreign Earned Income Exclusion.

Trump will not eliminate or change the Foreign Earned Income Exclusion. If you’re a resident of a foreign country, or out of the US for 330 out of 365 days, you can exclude up to $102,100 of income from your 2017 return.

The 2018 Foreign Earned Income Exclusion amount hasn’t been released yet. I expect it will be around $102,900. The FEIE goes up a few hundred each year to keep up with inflation.

By operating through an offshore corporation, you maximize the benefits of the FEIE, create a an asset protection and privacy barrier, and eliminate Self Employment Tax. SE tax will remain at 15% under Trump’s tax plan.

It will remain difficult to qualify for the FEIE using the 330 day test. In fact, the 330 day test will likely become more difficult, if not eliminated entirely, when Trump institutes his territorial tax plan.

For this reason, I’m recommending all my FEIE clients obtain residency somewhere within the next year. For US purposes, it doesn’t matter where, but you should have legal residency in some country… in the country you will call your “home base.”

Even perpetual travelers need to put down roots somewhere and sign up for residency. Because residency must cover an entire tax year, you should take steps now to be ready by January 1, 2019.

  • The 330 day test can be used over any 12 month period. To use the residency test, you must be a resident for a full calendar year.

Of course, you should try to become a resident of a country that won’t tax your income. For a list of countries that don’t tax foreign sourced profits, see: Which Countries Tax Worldwide Income?

The easiest residency program for US citizens is Panama. Invest $20,000 in Panama’s Friendly Nations Reforestation Visa Program and get residency for you and your family (husband, wife, and dependents 18 year of age and under). For more on this, see: Best Panama Residency by Investment Program.

Note that you can also get residency in Panama using your IRA. Purchase teak or one of the other reforestation programs with your IRA and get residency for free.

Operating a Division Offshore

There are two competing tax plans when it comes to those operating divisions offshore. First, Trump wants to incentevise businesses to bring back retained earnings to the United States. He’s offering a reduced rate (maybe 5%) and expects hundreds of billions of dollars to be repatriated.

One way to force companies to bring their cash hoards back now is to make it more difficult to retain earnings abroad in the future. This would have a long term impact on your ability to operate a foreign division through an offshore corporation.

Competing with this desire to force retained earnings back into the United States is Trump’s territorial tax plan. President Trump want’s to convert the United States from a worldwide tax system to a territorial one.

In a territorial tax system, businesses would be taxed in the United States on income earned in the US. They would not be taxed on income earned abroad in foreign divisions.

So, when it comes to how a foreign division will fair under Trump’s tax plan, there are many factors and moving parts. If the final version includes a change to a territorial system, US businesses may see significant tax savings going forward. If all we get is a repatriation and a tightening of the retained earnings rules, businesses might see an increase in US taxes going forward.

Conclusion

No matter how things shake out with the worldwide or territorial debate, the offshore corporation will remain one of the most important tools in the toolbox for reducing or deferring tax on international business profits.

As I said above, anyone living abroad should work towards residency in a zero tax country in 2018. Be ready for more changes in 2019 and the possibility of a territorial system.

I hope you’ve found this article on offshore corporation and Trump’s tax plan to be helpful. For more on how to setup an offshore company or residency in Panama, please drop me a line at info@premieroffshore.com or call us at (619) 483-1708. 

offshore company

What is Required to Form an Offshore Company

Quality jurisdictions are asking for more and more information on those setting up offshore companies. If you’re going to structure an international business or an IRA, you’ll need to collect a number of documents before you can form an offshore company.

There are a 4 primary offshore company structures. They are:

  1. Offshore corporation,
  2. Offshore trust or foundation,
  3. Offshore Limited Liability Company (LLC), and
  4. Offshore IRA LLC

Each of these structures has a different purpose and slightly different documents will be required.

An offshore corporation is generally used to hold an active business. This is because a corporation can retain earnings and is this a valuable tax planning tool.

In contacts, a offshore Limited Liability Company is a pass-through entity. An LLC can’t regain earnings and is best suited to passive investments. Some small businesses also select an LLC.

For example, if you’re living abroad, qualify for the Foreign Earned Income Exclusion, and won’t net more than $100,000 in your business an LLC is a good choice. A business that has no need to retain earnings tax deferred might choose an LLC for the lower compliance costs.

An offshore IRA LLC is a unique and complex version of a standard LLC. When structured properly, and IRA LLC allows you to move your retirement account out of the United States and installs you as the manager of that account. Once complete, you have total control of the investments of your retirement account.

When you need asset protection and estate planning for passive and active investments, you need an offshore trust or an offshore foundation. These entities are similar, but the trust has a lot of advanced features compared to a foundation. For a comparison, see: Offshore Trust or Panama Foundation?

Some countries (such as Panama) maintain a public database of the officers and directors of their structures and some do not. You can use an LLC in conjunction with an offshore company to build a bearer share company.

With this in mind, here’s what you will need to provide to your incorporator and resident agent.

  • Your name and any names you’ve used in the past
  • Your date of birth
  • Social Security / National Insurance Number
  • Current primary residence and whether it’s leased or owned
  • Landline phone number at your home
  • Other phone numbers
  • Country of citizenship
  • Passport number and country
  • Profession
  • Details, if any, of any arrests/indictments or convictions  (Exclude minor traffic offenses)
  • Details, if any, of any proceeding brought involving the SEC, FTC, Federal Reserve Board, a Stock Exchange or their equivalents elsewhere, to which you or any associated business was a party
  • Details, if any, of any known investigation of yourself by a government agency or regulatory entity
  • Details, if any, of any search warrant issued with regard to your home, office or other premises occupied
  • Details of any past or current litigation
  • Details, if any, of any subpoena to provide records or testify in civil proceedings
  • Details, if any, if you or  your businesses has ever declared bankruptcy, including date of discharge
  • List any Outstanding Judgments against you or your associated businesses
  • details, if any, of any liens, attachments, garnishments, receiverships or other orders filed against you or any business with which you are or were associated
  • List professional or charitable associations of which you have been a director, trustee or member
  • Details, if any, of any professional organizations from which you have been expelled, suspended or disciplined
  • List all political parties of which you have been a member
  • List any government or political office ever held by you or an immediate family member
  • Details of any expulsions, suspensions or disciplinary actions in respect of a government position held by yourself or an immediate family member

That’s quite a list, and we’re just getting started. You will also need to provide the following documents in original (by courier):

  • Certified copies of Passport of every Director and Shareholder of the Company
  • Original Bankers Reference for each Director and Shareholder of the Company
  • Original Legal or Accountant and professional references for each Director and Shareholder of the Company
  • US or Non US tax declaration
  • Notarized copy of a utility bill reflecting the name and home address of each Director and Shareholder of the company
  • US tax forms as applicable such as W-8 or W-8BEN (actual form varies based on your citizenship)

Only after all of these documents have been received, and your name has been cleared through a database like World Check will a company be formed.

I hope this list of the information required to form an offshore company has been helpful. For more, and assistance with an offshore corporation, LLC, IRA LLC, trust or foundation, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Puerto Rico Employee Requirements

Puerto Rico Employee Requirements

This article is to clear up issues concerning employment and payroll under the tax incentive programs in Puerto Rico. These requirements for the tax incentive programs are to be used in determining how much salary you must take (taxed at ordinary rates) vs. how much corporate profits the entity can make (taxed at 4%).

Keep in mind that all employees of Puerto Rico Act 20 and 273 companies are required to take a “reasonable” salary. This salary is taxed at ordinary rates of about 35% in Puerto Rico. The 4% tax incentive rate is then applied to corporate net profits after all salaries are paid. For more on the various tax incentive programs, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

It’s because of these salary requirements that I suggest small businesses, earning less than $300,000, are better off operating offshore. When you live abroad, qualify for the Foreign Earned Income Exclusion, and operate a business through an offshore corporation, you can earn up to $102,100 in salary tax free. If both a husband and wife are working in the business, they can earn a combined $200,000 tax free.

Puerto Rico’s tax incentive programs are basically the opposite of the FEIE. Your salary is taxed at ordinary rates and the profit after that salary is taxed at 4%.

If your business nets $100,000 or less offshore, you pay zero tax. If your business nets $200,000 offshore, and both spouses are working in the company, then you pay zero US tax..

Let’s say your business nets $200,000 in Puerto Rico. If you operate in Puerto Rico, you might pay yourself a salary of $100,000 (to compare apples to apples). That salary is taxed at 35%, or $35,000. Then the excess is taxed at 4%, for a total bill of $39,000. This is basically the same tax deal you have available offshore through the FEIE (you pay zero on the first $100,000 and ordinary rates on the second $100,000).

Puerto Rico’s tax incentives really begin to make a big difference as your net income increases. Let’s say you net $1 million. You pay yourself a salary of $100,000, taxed at ordinary rates, and then $900,000 is taxed at 4%. Your total tax bill is $71,000.

If that same business was operated offshore, with one employee, you would earn $100,000 tax free and pay ordinary rates on $900,000 at 35%. In this case, your net tax paid is $315,000. As your net profits increase, so do the benefits of Puerto Rico’s tax incentive program vs the FEIE.

Here’s a summary of the salary and payroll requirements under Puerto Rico’s tax incentive programs. Keep in mind that the $100,000 referenced above was simply an example… an easy way to compare Puerto Rico to the FEIE.

In 2015 the government determined that all companies under an Export Service Tax Incentive Program decree must pay a fair market salary to owner / operators. This only applies to top tier executives, and for regular level positions labor law changed in 2017, and employee requirements also changed entirely in Act 20 regs.

The following specifies how the government views top tier owners/shareholders who actively work for their tax exempt company in Puerto Rico.

Official-owner means any shareholder or partner who maintains at the end of the tax year a beneficial interest in an eligible service exporting company that:

  • dedicates no less than 80% of their time to the activity eligible under the export service laws and
  • is a resident of Puerto Rico during the taxable year

Any partner or shareholder, who is an employee of a company with a tax exemption decree under Act 20 / Act 273 / Act 399. All official-owners shall have a reasonable annual salary that clearly reflects their income from services rendered to the Eligible Services Company, in which they maintain a proprietary interest at the end of the taxable year.

For the purposes of the provisions of Section 1040.09 of code, a maximum limit of $ 350,000 of annual salary will be established. Therefore, in those cases in which an Official- Owners earns an annual salary of less than $350,000 for his services rendered to the company, in which he maintains a proprietary interest at the end of the contributory year, the Secretary, in his discretion will evaluate the reasonableness of said income, in comparison with the services rendered by the Official Owner, and may impose additional salaries up to a maximum of $350,000 per year in order to clearly reflect the income of Official-Owner.

The evaluation will be based on the facts and circumstances of each case considered but not limited to the economic reality of the company, the functions performed by the Official-Owner within the company’s organizational structure and the salary trend of the market in comparable positions.

Remember that the government of Puerto Rico views these tax incentive decrees is a way attracting capital. Many company owners are not reporting substantial income. So, this is just a way to assure that some form of tax is paid from even though it would be miniscule.

If you’re considering forming an Act 20 company in Puerto Rico, there’s a lot of opportunity through these tax incentive programs. This is truely tax planning while there’s blood in the streets. Due to mass loss of public service jobs in the last month ($ 500 million in budget cuts for government jobs). The peculiar political status of the island makes for a different type of professional.

The literacy rate in Puerto Rico is higher than all of the US (with Puerto Rico registering 93.3% and the US with 86% literacy rate).

Also, Act 20 just changed the employment requirements so the gate are open for a huge private sector overhaul! (See Changes to Act 20 Tax Incentive Program). To motivate job growth, this year the Puerto Rican government changed labor laws to benefits employers.

Below is a outline of the Labor reform in Puerto Rico. After that you will see the a full breakdown of labor laws in Puerto Rico.

The first big change was the initial probation period, which was changed from 3 months to 9 months. This is significant because employers now have a lot more leeway with hiring and firing employees. Facilitating longer probation periods, makes it difficult for employees to apply for bonuses, significant reductions of vacation time, sick days and so forth.

Here are the labor laws for Puerto Rico. They apply to all companies doing business on the island, both tax incentive companies such as Act 20 and standard corporations.

Article 1.2 establishes that employees hired prior to the validity of this Law (January 1, 2017) will continue to enjoy the same rights and benefits as previously had, as expressly provided in the Articles of this. This clause was inserted in the amendments of the Senate and seeks to address the claim of who applies this law.

Article 2.20, which establishes as public policy in favor of alternative procedures for the settlement of disputes related to disputes arising from the application of the law to be approved, such as mediation and arbitration provided by the Department of Labor and Resources Human Rights, including its Office of Mediation and Arbitration.

Article 3.1 of the project establishes and defines what will be overtime. As proposed, overtime will be the hours an employee works for his employer in excess of eight (8) hours during any period on a calendar day rather than twenty-four (24) consecutive hours.

The next article states that the employer may establish an alternating weekly work schedule by means of a written agreement between the employee and the employer (flexitime), which will allow the employee to complete a work week not exceeding forty (40) hours with schedules Daily that will not exceed ten (10) hours per day of work. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for hours in excess of a time and a half (NO MORE DOUBLE TIME PAY) of the agreed wage rate for the regular hours.

The accumulation of vacations and sick days will be staggered in the following order:

The minimum monthly accumulation for vacation leave will be half (1/2) day during the first year of service. After the first year of service, up to five (5) years of work service, it will accumulate at three quarters (3/4) of a day. Accumulation of (1) day after serving five (5) years of service until fifteen (15). After fifteen years of service, it will accumulate at the rate of one and a quarter (1 1/4) of a day. This last computation is the one that is used today uniformly for all the employee who works more than one hundred and fifteen (115) hours per month. Basically for the first year instead of 2 weeks vacation traditionally per year you accumulate only 6 days after 1 yrs  approx 9 day, and this only applies to those working 115 + hours per month.

The sick leave was amended and is now one (1) day per month.

Article 3.21 of the bill provides that, as regards Law 180-1998, all claims of this law shall be prescriptive within a term of one (1) year, thus amending the current term of three (3) years.

Regarding the proposed amendments to Act No. 80 of May 30, 1976, it establishes a probationary period of nine (9) and twelve (12) months in certain employees under the Fair Labor Standards Act.(NO MORE 3 MONTHS OF PROBATION)

As for the compensation of the unjustifiably dismissed employee, an allowance is established for three (3) months of salary and two (2) weeks for each year of service. However, the allowance will never exceed nine (9) months of salary without distinction of the years of service.

Article 4.12 of the draft amended article 11 of Law 80, in order to eliminate the text that established the presumption that in the case of a lawsuit for unjustified dismissal, the employer had the burden of proof. The bill provides that article 11 of Law 80 only establishes that in the cases arising from Law 80, “the court shall hold a conference no later than sixty (60) days after the response to the complaint or complaint is filed, Which parties will be required to appear or be represented by a person authorized to make decisions, including the transaction of the claim. During that hearing, the parties’ arguments will be examined, the essential disputes will be identified and the possibilities for an immediate settlement of the claim will be discussed. If the claim is not settled, the court will order the discovery to be pending and expedite the date marking to hold the conference in advance of the trial. “

Likewise, the “Puerto Rico Employment Security Act” (Act No. 74 of June 21, 1956) is hereby amended to allow for the gradual increase of unemployment benefits, so that effective July 1, 2019, The minimum weekly benefit increases to sixty (60) dollars and the maximum weekly benefit increases to two hundred forty (240) dollars.

As for the Christmas bonus, any employer employing more than twenty (20) employees for more than twenty-six (26) weeks within the twelve (12) months from October 1 of any year until September 30 of the subsequent calendar year, you must grant to each employee who has worked for at least 1,330 hours or more within that period, a bonus equivalent to two percent (2%) of the total salary earned up to the amount of six hundred dollars ($ 600.00).

Basically a new Act 20 company under Puerto Rico’s tax incentive program can hire up to 19 employees without paying the Christmas bonus.

We can assist you in get a tax exemption decree and draft employment contracts, help you plan an employment strategy to avail the benefits of the new labor laws.

Puerto Rico Tax Incentive Labor law:

Be it enacted by the Legislature of Puerto Rico:

Article 2. – (29 L.P.R.A. § 271)
Eight (8) hours of work constitute the daily legal working day in Puerto Rico, Forty (40) hours of work constitute the weekly working day.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 3. – (29 L.P.R.A. § 272)
They are regular hours of work eight (8) hours during any working day and forty (40) hours during any working week.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 4. – (29 L.P.R.A. § 273)

These are extra hours of work:

(a) The hours an employee works for his employer in excess of eight (8) hours during any calendar day. However, the employer may notify the employee of an alternate cycle of twenty-four (24) hours, provided the notice is in writing in a term not less than five (5) days prior to the start of the alternate cycle and there are at least eight (8) hours between consecutive shifts.

(b) The hours an employee works for his or her employer in excess of forty (40) during any one week of work.

(c) The hours an employee works for his employer during the days or hours in which an

establishment must remain closed to the public by legal provision. However, the hours
worked on Sundays, when by law provision if the establishment must remain closed to the public, will not be considered overtime for the mere reason of being worked during that period.

(d) The hours an employee works for his employer during the weekly rest day, as established by law.

(e) The hours that the employee works for his employer in excess of the maximum hours of work per day set in a collective bargaining agreement.
[Amendments: Law 223 of July 23, 1974; Law 1 of December 1, 1989; Law 143-2009; Law 4-2017]

Article 5. – (29 L.P.R.A. § 273a)

For purposes of computing overtime in excess of forty (40) hours, the workweek shall constitute a period of one hundred and sixty-eight (168) consecutive hours. It shall commence on the day and at the time the employer determines and notifies the employee in writing. In the absence of notice, the work week will begin at 12:01 am on the Monday of each week. Once the employer sets the beginning of the work week, any change will need to be notified to the employee at least five (5) calendar days in advance to be effective.
[Amendments: Law 83-1995; Law 7-2002; Law 4-2017]

Article 6. – (29 L.P.R.A. § 274)

The norms and requirements for the payment of overtime will be the following:

(a) An employer who employs or permits an employee to work during overtime shall be required to pay for each overtime a salary not less than one-and-a-half times the rate of pay agreed upon for regular hours. Provided that the employees entitled to higher benefits hired prior to the validity of the “Law of Transformation and Labor Flexibility” will preserve the same.

(b) An alternate weekly work schedule may be established by a written agreement between the employee and the employer, which will allow the employee to complete a work week not exceeding forty (40) hours with daily schedules not to exceed ten ( 10) hours per work day. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for the excess hours at a rate of time and a half of the agreed wage rate for the regular hours.

(c) Voluntary or approved weekly alternating work schedule agreements may be revoked by mutual agreement of the parties at any time. However, either party may unilaterally terminate the voluntary agreement after one (1) year of its adoption.

(d) Alternate weekly work itinerary agreements adopted pursuant to this Article may be continued by a third party acquiring the business, without it being necessary to establish a new contract.

(e) The employer may grant an employee request to replenish hours not worked in the week for personal reasons of the employee. The hours thus worked will not be considered overtime when they are worked in the same week of absence, do not exceed twelve (12) hours in a day, nor exceed forty (40) hours in the week.

[Amendments: Law 223 of July 23, 1974; Law 83-1995, Law 4-2017]

Article 7. – (29 L.P.R.A. § 275)

For the purpose of determining the compensation for overtime pay when no wage type has been agreed for the payment of regular hours, the daily, weekly, monthly or otherwise agreed wage shall be divided by the total number of hours during the same period.

[Amendments: Law 83-1995, Law 4-2017]

Article 8. – (29 L.P.R.A. § 276)

An employee may request in writing a change of schedule, the number of hours or the place where he / she should do his / her job. The employee’s written request will need to specify the requested change, the reason for the request, the effective date, and the duration of the change.

The employer shall be obliged to provide a reply within a period of twenty (20) calendar days counted from the receipt of said request. In the cases of an employer with more than fifteen (15) employees, the response will be in writing. If the employer meets with the employee within twenty (20) calendar days of receiving the change request, his / her response may be notified within fourteen (14) calendar days following such meeting.

In its response, the employer may grant or deny the employee’s request. A concession may be subject to conditions or requirements that the employer deems appropriate. A denial must contain the reasons for the decision and any alternative to the application submitted. The employer will treat with priority the requests by heads of families who have the sole custody or sole custody of their minor children. The provisions of this Article shall apply only to employees who regularly work thirty (30) hours or more per week and who have worked for the employer for at least one (1) year. In addition, they shall not apply to another application filed within six (6) months of receipt of the employer’s written decision or grant of change, whichever is greater.

Article 9. – (29 L.P.R.A. § 277)

The additional compensation established by this Law for overtime, except in the situations authorized in Article 6 of this Law, is hereby declared unenforceable. Any clause or provision under which the employee agrees to waive payment of the extra compensation for overtime fixed by this law. No judgment, award, award or other provision of a claim for compensation, right or benefit under any law, mandatory order, salary order, collective agreement or work contract, may be raised as a defense of res judicata by division cause of action, in order to defeat another claim, unless in the previous procedure had been expressly adjudicated, the same cause of action, for the same facts, between the same parties.

[Amendments: Law 83-1995; Law 4-2017]

Article 10. – (29 L.P.R.A. § 282)

Any employee who receives compensation lower than that fixed in this Act for regular hours and overtime work or for the period designated to take the food will be entitled to recover from the employer by civil action amounts not paid, plus an equal amount per concept of liquidation of damages, in addition to the costs, expenses and legal fees of the procedure. No employer may retaliate, terminate, suspend or otherwise affect the employment or employment conditions of any employee because he or she refuses to accept an alternate weekly work schedule authorized in Section 6 of this Act or for having filed a request for modification of the schedule, number of hours or place of work as provided in Article 8 of this Law. The employer who engages in such conduct may be civilly liable for an amount equal to the amount of damages that the act caused to the employee and if it is shown that the employer committed such conduct with malice or reckless indifference to the employee’s rights, a maximum maximum amount may be imposed as punitive damages equivalent to the actual damages caused. In order to determine the amount that should be imposed as punitive damages, the financial situation of the employer shall be taken into account, how reprehensible has been the conduct, duration and frequency of same, the amount of damage caused and the size of the company. In addition, it may be required that the worker be replaced in his employment and that he cease and desist from the act in question. Any employee who is affected in his tenure or employment condition as incurred by the employer in the conduct described in the preceding paragraph may file an appeal to the Court of First Instance. The Secretary of Labor and Human Resources of Puerto Rico may urge such action on behalf of and on behalf of the affected employee. In the ventilation of the resource the employer will have the weight of evidence to rebut the presumption that retaliation has been taken against the employee for not having accepted a flexible work schedule.

These claims may be processed in accordance with the ordinary procedure or the complaint procedure established in Act No. 2 of October 17, 1961 [32 L.P.R.A. secs. 3118 et seq.] As it has been or is subsequently amended. The judicial claim may be made by one or more employees for and on behalf of themselves or of them and other employees who are in similar circumstances; Provided, that after the claim is filed, the claim may be compromised between the parties, with the intervention of the Secretary of Labor and Human Resources or any of the attorneys of the Department of Labor and Human Resources, appointed by said Secretary and the approval of the court . The Secretary of Labor and Human Resources will determine administratively which judicial or extrajudicial transactions will require his personal intervention, fixing the criteria that will govern to that effect through regulation or administrative order. Any extrajudicial transaction will be void on the payment of the salary corresponding to the regular hours, overtime, the period indicated to take the food or on the payment of the sum equal to the amount established by this law for liquidation of damages; Provided, however, that any transaction that is verified before the Secretary of Labor and Human Resources or any of the attorneys or officials of the Department of Labor and Human Resources designated by said Secretary shall be valid for the purposes of this law. Any extrajudicial transaction that is carried out through the intervention of mediators of labor-management conflicts of the Department of Labor and Human Resources, subject to the norms or criteria established by the Secretary for such purposes, shall also be valid regulation or administrative order [Amendments: Law 25 of April 26, 1968; Law 47 of May 19, 1976; Law 8 of May 10, 1982; Law 83-1995; Law 4-2017]

Article 11 – (29 LPRA § 283)

Every employer shall notify in writing to its employees the number of hours of work required each day of the week, the hours of commencement and termination of work, and hour in which the period destined to take the food inside the regular commando begins and finishes. The schedule thus notified shall constitute prima facie evidence that such work hours in the establishment constitute the division of the working day. The employer who requires or permits an employee to work for a period of more than five (5) consecutive hours without providing a rest period to take food, will have to pay to the employee the time worked by means of extraordinary compensation, as provided in this Article. In those cases in which the total number of hours worked by the employee during the day does not exceed six (6) hours, the rest period for food can be ignored. The period to take the food should begin to be enjoyed not before the end of the second or after the beginning of the sixth hour of consecutive work. An employer may not employ an employee for a period of work exceeding ten (10) hours per day, without providing the employee with a second rest period for food, except that total hours worked does not exceed twelve (12) hours. In cases where the total number of hours worked does not exceed twelve (12) hours, the second rest period for food may be waived, provided that the first period of rest for food is taken by the employee. food occurring within or outside the employee’s regular hours may be reduced to a period of not less than thirty (30) minutes, provided a written stipulation is made between the employer and the employee. In the case of croupiers,nurses, nurses and security guards and those authorized by the Secretary of Labor and Human Resources, the period of rest for food may be reduced up to twenty (20) minutes when a written stipulation is made between the employer and the employee, without requiring approval of the Secretary. However, the other provisions of this Article shall apply.

The stipulations to reduce a period of rest to take food will be valid indefinitely and neither of the parties, without the consent of the other, can withdraw its consent to the stipulated until one (1) year after the stipulation is effective. Said provisions shall continue in force when a third party acquires the business of the employer. An employer who employs or permits an employee to work during the period of time for the taking of the food shall be obligated to pay for such period or fraction thereof a rate equal to one and a half hours of the rate agreed for regular hours, provided that employees entitled to payment of a rate higher than the time and a half prior to the validity of the “Labor Transformation and Flexibility Act”, will preserve the same.

[Amendments: Act 121 of June 27, 1976; Law 88 of June 22, 1962; Law 223 of July 23, 1974; Law 27 of 5 May 1976; Law 61 of June 3, 1983; Law 83-1995, Law 4-2017]

Article 12. – (29 L.P.R.A. § 284)

It shall be the duty of every employer to make, keep and keep the payroll of the persons employed by him, expressing the wages earned and the regular hours and overtime worked by each and other conditions and employment practices maintained by him . Payrolls shall be kept in accordance with the reasonable rules prescribed by the Secretary of Labor and Human Resources and shall be kept for the time they determine.

The Secretary of Labor and Human Resources, or any agent of his authorized, may examine in working hours the payroll of any employer in order to take data and reports for the statistics, studies, and investigations related to compliance with this Law.

[Amendments: Law 83-1995, Law 4-2017]

Article 13. – (29 L.P.R.A. § 285)

The provisions of this Law shall not apply to:

(a) administrators, executives and professionals, as defined by regulations of the Secretary of Labor and Human Resources;

(b) traveling agents, street vendors and external vendors, as defined by regulations of the Secretary of Labor and Human Resources;

(c) officers or organizers of workers’ unions when they act in such capacities;

(d) drivers and drivers of public and private motor vehicles working on a fee, fee or route basis;

(e) persons employed in domestic service who, however, shall be entitled to one day of rest for every six (6) consecutive days of work, in accordance with the provisions of Law 206-2016;

(f) Employees, occupations or industries exempt from the overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, according to amended;

(g) persons employed by the Government of the United States of America, including each of its three branches and its instrumentalities or public corporations;

(h) persons employed by the Government of Puerto Rico, including each of its three branches and its instrumentalities or public corporations;

(i) persons employed by municipal governments and their agencies or instrumentalities;

(j) employees covered by a collective bargaining agreement negotiated by a workers’ organization, unless the collective agreement itself establishes that the provisions of this Law shall apply to the relationship between the parties. However, all overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, shall apply.

amended;

(k) persons exempted by provision of a special law. [Amendments: Act 27 of May 5, 1976; Law 83-1995; Law 33-1996; Law 4-2017]

Article 14. – (29 L.P.R.A. § 286)

The Secretary of Labor and Human Resources shall be empowered to adopt and promulgate the regulations necessary to administer the provisions of this Act. These regulations shall be consistent with the “Fair Labor Standards Act,” approved by the Congress of the United States of America on June 25, 1938, as amended, and the regulations issued thereunder, as applicable to Puerto Rico, unless expressly provided otherwise by this Act.

Article 15. – (29 L.P.R.A. § 287)

Any employer who fails to pay the type of salary stipulated in this and for regular hours or overtime, or that allows, induces or compels an employee to waive, or to accept, or agree to waive, compensation based on a double rate of overtime wage, or not to carry the employee payrolls. wages as determined by the Secretary of Labor and Human Resources, or fails to provide the salary reports requested by the Secretary of Labor or Human Resources, or precludes the examination of said payroll by the Secretary of Labor and Human Resources or his authorized agents, or knowingly include false information in said payrolls or reports, or that violates any provision of this Act of the orders, rules or regulations issued by the Secretary of Labor and Human Resources as determined herein, or who dismiss or otherwise discriminate against any employee because he has initiated or initiated any procedure in accordance with this Law or related thereto, or that it uses any remedy, fraud, simulation or subtraction for not pay, cheat, deny or deprive any employee of the right to receive a double wage rate for overtime, shall incur a misdemeanor and, if convicted, shall be punished by a fine of not less than fifty dollars ($ 50) or imprisonment for a period of less than fifteen (15) days, or both penalties at the discretion of the court. In case of recidivism,shall be punished with a fine of one hundred ($ 100) to five hundred dollars ($ 500) or imprisonment for a term of thirty (30) to ninety (90) days, or both penalties at the discretion of the court.

Article 16. – (29 L.P.R.A. § 288)

In this Act, unless otherwise stated, the following definitions of words and phrases of the same shall be accepted.

(1) “Employee”. – means any natural person who works for an employer and receives compensation for his or her services. It does not include independent contractors as well as officers or workers’ union organizers when acting as such.

(2) “Patron”. – means any natural or legal person of any nature who hires and uses the services of an employee.

(3) “Employ”. – means to tolerate or allow to work.

(4) “Salary”. – includes salary, wages, salary, and any other form of pecuniary remuneration. It will not include that part of tips received that exceed the amount used to meet the payment of the legal minimum wage, nor the charges for services.

(5) “Tipping.” – means any gift or gratuity which it grants, directly or indirectly,

indirectly, a person who is not the employer to an employee in recognition of the services received.

(6) “Charges for services”. – means any amount of money added to an account, and required by an establishment, which is distributed in whole or in part to employees. It also includes charges negotiated between an establishment and a customer.

[Amendments: Act 11 of April 26, 1963; Law 223 of July 23, 1974; Law 27 of May 5, 1976; Law 61 of 3 June 1983; Law 83-1995; Law 4-2017]

Articles 17 – 19. – [Note: The subsequent amending laws renumbered Arts. originals of this Law]

Article 20. – (29 L.P.R.A. § 271 note)

If any clause, paragraph, article, section or part of this Act is declared unconstitutional, by a court of competent jurisdiction, said ruling shall not affect, impair or invalidate the rest of this Law, but its effect shall be limited to the clause, paragraph, article, section or part of the law that has been declared unconstitutional.

Article 21. – (29 L.P.R.A. § 2)

Law No. 49, approved on August 7, 1935, entitled “An Act to regulate the hours of work of persons employed in commercial, industrial and other lucrative businesses, and for other purposes, is hereby expressly repealed. “.

Article 22. – (29 L.P.R.A. § 271 note)

Any law or part of law that opposes the present, is hereby repealed; Provided, however, that the provisions relating to the duration of the workweek and to the payment of overtime that appear in mandatory decrees nos. 11, 16, 20 and 21, approved by the Salary Board Minimum under Law No. 8 of April 5, 1941, as amended, which would be of greater benefit to the employee, the

which shall remain in force until the corresponding provisions established in Section 8 of this law are more favorable to those established in said decrees, in which case the provisions of the law shall prevail; Article V of Mandatory Decree number 4 approved by the Minimum Wage Board under the aforementioned law, which provides a Minimum Weekly Compensation Guarantee, which is hereby modified to be an amount to the product that results in multiplying the type of regular salary per hour that the worker is receiving for forty; Law no. 73, entitled “Law regulating the work of women and children, and protecting them against dangerous occupations,” approved June 21, 1919, as amended; Act No. 230, entitled “Law to regulate the employment of minors and to provide compulsory attendance of children of Puerto Rico to public schools”, to repeal Act No. 75, adopted on June 20, 1921, as subsequently as amended, and for other purposes, approved May 12, 1942, as amended; Article 553 of the Penal Code, generally known as the “Law on the Closure of Commercial and Industrial Establishments”, as amended, and Act No. 289, adopted on April 9, 1946, as it has been or has subsequently been amended.

Article 23. – (29 L.P.R.A. § 2)

This Act, being of an urgent and necessary character, will take effect immediately after its approval.

Puerto Rico Act 20 no employees

Puerto Rico Eliminates 5 Employee Requirement

Puerto Rico has opened up its Act 20 program by eliminating the 5 employee requirement. Any US citizen can now move to Puerto Rico, set up a business under Act 20, and pay only 4% in corporate tax. By eliminating the 5 employee requirement for Act 20 businesses, Puerto Rico has opened the floodgates.

Note that this article on Puerto Rico eliminating the 5 employee requirement is based on a law change signed on July 11, 2017. For a detailed review of all the modifications, see Changes to Puerto Rico’s Act 20 and Act 22.

First, a quick review of Puerto Rico’s Act 20.  

If you move you and your business to Puerto Rico, you can exchange your US tax rate of 40% (including your state) for Puerto Rico’s Act 20 rate of 4%. To qualify, you must be moving a service business to the territory. One that can provide a service from Puerto Rico to persons and companies outside of Puerto Rico.

You’ll pay 4% tax on corporate profits earned on income generated from work done in Puerto Rico. That is to say, you pay 4% on Puerto Rico sourced income… on the earnings and profits from work performed in Puerto Rico.

4% is your corporate tax rate payable on net business income. Net income is after you pay yourself a reasonable salary. Most pay themselves $50,000 to $100,000, which is taxed at ordinary rates by Puerto Rico (not the United States). 

For this reason, Puerto Rico’s Act 20 is best for those earning $250,000 or more. If you’re netting $100,000 or less, you can use the Foreign Earned Income Exclusion to pay zero tax on your business income. The bottom line is that, the more you earn the more you save with Puerto Rico’s Act 20. For more, see Panama vs. Puerto Rico.

In order to qualify for Puerto Rico’s Act 20, you must spend 183 days a year on the island and become a resident. Moving to Puerto Rico is much easier than the FEIE which requires you spend 330 out of 365 days a year offshore, at least in the first year.

Puerto Rico Eliminates 5 Employee Requirement

When Puerto Rico’s Act 20 was first passed in 2012, it required a minimum of 3 employees. Then, in December of 2015, the minimum number of employees was increased from 3 to 5. As of July 2017, there is no employee requirement.

Remember that only Puerto Rico sourced income qualifies for the Act 20 4% tax rate. Puerto Rico sourced income is earnings and profits from work performed in Puerto Rico. Therefore, all Act 20 companies must have at least 1 employee… someone must be doing the work and generating the profits. This employee can be the business owner. 

Eliminating the 5 employee requirement opens the doors of Puerto Rico to any portable business. Even a one man affiliate marketer, or a one woman online publisher / SEO maven, can set up in PR and cut his or her taxes from 40% to 4% overnight. Grab your laptop and get your rear to Puerto Rico immediately!

New Risks of Act 20 in 2017

I should point out that eliminating the 5 employee requirement for Puerto Rico’s Act 20 can lead to abuse. Someone will try to work from the US and hire a secretary in Puerto Rico for $10 an hour as his 1 employee.

His Act 20 company might be approved, but he’ll get crushed by the IRS if and when he’s audited Again, for the third time, Puerto Rico sourced income is earnings and profits from work done in Puerto Rico. Likewise, US source income is earnings and profits from work performed in the United States.

In the above hypothetical, 99% of the effort to create the income will be done in the US with a very small amount attributable to the employee in Puerto Rico. The IRS is sure to look at these arrangements very closely and assess all kinds of interest and penalties.

Remember that, when you move to Puerto Rico, you must follow the tax laws of Puerto Rico and the United States.

For this reason, I suggest any business owner with less than 5 employees in Puerto Rico must move to the island. You should spend 183 days in the Territory and become the employee of your Puerto Rico Act 20 company.

If you move you and your business to Puerto Rico, it’s fine if you’re the only employee. If all work is done by you, a resident of Puerto Rico, all income is Act 20 eligible. If you live in the United States, and operate a division in Puerto Rico, a much more in depth analysis must be undertaken.

Getting Money Out of Puerto Rico Act 20 Company

Dividends from a Puerto Rico Act 20 company are tax free when paid to a PR resident. This means you’ll pay zero tax on these distributions. You’ll pay ordinary rates on your salary, 4% on your corporate profits, and zero on dividends from your Act 20 company.

And we’re not talking about tax deferral here. Puerto Rico’s Act 20 gets you tax free distributions. You’ll never pay US tax on this income. Even when you shut down the business and move back to the US, you pay zero to Uncle Sam.

Conclusion

I hope you’ve found this article on how Puerto Rico opened up its Act 20 program by eliminating the 5 employee requirement to be helpful. For more information on setting up a business in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Changes to Puerto Rico’s Act 20 and Act 22

Changes to Puerto Rico’s Act 20 and Act 22

On July 11, 2017, major changes to Puerto Rico’s Act 20 and 22 were approved. These changes make it much easier to qualify for Puerto Rico’s Act 20 tax holidays. Here’s everything you need to know about the changes to Puerto Rico’s Act 20 and Act 22.

As of July 2017, Puerto Rico has a tax deal that can’t be matched by any offshore jurisdiction. All the other tax havens might as well just close down…. Puerto Rico just hit it out of the park… did the best set ever and dropped the mic. Offshore tax havens are done.

The US territory of Puerto Rico is working hard to bring new business and high net worth persons to the island. As a territory, Puerto Rico can offer tax deals to US citizens that can’t be matched by any foreign country.  

This is because US Tax Code Section 933 excludes Puerto Rico sourced income from US tax. When a US citizen moves to a foreign country, we pay US Federal tax on our business profits (less the FEIE) and US capital gains tax on our investment profits. 

Residents of Puerto Rico don’t pay US Federal tax on their Puerto Rico sourced income. They pay only Puerto Rico tax on these profits and capital gains. And Puerto Rico is free to charge whatever tax rate they want, which is why Act 20 and Act 22 are possible.

To qualify for Puerto Rico’s Act 20 and 22 tax holidays, you must be a resident of Puerto Rico and spend a minimum of 183 days a year on the island.

Puerto Rico’s Act 22 gives you a zero percent tax rate on capital gains on assets acquired after you move to Puerto Rico.

Puerto Rico’s Act 20 gives you a 4% corporate tax rate on any Puerto Rico sourced business income earned inside an Act 20 company. Puerto Rico sourced business income is earnings and profits from work performed in the territory. 

This post will focus on changes to the law which were approved on July 11, 2017. You might also take a read through my article comparing Puerto Rico’s Act 20 with Panama (or any offshore jurisdiction). Just remember that this article does not include the changes described below.

For more on Act 20, see: Puerto Rico Eliminates 5 Employee Requirement

The primary changes to Puerto Rico’s Act 20 and Act 22 are:

  1. Adding eligible services of
    1. Hospital services and laboratories including medical tourism and telemedicine services
    2. Trading companies with no less than 80% of business in PR exporting business.This means Act 20 is no longer limited to online and service businesses. 
  2. No minimum number of employees required for most Act 20 businesses. Some exceptions will apply based on regulations yet to be written by the Secretary of DDEC. It seems these regs will focus on call centers and telemedicine. We believe all service and tech businesses can operate with only one employee (the business owner).
  3. 30% of doctors at medical tourism and telemedicine facilities should be Puerto Rican residents.
  4. Annual filings and reports shall be be required.

Amendments to Act 22 include an annual donation of $5,000.00 per decree holder to a recognized Puerto Rican non profit organization.

Here is a loose translation of Puerto Rico’s Act 43, approved July 11, 2017, which modifies Puerto Rico’s Act 20 and 22. This is not meant as a legal translation and you should consult an expert before acting upon this summary.

We translated the full memo because I love the way it’s written. The current government is the blue party, which is the party that was in power in 2012. They couldn’t help but take a shot at the red party which was in power in 2015.

As you read this, you’ll see that the focus of Puerto Rico’s Act 20 is to bring business and employment to an island. You might also want to take a read through my article, How to benefit from Puerto Rico’s bankruptcy.

I’ll be happy to assist you to set up a business in Puerto Rico under Act 20 or qualify for Act 22 to eliminate capital gains tax on assets acquired after you become a resident and receive your decree. Please contact us at info@premieroffshore.com or call us at (619) 550-2743 with any questions.

Explanatory Memorandum on Changes to Puerto Rico’s Act 20 and Act 22

Beginning in the 1970s, the economic development of Puerto Rico has focused on the promotion of foreign industries through granting Federal and state tax incentives. Since that time, the Puerto Rican economy has fallen upon hard times, as federal incentives were removed, over which the local government of Puerto Rico had no control resulting in conflict with the strengthening and development of new local companies.

The deterioration of the Puerto Rican economy became more defined when the government incurred expenses that exceeded over receivable income, which in turn led to more taxes and high fees for local businesses, as well as the whole island, later lead to a reduction in local economic activity. With the exception of fiscal year 2012, since fiscal year 2007, there has been an economic contraction of fifteen percent (15%). Since then, the Gross National Product of the Commonwealth of Puerto Rico has been in negative numbers.

Puerto Rico looks to become more competitive  in achieving their economic development goals in a globalized and interconnected economy. According to the Global Competitiveness Report 2016-2017 World Economic Forum, competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of an economy, which in turn, marks the level of prosperity that a country can attain.

It is imperative to revert, as a matter of urgency, the negative of our economy and return to the path of prosperity. For this, we need to make a paradigmatic change in the way we conceive the function of our public institutions and our model of development economic. Precisely, the Plan for Puerto Rico that the People endorsed on November 2016, includes measures to achieve fiscal responsibility and economical development of the island. This administration has been active and, in less than 50 days, has passed more laws than on any previous occasion. At the beginning of a four-year term, more than a dozen laws that seek to promote development of our economy and to tackle the fiscal crisis. See Laws Number 1-11 of 2017.

In order to achieve the development and growth of our economy, during the administration of  ex-governor, Hon. Luis Fortuño, the Government of Puerto Rico identified the need to encourage the export of services. He approved Law No. 20-2012 (Act 20) to find ways to encourage the development of local companies, also for those that want to move to the Island to expand their capacity to export services and help insert Puerto Rico, in better conditions, into the global economy.

A study carried out by the company “Estudios Técnicos”, published in December 2015, revealed that by November of that year 360 decrees had been issued under Act No. 20-2012; That companies operating under the law created about 3,350 direct jobs, 2,160 indirect jobs and more than 1,500 achieved, for a total of 7,000. This shows that Act 20 has been essential in fostering the economic development of Puerto Rico.

In fact, this Law was endorsed by the Garcia Padilla Administration, through former secretary of Economic Development and Commerce, Alberto Bacó Bagué, who became its main promoter. He stated that Law No. 20-2012 has been an economic stimulus tool that has generated thousands of opportunities for well-paid jobs and has avoided a greater exodus of professional Puerto Ricans.

However, during the last four years, Act No. 20-2012 was amended by the past administration to establish restrictions which, instead of stimulating the service industry, discouraged growth. It is time to put aside “not my problem” politics and take into our hands the course of economic development started by the Fortuño Administration, which was depleted by the lack of interest of García Padilla Administration.

Certainly, Puerto Rico’s greatest asset is its human resource. We count with a high level of quality of professionals, technicians, advisers, consultants and service providers, who have the talent to offer from Puerto Rico their services to other jurisdictions with the greatest guarantee of success. It is a commitment of this Administration to help push our workers forward and all those that see Puerto Rico as an economic investment destination.

In order to promote the export of services, the public policy that Puerto Rico must be focused on developing the growth of the services sector in its economy. At the same time, these incentives should promote sustainable economic development and creation of employment in the island. We have a bicultural and bilingual population and a strategic relationship that serves as a bridge between Latin America and the continental United States.

To achieve the objectives described here, this Administration believes it necessary to promote amendments to the “Law to Encourage the Export of Services.” For this reason, it is included as part of the services eligible under Law No. 20-2012, medical tourism services and telemedicine facilities. This broadens the range of eligible services to allow foreign or local investment to have an incentive to develop in Puerto Rico an economic component predicated on the export of medical services. This, in turn, together with the medical incentives approved under Act No. 14-2017, will help our doctors to expand their services in this area, and decide to remain in Puerto Rico.

It is a principle of this administration, included in the Plan for Puerto Rico, that the role of government must be based on encouraging and facilitating economic development, developing the financial capital to attract service companies and large institutions to Puerto Rico, and to encourage local companies to export services outside the island.

This commitment contemplates the implementation of a development model based on the global principles of competitiveness and sustainability that allows the private sector to be a protagonist and leader of our economic development. This Government is committed to eliminate any obstacle so that Puerto Rico can compete favorably with other jurisdictions.

Amendments to Act 20: articles 3, 10, 12 and 13:

Section 1.- Amendment are made to subsection (k) Article 3 of Act 20-2012 as follows:

Article 3: Definitions;

(k) Eligible services include the following:
(xvi) Hospital services and laboratories including medical tourism and telemedicine facilities;
(xxi) Companies dedicated to international trading (known as trading companies) – Trading companies will mean any entity that produces no less than 80% of gross income from the following:
(a) sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
(b) from commissions derived from sales of goods for consumption and use outside of Puerto Rico; stipulating that none of the income derived from selling and reselling of products be used or consumed in Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree;and
(c) Other eligible exportation services as described under this law

Section 2.- Eliminating subsection (a), amending subsection (b) and renumbering as (a) as well as renumbering subsections (c) to (f)  and (b) to (e) of Article 10 of Act 20-2012 as follows:

Article 10: Procedures-
(a) Ordinary procedure:
(i) Tax Decree applications. –  

Any person that has established or proposes to establish an eligible business in Puerto Rico can apply for all the benefits provided by law through a sworn application before the Exemption Office.

The secretary will establish through administrative orders or regulation the criteria to be used in the evaluation process of applications, including as part of the evaluation criteria benefits that the business will generate to Puerto Rico’s economic development.

Criteria includes but is not limited to:

(i) job creation;

(ii) investment of capital;

(iii) direct or indirect contributions to the economy.

The secretary may require in the decree, that if a business requires employees or independent contractors to operate, a certain number of those employees must be Puerto Rican residents or performed by local entities in the industry or business in Puerto Rico.

However, in case of telemedicine services, the Secretary will require that 30% of doctors contracted must be Puerto Rican residents. If there are no qualified professionals to provide such services, then doctors can be outsourced from any other jurisdiction. All businesses that have an approved Act 20 Tax Decree or has submitted applications pending approval, that had direct employees under contract, cannot dismiss employment contracts hereafter of the amendments established under this act which eliminates the employee requirement.

Section 3.- Amendments for subsection (f) of Article 12 of Act 20-2012 as follow:

Article 12. – Periodical reports to Governor and Legislative Assembly.-

(f) The Secretary, along with the support of the Industrial Development Office and Treasury Department will establish an electronic database that will provide information on the businesses with approved tax decrees and will allow access to pertinent government agencies to review information, with the precautions of safeguarding confidentiality of all information provided.

The information will be used for compliance purposes for all businesses that have been granted tax decree and will be used to develop an intelligence promotional program by Department of Economic Development to identify and help eligible businesses that are in precarious situations.

Section 4.- Amendment to subsection (d) in Article 14 of Act 20 are as follows:

Article 13. –  Reports required for exempt business and stockholders or shareholders:

(d) All eligible businesses which has been granted an Act 20 tax decree will file an annual reports at the exemption office, with copies to the Secretary, Treasury Department Secretary and Executive Director, no more than 30 days after income tax returns have been filed. This report will include an authenticated statement from either the President, administrator or authorized agent, that business has complied with all terms and conditions provided in tax decree. The report will include, but is not limited to the following areas: average employment, services provided as per decree and any other information that is required by regulations. This report will include filing fee established under regulation and payable to Secretary of Treasury. Information provided in this report will be used for statistical purposes and economic study. The Secretary of Economic Development Department will be auditing every two (2) years compliance of terms and conditions stipulated and granted under tax decree.

Act 45 Approved July 11, 2017

Amendments to Act 22: articles 3, 5, and 6:

Section 1.- Subsection (a) of Article 3 is eliminated and substituted by new subsection (a) in the Act 22 as follows:

Article 3. – Procedures.

a) In order to benefit from incentives provided by law, all individual resident investor that requests an Act 22 tax decree will be required to file a sworn application before the tax exemption office.

At the time of filing, the Director will collect the rights for the corresponding procedure that is provided by regulation. They will be paid in the manner and manner established by the Secretary. After the Exemption Office issues a favorable recommendation, the Secretary will issue a tax exemption decree, which will detail all the tax treatment provided in this Law. Decrees under this Act will be considered a contract between the concessionaire and the Government of Puerto Rico, and said contract will be considered law between the parties. The decree shall be effective during the period of effectiveness of the benefits granted in this Law, but never after December 31, 2035, unless prior to the expiration of said period the decree is revoked pursuant to section (b) of this Article. The decree shall not be transferable.

Section 2.- Subsection (a) of Article 5 of Law 22-2012, is amended, to read as follows:

“Article 5.- Special Contribution to Individual Resident Investor on Net Capital Gain.
(A) Assessments before becoming a resident of Puerto Rico.- The portion of net long-term capital gain generated by a Resident Individual Investor that is attributable to any valuation that had securities owned by them before becoming a resident of Puerto Rico, to be recognized after ten (10) years of becoming a resident of Puerto Rico, and before January 1, 2036, Shall be subject to the payment of a five percent (5%) contribution, in lieu of any other contributions imposed by the Code, and shall not be subject to the alternate basic tax provided by Subtitle A of the Code. If such appreciation is recognized at any other time, net long-term capital gain in relation to such securities will be subject to the payment of income taxes in accordance with the contributory treatment provided in the Code. The amount of this net long-term capital gain will be limited to the portion of the gain that relates to the appreciation of the securities while the Resident Investor Individual lived outside Puerto Rico. Provided that, for taxable years beginning after December 31, 2016, said capital gain shall be considered income from sources outside Puerto Rico for purposes of the income tax provided in the Code.

Section 3.- Article 6 of Law 22-2012, as amended, is hereby amended to read as follows:

“Article 6.- Reports Required to the Resident Investor Individual. – Any Resident Investor Individual who has a decree granted under this Law, will file an annual report in the Exemption Office, with a copy to the Secretary of the Treasury, thirty (30) days after filing the income tax return before the Department of the Treasury, including any extension. The Director of the Exemption Office may grant an extension of thirty (30) days in cases where it is requested in writing before the expiration of the period for filing the Report, provided that there is just cause for it and expressed in the request. In the case of the Report for the first year as a bona fide resident of Puerto Rico with a tax exemption decree under this Law, said report shall contain a list of data that reflect compliance with the conditions established in the decree for the immediately preceding taxable year At the date of filing, including, in the case of Resident Investing Individuals who were previously residents of other jurisdictions in the United States, evidence of filing Form 8898 with the United States Internal Revenue Service (IRS), or its equivalent in the case of Resident Investing Individuals who were previously residents of any foreign jurisdiction, giving notice of their intention to become a bona fide resident of Puerto Rico and, together with the reports to be filed annually, submitting evidence Of having made an annual contribution of at least five thousand dollars ($ 5,000.00) to non-profit entities operating in Puerto Rico and duly certified under Section 1101.01 (a) (2) of the Internal Revenue Code of Puerto Rico 2011, as amended, that is not controlled by the same person, as well as any other information that may be required by regulation, including the payment of annual fees. The rights will be paid in the form established by the Secretary. The information provided in this annual report will be used for statistical purposes and economic studies. Likewise, the Exemption Office must carry out a compliance audit every two (2) years with respect to the terms and conditions of the decree granted under this Law. “

Click here to read the law in Spanish (downloadable PDF on the government website)

tax free as an affiliate marketer

How to live tax free as an affiliate marketer in 5 steps

Here’s how to live and work as an affiliate marketer and pay zero in US taxes. If you market other people’s products online, you can easily structure your business to be tax free and fully compliant with US laws. If you’re living and working outside of the United States, this post on how to live tax free as an affiliate marketer in 5 steps is a must read.

This article is specifically tailored to affiliate marketers – those who market other people’s products or services online. You might use PPC, PPA, SEO, or whatever… the point is that you are marketing other people’s products and not selling a physical good into the United States.

If you’re white labeling products, or selling your own products online, the tax analysis is much more complex. If you’re selling other people’s products, the tax picture is simple. It’s easy to live tax free as an affiliate marketer if you know the rules.

And these same techniques can be used by anyone selling a service online. At the end of the day, affiliate marketing is categorized as a service by the IRS. You’re performing the service of marketing. And services are taxable wherever the work is performed. So, affiliate marketing performed outside of the United States is foreign source income.

The same goes for any other service business or business where labor / work is what generates the money. If you’re writing blog posts, selling subscriptions, putting on conferences outside of the US, or marketing other people’s products or services, you’re in the service business.

The difference with a physical product sold into the US market is that products create some level of US source income. Some value must be assigned to the product itself, and that value is taxable in the United States no matter where the work is done to create, pack, ship, support, and market the product.

I should also point out that I’m focused on internet businesses and affiliate marketing in this article. If you are providing a professional service, one that requires you to go to the client’s location to work, more complex rules apply. For more on professional service income, see How to Eliminate Subpart F Foreign Base Company Service Income.

With all of that backstory, here’s how to live tax free as an affiliate marketer in 5 steps.

  1. Setup an offshore corporation and run your business through that entity,
  2. Open an offshore bank account and have your clients pay into that account,
  3. If you must have a US corporation and account, move your income out of the US and over to the offshore company each month or quarter,
  4. Live outside of the United States and qualify for the Foreign Earned Income Exclusion, and
  5. Hold profits in excess of the FEIE in the offshore corporation as retained earnings.

The first step in living tax free as an affiliate marketer is to setup your offshore company. The most efficient structure is usually a corporation formed in a zero tax jurisdiction. We’ve found Belize, Nevis, Cook Islands and Panama are the best options for internet businesses.

If you want an added layer of asset protection, you can setup an offshore trust or Panama foundation as the holding company. This will provide maximum protection from future civil creditors. For more, see: Panama Foundation vs Cook Island Trust.

One word of caution on Panama. The officers and directors of Panama corporations are public record and listed in a searchable database. The same goes for founders (settlors) and council members (trustees) of a Panama foundation.

Affiliate marketers often want privacy to minimize the probability of a lawsuit. So, you might add an LLC from Belize or Nevis to the mix. You are the owner of the LLC and the LLC is the officer, director, or founder of your structure. In this way, only you and your banker know who the ultimate beneficial owner of the business is. For more information see: The Bearer Share Company Hack.

The second step is to open an offshore bank account (and possibly a merchant account) for your internet business. Your clients or affiliate networks should be paying by wire transfer into this account.

Clients often look to St. Vincent, Belize, Cook Islands or Panama for this account. The most popular offshore jurisdiction with affiliate networks are Panama and Hong Kong. The problem with this is that both of these jurisdictions now require you have legal residency before opening a business bank account.

If you can’t get paid into an offshore bank account, then you’ll need a US corporation. You want this company to bill the customer and then transfer the profit to your offshore account. The US company bills the client and you bill the US company such that it breaks even at the end of the year.

Note that this is only permitted if you’re living abroad, qualify for the Foreign Earned Income Exclusion, and have no employees or other business ties to the United States. Basically, all profits must be foreign sourced and not taxable to your US corporation.

That’s all pretty simple. The next part is the hard one… the one that takes real commitment if you want to keep Uncle Sam out of your pocket and live tax free as an affiliate marketer. You must live abroad and qualify for the Foreign Earned Income Exclusion (FEIE).

In order to qualify for the FEIE, you must be a legal resident of another country for a calendar year or out of the United States for 330 days during any 12 month period. The legal residency option is referred to as the residency test and the 330 days option is referred to as the physical presence test.

If you qualify for the FEIE, you can exclude up to $102,100 in salary from your internet business in 2017. That is to say, you can take a salary of up to this amount from your offshore corporation and pay zero Federal income tax on the amount. If both a husband and wife are working in the business, you can take out just over $200,000 tax free.

The physical presence test is easy enough to understand. Simply be out of the United States for 330 out of 365 days and you’re golden.

The problem with this test is that everyone tries to push the boundaries. They plan to spend exactly 36 days in the United States, but something always goes wrong. Maybe a delayed flight, extra business meeting, or family emergency. Many people who attempt to use the FEIE physical presence test get it wrong or incorrectly report their days, which is why the IRS loves to audit Americans who claim the FEIE using the 330 day rule.

If you do lose the Exclusion, you lose it entirely. If you spend 37 days in the US because a flight was delayed, you loose the entire exclusion for that tax year. This means that 100% of your income earned abroad will be taxable in the US. One missed flight could cost you $40,000… if it’s a husband and wife both living and working abroad, the bill might be $80,000.

The residency test is easier to qualify for but harder to setup. You first need to become a legal resident in the country you want to call your home base. Then you need to file taxes in that country, move there with the intention of making it your home for the foreseeable future, and break as many ties with the US as possible.

The physical presence test is fact based while the residency test looks to your intentions and your legal status in a country.  But, if you can jump through all these hoops, you can spend 3 or 4 months a year in the United States (never more than 183 days a year), and stop worrying about losing the exclusion.

In order to use the residency test, you must become a legal resident of your home base country. Finding a country that will grant you legal residency can be hard. Finding a tax haven that will give you residency is darned near impossible these days.

For example, Hong Kong requires an investment in a business of about $850,000. To become a resident of Singapore, you must invest $2.5 million in a business. BVI expects you to setup a business and issues only 25 residency visas a year.

The lowest cost tax haven is Panama. If you’re from a top 50 country, you can get residency in Panama by investing in their reforestation program. Invest $20,000 in a licensed teak plantation and you’ll become a resident of Panama. For more information, see: Best Panama Residency by Investment Program.

The final step is living tax free as an affiliate marketer is to plan for your success. If you earn more than $100,000 (single) to $200,000 (joint) in the business, you need to hold the excess in the corporation. If you take a salary in excess of the FEIE, you will pay US tax on the amount over the exclusion. If you leave that money in the corporation, you only pay US tax on it when you take it out as a distribution.

If you’re business will net $500,000+, and you can benefit from 5 employees, you might think about setting up in Puerto Rico. This island has a unique tax deal which is basically the inverse of the FEIE. For more see: Panama vs. Puerto Rico, which is right for my business.

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

I hope you’ve found this article on how to live tax free as an affiliate marketer to be helpful. For assistance in forming the offshore company and planning the business please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to set up the structure business and keep it in compliance.

Foreign Base Company Service Income

How to Eliminate Subpart F Foreign Base Company Service Income

In this article I’ll explain how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation.  Subpart F issues are the most common tax planning hurdles to overcome when you have a division of a US company operating abroad. Subpart F applies to income of a Controlled Foreign Corporation (CFC).

This article is focused on service income of a foreign division. Service income is earnings and profits generated by work done in a foreign country or a US territory. Service income is not profits from the sale of a physical good into the United States market.

This analysis applies to a business setup in a low tax country, such as Panama, or in the US territory of Puerto Rico under Act 20. For a basic summary of offshore and Puerto Rico, see: Panama vs. Puerto Rico, which is right for your business?

Sub F foreign base company service income is defined under Section 954(e) of the Internal Revenue Code as income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that are performed for, or on behalf of, a related person, and are performed outside the country under the laws of which the CFC is incorporated. Under this definition, income earned by a CFC will constitute foreign base company services income only if it satisfies all three of the following tests:

  1. The income is derived in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person or company; and
  3. The services are performed outside of the country in which the CFC is organized (IRC Section 954(e)(1) and Treasury Reg 1954-4(a)).

Thus, where a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income.”

Income that is deemed to be foreign base company services income is not eligible to be retained offshore tax deferred and not eligible to be tax free in Puerto Rico under Act 20. That is to say, Subpart F income must be included in the parent company’s US tax return and is taxable in the United States as earned.

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

There is no US tax benefit when Sub F income, including foreign base company services income, is generated in an offshore or Puerto Rican corporation. Thus, all service businesses must strive to eliminate Sub F income and must be prepared to deal with the issue in an audit.

The easiest way to avoid Sub F base company service income issues is to ensure that the services are performed where your offshore business is incorporated. This means that your business should be operated from a low cost and zero tax jurisdiction such as Panama or Puerto Rico.

Where US businesses often run into problems is in setting up a Cayman Islands corporation (in a high cost offshore jurisdiction where they won’t have any employees) and then hiring independent contractors in Latin America and India. You should be hiring employees and building a real division offshore… not just using a shell company to manage independent contractors.

I see the same issue when US companies set up divisions in low cost but high tax countries like Mexico. The Mexican corporate tax rate is 28.5% compared to the US rate of 35%, so not much savings there. Also, Mexico taxes the worldwide income of its corporations.

So, companies incorporate in Panama (which taxes local sourced income but not foreign sourced profits) and put the employees in Mexico, hoping to get the best of both worlds.

If your employees are providing a service from Mexico, and the business operates through a Panama corporation, you’re opening yourself up to Sup F foreign base company service income issues.

The other way to avoid Sub F foreign base company service income issues is for the offshore corporation to contract directly with the customer. The foreign company should contract with the customer and the customer should be paying the foreign company, not the US parent.

Basically, if the US parent is obligated to perform the services which are performed by the CFC, the income earned is attributable to the US company. This can be avoided by having the customer contract directly with the client such that the parent is not responsible for the service.

Also, the “related party” rules can apply if the foreign division receives “substantial assistance” from the US parent. To avoid this part of the test, the foreign division should be operating independently such that the work, as well as the mind and management of the business, is performed in the offshore jurisdiction (the country of incorporation). IRC Section 954(e)(1) and Treasury Reg 1.954-4(a). See also IRC Notice 2007-13.

When it comes to avoiding Subpart F of the US tax code, the US territory of Puerto Rico can provide significantly more cover to a CFC than any offshore jurisdiction. A corporation in Puerto Rico is a US entity for contract purposes and can open a bank account anywhere in the United States.

That is to say, a corporation from Puerto Rico can open a bank account at Wells Fargo in California, Bank of America in New York, or wherever it’s owners have a relationship. While an offshore company can only bank outside of the United States, a Puerto Rican company can bank where it likes.

These facts make doing business through a Puerto Rican company much easier than a foreign entity. This is especially true in high volume low dollar transactions. No one is going to send an international wire for a $200 product.

I hope you’ve found this article on how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation helpful. For more information, or for assistance in planning or forming a division in Puerto Rico or offshore, please contact me at info@premieroffshore.com

tax free income the legal way

Pay Zero Income Tax the Legal Way

The internet is filled with Idiots selling scam programs that will teach you how to pay zero income tax. They’re all full of BS and infuriate those of us who try to write about legal ways to protect your assets and minimize your income taxes. In this article I’ll talk about the only legal ways to pay zero income tax on your business and capital gains offshore.

This post is meant for US citizens or green card holders willing to do what it takes to reduce or eliminate their US taxes.

I’ll tell you upfront that paying zero income tax the legal way is VERY difficult. It takes a lot of work and commitment on your part. There are no tricks or easy solutions. To pay zero income tax requires moving you and your business out of your comfort zone… not necessarily out of the United States… but, I’ll get to that in a bit.

And I’m not talking about retirement accounts or other US methods for reducing or deferring US tax. I’ll assume you’re making too much money to benefit from those accounts or that you already have your IRA and 401-k plans setup.

As I said, the web is filled with scam artists pitching all kinds of ways avoid US taxes. Tax lawyers call these guys tax protestors (and morons) and they refer to themselves as sovereign citizens. They’re using straw man companies and sham trusts to claim they earn no “income.”

I won’t get into these bogus arguments because they’ve been debunked time and time again. At this point, tax protestors are just a sad commentary on how gullible some people are. These cases are so cut and dry that lawyers can be sanctioned for wasting the court’s time.

Another issue to watch out for when searching the web are claims that you can operate tax free in a foreign country. These are true statements by providers in the country where you will incorporate… but meaningless to US citizens.

For example, you call a lawyer in Panama to set up a corporation there. You ask them if your structure will pay any tax… and they say no, it does not. It’s totally tax free! They’re talking about the tax laws of Panama. That’s great but, as a US citizen, you’re focused on US tax laws because that’s your real risk.

The provider in Panama is not trying to mislead you. He’s simply telling you the law of his country. He’s an expert in Panamanian law, thus his comments are limited to that country. This is why you always need a quarterback in the US who can show you how US tax laws interact with those of the foreign jurisdictions you’re setting up in.

There are basically four legal ways to eliminate US tax by going offshore. They are:

  1. Offshore captive insurance,
  2. Offshore life insurance,
  3. Set up a division of your business offshore, and
  4. Move to Puerto Rico to eliminate capital gains tax.

Offshore Captive Insurance Company

An offshore captive insurance company allows you to provide insurance to your active business. You form an offshore captive insurance company in Bermuda, Cayman or Belize, and insure against risks not covered by your traditional policies.

As of 2017, the US IRS will allow you to deduct up to $2.2 million of insurance premiums paid to an offshore captive insurance company owned by you. For previous years, the amount was $1.2 million.

By insuring against risks with a low probability of occurring, you effectively move $2.2 million of pre-tax income off of your corporate books in the US and onto an offshore captive insurance company. These transfers then accumulate offshore tax deferred until you close down the structure.

For more, see: The Mini Offshore Captive Insurance Company. This article was written before the deductible amount was increased from $1.2 to $2.2 million.

Offshore Life Insurance

Offshore life insurance, typically offshore private placement life insurance basically allows you to create an “offshore ROTH” without any of the contribution limits or distribution requirements.

You can put as much after tax money into an offshore life policy as you like and it will remain in the plan tax deferred. That is to say, you will pay zero tax on capital gains inside the life policy so long as the plan is active.

If you decide to shut it down and take a distribution, you will pay US tax on the increase in value. If you leave the policy in place until your death, the value will pass to your heirs tax free. Neither you nor they will ever pay US tax on the gains because of the step-up in basis they receive.

You also have the choice of borrowing against the policy. If you need access to the cash, you can take out a loan.

The minimum investment for these offshore life policies is usually between $1.2 to $2.5 million depending on the provider and other factors. For more, see: Benefits of Private Placement Life Insurance.

Offshore Business

If you move you and your business offshore, you can earn up to $200,000 a year tax free. If you move a division of your business offshore, you can get tax deferral on any foreign sourced profits that business generates.

If you move abroad and qualify for the Foreign Earned Income Exclusion, you can earn $102,100 per year free of Federal income tax from your offshore business. If a husband and wife are both working in the business, and both qualify for the Exclusion, you can take out over $200,000 combined.

To qualify for the Exclusion, you need to 1) be a resident of a foreign country and out of the US for about 5 months a year, or 2) out of the US for 330 out of 365 days. It’s much easier to qualify for the FEIE as a resident, so I strongly recommend you consider one of the easy and low cost second residency programs.

For example, you can become a resident of Panama with an investment of $20,000 and Nicaragua for $35,000. Panama is the easiest because this one doesn’t have a physical presence requirement. For more, see: Best Panama Residency by Investment Program.

If you’re not ready to move you and your family offshore, but can setup a division of your business offshore, then you can defer US tax on income attributable to that division.

Assuming your offshore team can operate independently, income they generate should be eligible to be held in the offshore corporation tax deferred. When you take it out as a dividend, either personally or as a transfer to the parent company in the US, you will pay US tax. For more, see: Step by Step Guide to Taking Your Business Offshore

Move to Puerto Rico

Even if you go offshore, you’re still going to pay US tax on your capital gains. So long as you hold a US passport, the IRS wants it’s cut of your investment profits. The only exceptions are investments inside a US compliant life insurance policy (described above) and capital gains for residents of Puerto Rico.

When an American moves to a foreign country, they’re subject to US Federal Income Tax laws. All US citizens and green card holders must pay unto the IRS.

The only individuals exempted from this rule are residents of the US territory of Puerto Rico. US Tax Code Section 933 excludes residents of Puerto Rico from US Federal tax laws.  This means that Puerto Rico is free to create it’s own tax system, which it has done.

If you set up a service business in Puerto Rico, one with at least 5 employees on the island, you can qualify for a 4% tax rate on your Puerto Rico sourced income. To see how this compares to the FEIE, see: Panama vs 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

Even better, if you move to Puerto Rico, spend a minimum of 183 days a year on the island, and otherwise qualify for their Act 22, you’ll pay zero tax on your capital gains. That’s right, without any of the costs or limitations associated with a private placement life insurance policy, those willing to live in an island paradise can pay zero income tax on their capital gains.

For more on how to pay zero tax in Puerto Rico, see: How to stop paying capital gains tax.

Conclusion

I hope you’ve found this article on how to pay zero income tax legally to be helpful. For more information, and a consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to structure your affairs offshore in a tax compliant manner.

Foreign Base Company Income

Foreign Base Company Income

When a foreign company is owned by a US person or persons, it’s a Controlled Foreign Corporation (CFC) for US tax purposes. Even if a CFC is operated abroad, some types of income will be taxable in the US as earned. The most common category of taxable income in a CFC is Foreign Base Company Income.

A company with Foreign Base Company Income is owned by “US persons” if residents, green card holders, or citizens of the United States own more than 50% of the company. US persons also includes domestic partnerships, domestic corporations, and certain estates and trusts (IRC § 951).

For purposes of determining who is a US shareholder and CFC status, stock owned directly, indirectly, and constructively is taken into account (IRC § 957). These are called the “look through” rules and prevent you from avoiding CFC status by giving shares to family or putting them in offshore structures and trusts.

Being a CFC means that your foreign company needs to consider Subpart F of the US tax code. As a result, certain types of income of this corporation may be taxable as earned in the United States. Conversely, most income that is not Subpart F income can be retained tax deferred in the corporation.

The most common type of Subpart F income is referred to as Foreign Base Company Income. This category includes 4 subcategories:

  1. Foreign personal holding company income;
  2. Foreign Base company sales income;
  3. Foreign base company service income;
  4. Foreign base company oil-related income.

Foreign base company taxable income consists of the sum of these 4 types of profits earned in a foreign corporation which is owned or controlled by US persons.

I will consider foreign personal holding company income and foreign base company services income here, as those are the categories relevant to my clients. For sales income, you might review IRC § 954(a)(2). For oil-related income, see IRC § 954(a)(5) or contact Secretary of State Rex Tillerson, ℅ US State Department.

Foreign Personal Holding Company Income

Foreign personal holding company income is basically your net passive income earned in a CFC. It’s “net” after foreign taxes paid (subject to treaties), your basis, and allowed expenses. Foreign personal holding company income typically includes the following:

  1. Dividends, interest, royalties, rents, and annuities;
  2. Net gains from certain property transactions;
  3. Net gains from certain commodities transactions;
  4. Certain foreign currency gains;
  5. Income equivalent to interest;
  6. Income from notional principal contracts;
  7. Certain payments in lieu of dividends; and
  8. Amounts received under certain personal service contracts.

The  purpose of the personal holding company income rules as to prevent US persons from deferring tax on passive income on portfolio type investments. An active business can defer foreign source income, but an individual can’t typically structure their passive investments offshore and receive the same benefit.

Foreign Base Company Service Income

Foreign base company service rules target service income earned abroad from related companies in the United States. This is usually income earned from the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or other services.

Income earned by a CFC is considered foreign base company service income only if it meets all three of the following criteria:

  1. The income is earned in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person; and
  3. The services are performed outside of the country in which the CFC is incorporated.

This all means that, when a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income” that may be currently included in its US shareholder’s gross income under Section 951.

Services will be considered performed wherever the worker performs their duties. If you’re a consultant flying from country to country performing a technical task, you probably have foreign base company service income.

Likewise, if you’re a technical professional working in Mexico and operating your business through a Panama corporation to save on Mexican taxes, you probably have foreign base company service income issues.

The solution to this for those who do not travel is to incorporate in the country where you’re working. If you want the benefits of a low tax country such as Panama, you need to be living in and working from Panama.

If you do travel, or don’t wish to incorporate in your country of operation, then a foreign corporation owned by US persons may only provide services to unrelated persons. That is, the company should be performing services for customers on behalf of itself and enter into contracts with those customers directly, not through a related party.

As stated above, only services performed for related parties, and services performed outside of your country of incorporation, generates foreign base company service income. Services are performed for or on behalf of a related party in the following situations:

  1. The related person pays the controlled foreign corporation for the services;
  2. The related person is or was obligated to perform the services performed by the controlled foreign corporation,
  3. The performance of the services that were performed by the controlled foreign corporation was a condition or material term of a sale of property by a related person, or
  4. The related person contributed “substantial assistance” in the performance of the services by the controlled foreign corporation.

If you wish to retain earnings offshore, you must avoid Subpart F, the foreign base company service income and foreign personal holding company issues. The key to a successful offshore plan is to maximize tax deferral in a compliant manner.

I will end by pointing out that foreign base company service income issues are not a concern for small businesses, only those looking to hold retained income offshore. If you’re a small business owner, you live and work abroad, net $100,000 or less, and qualify for the Foreign Earned Income Exclusion, then you don’t need to worry about Base Company isuses.

This is because a small business owner can take out up to $102,100 as salary tax free using the Foreign Earned Income Exclusion. You never want to retain earnings when you can distribute them as earned tax free using the FEIE.

I hope this article on foreign base company income has been helpful. For more information on structuring an active business abroad, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

offshore bitcoin license

Low Cost Offshore Bitcoin License

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

how to report foreign salary

How to report a foreign salary or international business income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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