Currency Transaction Report
Christian Reeves

IRS Currency Transaction Report

/in /by

Today I’m taking time out from my offshore beat to warn you about the CTR.  An IRS Currency Transaction Report is a form filed by U.S. banks and casinos each time you make a deposit or withdrawal of $10,000 or more.  It is filed in secret, without your knowledge, you don’t receive a copy, and it becomes part of your permanent IRS file.  An IRS Currency Transaction Report greatly increases your chances of an audit.

If you are a high stakes gambler, you should be aware that any casino transaction of $10,000 will result in a Currency Transaction Report being sent to the IRS.  Just as high dollar wins are reported on form W-2G, buying in or cashing in high dollar chips is traced with a Currency Transaction Report.  Both W-2G and CTR increase your chances of an audit and require you to prove 1) where the cash came from, 2) where the cash went, and 3) whether the cash was properly reported on your tax return.

  • IRS Currency Transaction Reports are filed by U.S. banks and U.S. casinos.  These rules do not apply to offshore casinos.  Also, offshore banks do not file CTRs … for now.  I expect that will change soon enough.

If you are in a cash business, like a successful bar, or restaurant, you will generate an IRS Currency Transaction Report every time you deposit more than $10,000.

Now for the point of this article:  Never attempt to avoid the IRS Currency Transaction Report.  You might end up behind bars.

Yes, planning your deposits to avoid the CTR is a crime.  While it might be hard to believe, there are Americans sitting in jail because they “structured” their cash transactions in an attempt to avoid a costly IRS audit.

And I’m not talking about terrorists, money launderers, or the likes of Al Capone.  I mean ordinary citizens are sitting in jail for attempting to avoid an IRS exam by depositing $6,000 one day and $6,000 the next, rather than $12,000 all at once.  Planning to avoid an IRS Currency Transaction Report is the crime of “structuring,” and it is punishable by up to 5 years in prison.

  • Never heard of structuring?  Very few have, but ignorance of the law is not a defense to a criminal charge.

If you are in a cash business, you must have policies in place to track and deposit cash.  Maybe you go to the bank every morning or maybe twice a week.  Don’t vary your routine and never hold cash in your safe to prevent the CTR.

If you take steps to structure your affairs, you run the risk of your bank filing a Suspicious Activity Report.  This will certainly bring down the weight of the Federal Government up on you and is far worse than and IRS Currency Transaction Report.

One interesting issue:  If your policies result in your depositing around $9,000 twice a week, you might want to change to once a week.  As strange as this sounds, it will guarantee the IRS Currency Transaction Report and avoid the STR.

As the United States works even harder to control its citizenry, and ensure only “approved or compliant” transactions get through, you can be assured that laws like the IRS Currency Transaction Report will continue.

Best Offshore Company Jurisdiction
Christian Reeves

Which is the Best Offshore Company Jurisdiction?

/in , /by

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

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

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

Best Offshore Company Jurisdiction for Privacy and Protection

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

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

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

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

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

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

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

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

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

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

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

Best Professional Services for Offshore Companies

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

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

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

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

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

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

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

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

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

Best Offshore Company Jurisdiction for Businesses with Employees

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

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

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

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

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

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

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

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

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

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

Tax Issues for Offshore Company Formations

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

The bottom line on U.S. taxation is:

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

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

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

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

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

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

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

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

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

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

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

Local Reporting Requirements

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

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

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

World Image

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

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

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

Offshore Company Specialists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore Captive Insurance Company
Christian Reeves

The Mini Offshore Captive Insurance Company

/in , /by

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

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

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

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

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

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

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

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

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

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

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

Offshore Captive Insurance Company Must Provide Insurance

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

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

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

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

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

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

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

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

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

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

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

Uses of a Mini Offshore Captive Insurance Company

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

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

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

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

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

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

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

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

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

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

Offshore Roth Conversion
Christian Reeves

Offshore IRA Roth Conversion to cut taxes

/in /by

Are you ready to retire with a large offshore IRA?  Consider an offshore IRA Roth conversion.  You have Romney sized IRA issues?  This article will show you how to deal with your offshore IRA without getting crushed by the new higher tax rates with an Offshore IRA Roth Conversion.

  • Real Estate: For details on how to distribute real estate from an offshore IRA, see my offshore IRA real estate article on this site.  The analysis below is focused on cash and stock accounts.

So, you took your IRA offshore a number of years ago and reaped the rewards of high returns and diversification.  Now, you are facing forced withdrawals from that offshore IRA at ordinary income tax rates plus the multitude of Obama taxes.

We in the industry affectionately refer to the problem of how to extract money from an oversized offshore IRA as Romneyitis.  You might read that much was made in the press of Mitt Romney’s (allegedly) $20M offshore IRA LLC structure . . .what a shame that all that money will come out at ordinary tax rates of nearly 40% when all the new taxes are added onto the typical 35% rate.

You don’t need to be a 1% to be crushed by the new tax rates.  Most of these taxes hit families with incomes between $20K and $500K.  If you take a withdrawal from an offshore IRA and get pushed into these brackets, an offshore IRA Roth Conversion might be in order.

Offshore IRA Roth Conversion Bracketology

The key to minimizing tax on forced withdrawals from an offshore IRA is managing your tax brackets.  One of the best ways to play the IRA bracketology game is to prepay your tax now with an Offshore IRA Roth Conversion.

Yeah, I know a number of you just stopped reading.  None of us like the idea of giving cash to Uncle Sam today for a benefit tomorrow.  Those of you who are still with me, (thank you) and, prepaying your tax with an Offshore IRA Roth Conversion, this can lead to big savings.  Here’s how:

In its most basic form, the Offshore IRA Roth Conversion is great for those with quickly appreciating accounts.  It allows you to pay tax today and for your accounts to appreciate tax free thereafter with no withdrawal requirement.  If the majority of your retirement account is locked in offshore real estate, ad you can afford to pay the tax, the Roth conversion cane make life much easier for your offshore IRA.

No matter how hard it is to accept, prepaying tax can be a solid tax reduction plan.  So long as you can make the payment with cash that’s outside of your offshore IRA, and your tax bracket in retirement is likely to be the same or higher than it is now, IRA Bracketology is for you.  Even better, if you’re in a lower bracket this year than you expect to be at age 70, convert your offshore IRA to a Roth immediately.  You might be in this lucky group if you recently retired but are not yet collecting social security.

Slice and Dice Your Offshore IRA Roth Conversions

If you buy my argument that paying tax today can save you big in the long run (to be continued below), then you might consider slicing and dicing your offshore IRA to maximize the value of your Roth conversion.  Put simply, you can divide your IRA into multiple accounts, convert them all to Roths and selectively revoke these conversion, on accounts that have gone down in value, by the due date of your return (October 15 on extension).

  • Much like the Offshore IRA LLC and the inherited IRA, I don’t believe this tax loophole will be around for long.

Let’s say you have $500K in an offshore IRA you want to convert to a Roth.  First, slice this into five accounts of $100K each.  Next, invest each into different (high return) opportunities.  Maybe one goes into rental real estate in Panama, one into a currency trading account in Cayman, one into hardwood in Brazil, one to merging market debt and one into a BUI hedge fund.

Assuming you file an extension for your personal return, you have until October 15 to see how these investments perform.  If you lost money trading currencies (as I always do), then you should undo that conversion.  If your hardwood and real estate investments are appreciating nicely, keep them as Roth accounts and send the IRS a check.

Back to Offshore IRA Roth Conversions

If you are 55 to 70, an Offshore IRA Roth Conversion is probably a great move . . .but always a tough sell.  The fact that you’ve read this far is much appreciated.  I’ve seen cases where clients could save $500K in taxes over a number of years by converting a $1M offshore IRA, but just would not pull the trigger.  Noone likes to pay the IRS today for a future benefit.

For those of you on the fence, here’s a look at the numbers:

You probably have a good understanding of your tax bracket.  From her on, I’ll assume it’s 35%.  Now, let’s talk about the bracket busters – four taxes that push you up over 35%.

First is the Obamacare tax.  In order to cover the cost of the healthcare remodel, a 3.8% bonus tax applies to investment income if your AGI is above $250K (joint).  For example, if your salary is $240K, plus capital gains and dividends of $35K per year, your AGI is $275K and the 3.8% bonus tax applies to $25K.

In the case of the Obama tax “investment income” does not include earnings in your retirement account or a withdrawal from an offshore IRA (or any IRA for that matter).  It bumps up the tax rate on unsheltered assets like your after tax offshore brokerage account.

The same is true of withdrawals from an offshore Roth.  These are not considered income.  However, a withdrawal or conversion from a traditional IRA (pre-tax account) is added to AGI and counts toward the 3.8% healthcare tax.  Therefore, a mandatory withdrawal from an offshore IRA can bump other income, such as dividends into the Obama tax bracket.  If your only “income” is from an Offshore IRA Roth Conversion, this 3.8% tax does not apply.

If you have a Romney sized IRA, where your forced distributions are $100K-$200K per year, or your finances are such that these forced withdrawals from an offshore IRA will push you over the $250K threshold year over year, a Roth conversion might be just what the doctor ordered.  Yes, you will pay the 3.8% tax on your 2014 unprotected income, buy you limit the pain to only one year of dividends and capital gains.  In this situation an Offshore IRA Roth Conversion could save 20 years of bracket busting taxes of 3.8% on unprotected income.

The Obama tax is the biggest, but not the only bracket buster.  For example, if your joint income is over $305K to $428K this can add 4% to your marginal tax rate (I’ve assumed a family of 4 and simplified the calculations a bit).  If your income is just below this range, you will probably benefit from an Offshore IRA Roth Conversion.

The last bracket buster I’ll consider is the Medicare slam dunk.  If your income is b3tween $170K and 428K, your Medicare premiums increase.  In essence, this boosts your taxes by 2%.  You can eliminate this tax by converting your offshore IRA to a Roth before you hit age 65.

If the above tax bracket busters apply to you, consider an Offshore IRA Roth Conversion.  Also, if you are in a high tax state, or subject to AMT, then the benefits of converting are multiplied.  AMT usually hits those with incomes of $200K to $500K.

Expat Tip: If you’re planning to move out of the U.S. (or to a low tax state), hold off on the Offshore IRA Roth Conversion.  Wait until you obtain tax residency in your new country and then convert.  This should keep the ex state out of your pocket.

I hope you have found this article helpful.  Thank you for sticking with me.  Feel free to phone or email to info@premeiroffshore.com anytime.  We will be happy to help you move your IRA or other retirement account from a previous employer out of the United States.

Cheap offshore Company
Christian Reeves

A Cheap Offshore Company Cost Me $100K

/in , /by

Are you considering forming a cheap offshore company?  Has some scammer in Nevis promised you tax freedom and privacy?  Forming a cheap offshore company that does not include U.S. tax compliance is a roadmap to disaster for the American living, working or investing abroad.

How much would you be looking at in penalties for using a cheap offshore company formation mill?  The most common error is failing to Ale the Foreign Bank Account Report or FBAR.  Most get a penalty of $100K per year and are happy to avoid jail time.

Others get in to even more trouble for failing to file an offshore corporation return on Form 547 or one of the various LLC reporting forms.  Those of you with complex asset protection trusts have even more risks.  You may need to file a form when you fund the structure and Forms 3520 and 3520-A each year to report transactions in your trust.  Add to this the requirement to report foreign assets in a variety of situations, and in improperly structured and reported cheap offshore company can cost you a fortune.

When asked how much a cheap offshore company will cost, I like to say about $100K.  This is because the FBAR is the IRS’s first line of attack and other forms base their penalties on the amount of unreported tax or as a percentage of assets (i.e. an offshore trust).  For the trust, the usual penalty is 25% of assets under management per year!

Back when I was defending cheap offshore company users, I commonly saw people who were out of compliance for multiple years and who owed more in taxes and penalties that they had taken offshore.  In one case, a client put $75,000 offshore for a few years and ended up paying $225,000 in taxes, fines and penalties. . .and happy to pay up rather than sit in jail.

Some were not as lucky.  U.S. jails are full of people who had a cheap offshore company and found themselves in theirs crosshairs – to eventually spend time

behind bars.  How much does a cheap offshore company cost?  If the IRS wants to make an example of you, about 3 to 5 years of your life.

The U.S. is one of the very few nations on earth that locks away its citizens for not paying taxes.  In fact, America has put people away for failing to file a form when no tax was due (lawyers calls this a zero tax loss case).  I personally know people in jail for 10 months for failing to file a form in a zero tax loss case.  I know of another person who got 2 years home confinement on a zero tax loss case.

This is all to say, stay away from cheap offshore company formation mills unless you are an international tax expert, you are heading for trouble using such a provider because you can’t tell puffery and salesmanship from fact.

When you form an offshore company with Premier, we include 12 months of tax and business consulting services at no cost.  Our U.S. tax experts are here to answer any questions from you or your tax preparer, explain what forms to use and when to file and make sure you in compliance with the IRS.  We also assist with any business or banking questions – including opening additional bank or brokerage accounts in the first 12 months.  We are always her to answer your questions.

While advice and consulting services are free, we also offer tax compliance packages for corporations, LLCs, trusts and asset protection structures that we have created.  We do not prepare complex returns for structures we have not formed . . .this is just too much liability for us to assume from others’ mistakes.

  • We also prepare personal returns, Form 1040 and 2555, for anyone living and working abroad.

So, how much does a cheap offshore company formation cost?  Too much!  If you don’t select Premier to structure your international affairs, please use a U.S. attorney or firm that can keep you out of trouble.  The cheap offshore company formation is not worth the risk.

For a confidential consultation, please call us anytime or send an email to info@premieroffshore.com.  All discussions are private and there is no obligation.

Real Estate in an Offshore IRA
Christian Reeves

Distribute Real Estate in an Offshore IRA

/in , , /by

So, you’ve diversified your retirement account and invested in real estate in an offshore IRA. . .great.  Now you need to take a distribution, what should you do?  In this article, I will describe how to distribute real estate in an offshore IRA.

 Rental real estate in an offshore IRA is one of the highest returning investments my clients have.  The problem is, the primary asset can’t be divided up and sold to pay any taxes due on required distributions when you turn 70 ½ or at another age to reduce your net tax rate.

The same problem occurs when you decide you want to live in the property.  To spend even one night in the home, you must distribute all of it from your account.

Note: One of the most common and reasonable questions I get is, “If I want to spend 2 weeks a year in the rental property, can I pay fair market value rent or take a distribution of 2/52nds (2 weeks out of 52 weeks in a year) of value?”  The answer is a resounding NO.  You may not spend any time in the property while it’s in your retirement account.  The fact that the real estate is in an offshore IRA makes no difference – you must follow the same rules.

 With this in mind, before you buy real estate in an offshore IRA, plan ahead for the forced distributions or the complete distribution if you plan to live in the property someday.  This means you must have the cash in savings or in other liquid IRA investments to cover the taxes due.

Of course, if the rental property is cash flow positive, you can use the rental income to pay the taxes.  However, because you should not use non-IRA money (i.e., savings) to cover IRA expenses, repairs, or costs incurred when the tenant moves out, be sure to run a reserve of several months before taking out funds to pay Uncle Sam.

The next item to consider early on when you invest in real estate in an offshore IRA is whether to convert to a ROTH.  I will discuss ROTH conversions for offshore investors in more detail in a future article.  For now, if you expect a return of 10-20% per year, and your income and tax bracket are  low (maybe you recently retired), converting before buying real estate in an offshore IRA may pay off big.  I understand it’s tough to pay taxes today for a potential savings in the future, but, if the upside is big in your market, you may take this tax gamble.

If you’ve held real estate in an offshore IRA for a few years, and it has maxed out on appreciation, then a ROTH conversion is unlikely to be beneficial.  Now you need to consider longer term planning.  For example, if you wish to live in the property 10 years from now, take a 1/10th distribution each year.  This will allow you to manage the tax payments and possibly reduce your total tax paid by keeping you in a lower tax bracket throughout the decade.

To re-title 10% of the property, you must go into the recorder’s office and enter the change into the record.  Hopefully, as in most U.S. states, you can make the transfer at zero value.

Remember that each of these distribution sis taxable in the U.S. and made at ordinary income rates.  I assume you have reached an age where distributions may be made without a 10% penalty.

Another way to reduce your net tax when you distribute real estate in an offshore IRA is to cut out your high tax state.  If you are considering moving offshore, or to a lower tax state, make the move 12 months before you take the distribution.

For example, if you are living in California, a distribution of real estate in an offshore IRA may be taxed at 10% or more.  The same distribution to a tax resident of Belize or Panama should be at zero state tax . . .of course, federal tax still applies.

Finally, the Foreign Tax Credit may apply and provide a dollar for dollar credit for any tax you paid to the country where the property is located.  Considering IRA distributions are taxed at ordinary rates, it’s unlikely the Foreign Tax Credit will totally eliminate U.S. tax, but it will ensure you don’t pay double.

I note that some countries charge transfer taxes and duties rather than a capital gains tax.  Special attention should be paid to these, because they may not qualify for the credit but might be added to the property’s basis and therefore reduce your taxable profit.

If you are considering taking your IRA offshore, or would like to set up a specialized real estate investment structure, please contact us at info@premieroffshore.com for a confidential consultation.  We will be happy to work with you to structure your offshore IRA in a tax efficient manner.

Asset Protection, Banking Offshore, IRS and Retire, Offshore Bank Accounts
Christian Reeves

Eliminate UBIT in Your IRA by Investing Offshore

/in /by

Are you paying Unrelated Business Income Tax in your IRA? Want to eliminate UBIT in your IRA? Is your retirement account invested in U.S. mutual funds or hedge funds? Are you thinking of taking control of your retirement account with an offshore IRA LLC and are concerned with UBIT? Do you have no idea what the heck UBIT is? Here are the ins and outs of UBIT in your IRA or other retirement account structures.

Let me start with the basics: Unrelated business income tax is a 35% tax paid on certain types of income earned by a retirement account. Regardless of whether you are a ROTH or a traditional, a 401K or a SEP, UBIT can apply to you…but it is simple to eliminate UBIT in your IRA, go offshore!

  • If your retirement account is invested in traditional stocks and bonds, or just about any type of passive investment, you don’t need to worry about UBIT.

The most common forms of UBI in an IRA is income from leverage or profit distributions from an active business. For example, if you purchase a rental property in your ROTH and 50% of the money comes from your retirement account and 50% from a non-recourse bank loan, then 50% of the profits generated will be taxable at 35% as UBI and 50% will flow through to your ROTH tax free.

Another example is a leveraged brokerage account. If you use leverage in the trading account held by your IRA, then income generated by that leverage is taxable.  If you leverage the account 10 times, then the majority of your income will be taxable and only that portion attributable to your original deposit will be tax free.

Finally, if you invest in an active business, or in to a U.S. hedge fund that invests in active businesses, then you might end up paying 35% tax on all profits generated. This is because the business or fund passes income to you, often on Form K-1, which is taxable as income not related to typical investing.

The solution for UBIT from investing in U.S. funds is simple – DON’T DO IT! A tax preferred investor should never be talked in to a U.S. fund that will generate UBIT. If the fund is structured properly, it will have an offshore feeder component. By investing in the offshore feeder, rather than the U.S. LP or LLC, you completely eliminate UBIT.

As shown below, traditional U.S. investors should come in to a fund through a U.S. structure while foreign and tax preferred investors (retirement accounts, pension funds, etc.) should come in through an offshore corporate entity. If the fund you are being sold does not have a structure for retirement accounts, you can be assured they will also be dazed and confused when it comes to reporting and tax compliance, so don’t get involved.

eliminate UBIT

eliminate UBIT

So, the costs and planning to avoid UBIT in a mutual fund or a hedge fund (should) fall on the administrator of that fund. If you are running your own investment account using leverage, or investing in real estate through leverage, you need to create your own offshore structure to deal with the tax.

Smaller retirement account investors are generally told they can’t use leverage. Accounts that are with private banking divisions, or with professional trading platforms, are allowed to access leverage at their own risk. In other words, the broker or bank won’t help you when it comes tax time.

To eliminate UBIT in your retirement account you need to 1) take that retirement account offshore in an LLC and 2) form an offshore UBIT Blocker Corporation under the LLC. This offshore corporation is the entity that holds the trading account or purchases the property. Income flows to the corporation, then the LLC, and then in to your IRA.

Here’s the trick: UBIT applies to income from leverage or ordinary income received by the IRA. By sending that money first in to an offshore corporation, and then in the LLC as a dividend, you eliminate the UBI character of the transaction and thereby jettison UBIT.

If you would like more information on the IRA LLC structure, please check out my Self Directed article.

For more information on investing in an active business, please read Can I Invest in a Business with my IRA?

As always, please post general questions in the comments below or contact me at info@premieroffshore.com for a confidential consultation.

Cheap offshore Company
Christian Reeves

How to Prorate the Foreign Earned Income Exclusion

/in , /by

When you first move offshore, you will need to know how to prorate the foreign earned income exclusion. This is because, you will be using the physical presence test in your first year and, presumably, won’t move abroad on January 1, so you will need to prorate the foreign earned income exclusion.

Let me take a step back. As you probably know, the Foreign Earned Income Exclusion allows you to exclude $99,200 in salary from your US taxes in 2014. To qualify, you must be a resident of a foreign country (residency test) or be out of the United States for 330 out of 365 days (330 day test or physical presence test).

Under the physical presence test you can choose any consecutive 12 month period for your Foreign Earned Income calculation. So, you might have moved abroad on Mach 15, 2014 and begin your new job on April 1, 2014. Therefore, you will probably want to prorate the Foreign Earned Income Exclusion from April 1, 2014 to April 30, 2015.

In this case, you should be out of the U.S. 330 days from April 1, 2014 to April 30, 2015. You could use March 15th as your start date, but that would mean you lose 15 days of the exclusion and these 15 days can’t be recouped when you file your 2015 return.

I note that it is necessary to prorate the Foreign Earned Income Exclusion because most people don’t leave the good ole USA on January 1, so they need to prorate in the year they begin their new lives. Also, to qualify as a resident of a foreign country, you must be out of the US for a full calendar year. Therefore, the physical presence test is common in year one.

In the example above, it would be possible to use the 330 day test to qualify for the FEIE from Aril 1, 2014 to December 31, 2014, and then use the residency test to qualify for the exclusion from January 1, 2015 to December 31, 2015. However, this will not affect your exclusion amount. You will still need to prorate the Foreign Earned Income Exclusion. In other words, there is no financial benefit to converting to the physical presence test, though you will be able to spend more time in the United States. The prorated exclusion amount may not exceed the maximum allowable exclusion.

To prorate the Foreign Earned Income Exclusion, use the number of days you were physically present during the tax year over 365. That is to say, exclusion is calculated by dividing the number of days physically present in the foreign county or countries (numerator) by the number of days in the year (denominator). (See Publication 54, section on part-year exclusion.)

In the example above, your 2014 exclusion is April 1, 2014 to December 31, 2014, or 274 days. Each day is worth $271.78 ($99,200 / 365= $271.78), so you can exclude up to $74,467.72 in 2014. If you earned $100,000 in salary from April 1, 2014 to December 31, 2014, you will owe U.S. tax on about $25,500 ($100,000 – $74,467 = $25,532.28) because of the prorated Foreign Earned Income Exclusion calculation.

Prorating the Foreign Earned Income Exclusion is common in the first year an ExPat moves abroad. It is also possible to prorate if you are forced to leave the country due to civil unrest.

According to the instructions for IRS Form 2555, under Waiver of Time Requirements:
If your tax home was in a foreign country, you reasonably expected to qualify for the Foreign Earned Income Exclusion in that country, but were forced to leave because of war, civil unrest, or similar adverse conditions, the time requirements residency test or the 330 day test may be waived. You must be able to show that you reasonably could have expected to meet the minimum time requirements if you had not been required to leave.

To support this rule, the IRS publishes a list of countries and the dates they qualify for the waiver. If you left one of these countries during the period indicated, you can claim a prorated Foreign Earned Income Exclusion on Form 2555 for the number of days you were a resident of or physically present in the foreign country.

As I wrote above, you must reasonably expect to qualify for the Foreign Earned Income Exclusion in the affected country. This is aimed at contractors moving in to dangerous areas. Basically, if you move to a dangerous area, and then decide to leave or are forced to leave, you don’t get the benefit of this rule. If you move to an area after it is listed in the IRS publication, you are on notice that it is dangerous and don’t get the benefit of this section.

I hope you have found this article helpful. Please post any questions in the comments below and I will respond online. You may also contact me directly at info@premieroffshore.com.

Offshore IRS Audit
Christian Reeves

Will the IRS Audit Me for Going Offshore?

/in , /by

For those of you living and working abroad, or investing outside of the United States, the fact that you file one or more of the offshore company forms and report a foreign bank account on the FBAR will have little to no effect on your chances of an audit. The IRS is focused like a laser on those who fail to report their offshore transactions. So, if you are in compliance, you have little to fear.

To put it another way, individuals who file an offshore return are not currently a target for the IRS. They have amassed their forces to go after the banks and non-compliant individuals because that’s what makes headlines…that’s what brings in the cash.

How much are we talking about you ask? The IRS has brought in about $4 billion through the Voluntary Disclosure Program and another few billion in fines and penalties against Swiss and other banks who helped Americans avoid taxes. These are the kind of numbers the government is going for…they are not concerned with the average person’s compliant offshore dealings.

This is all to say that the IRS is not so concerned with those in compliance. If you have been filing your forms and paying along, you are no more likely to be audited that the average person. If you get in to compliance voluntarily, then you take the target off of your back.

It is also important to realize that the IRS audits less than 1% of taxpayers each year…and their budget for 2014 and 2015 has been cut by Republicans angry about the way their fund raising groups were treated in the last election cycle. Based on the following factors, I believe that most of my clients have a 3% to 5% chance of facing the tax man…not because of international structures, but because of their higher levels of income.

My point here is not that you will never be audited. It is simply that going offshore does not significantly increase your probability of facing down the IRS. For more on this topic, please take a look at my article How to Avoid an IRA Audit – Expat Edition.

If you are behind in your U.S. tax filings, I suggest you take a look at my article on the IRS Voluntary Disclosure program. If you qualify as an Expat, this might be a cost effective avenue for you to get right with the Service.

IRA & Retire, Asset Protection
Christian Reeves

How to Avoid an IRS Audit – Expat Edition

/in , /by

If you are living and working abroad, you still need to worry about the IRS. In this article, I will talk about how to avoid an IRS audit with a focus on Expats.

Are you worried that the IRS will come knocking on your door? Want to know how to avoid an IRS audit? I battled the IRS for a decade and here are a few of the tips and tricks learned, often the hard way, in those skirmishes.

So, what are the major audit flags? What will bring the IRS to your door? Some are selected at random, a kind of control group, but there are a number of items that can increase your chances of being selected by the computer for an audit.

The key factors are the amount you earn, the type and quantity of deductions you take, the volume of capital gains transaction on Schedule D, your line of work, and whether you own your own business.

Of these, income level is far and away the most important factor. As I said above, less than 1% of the taxpaying population is audited each year. If your income is $200,000 or more (defined as rich in today’s America), your chance of an audit jumps to 3.26%. If you have a great year, and make $1 million, your chance of a visit skyrockets to just over 11% (about 1 in 9). So, you want to know how to avoid an IRS audit…just stop working!

I assume you won’t decide to work less, or earn less, to keep the IRS from your door, so let’s talk about what you can control. By far, the most egregious error is failing to report all of your income…and this is exactly what the IRS is targeting with FACTA and its offshore banking initiatives.

You see, FACTA forces all banks around the world to report the income and transactions of their American clients to the IRS, just as American banks do today. It essentially turns your foreign banker in to an unpaid agent of the U.S. government.

Next, IRS computers compare these reports to the return you file and audit those whose report doesn’t match the computer file. The larger the discrepancy, the higher your chance of an audit. The purpose of FACTA is to ensure all Americans are reporting each and every transaction and to provide a tool to the IRS to easily track down and persecute those who failed to toe the line.

Therefore, the best way for the U.S. person living, working or investing abroad to avoid an IRS audit is to file all necessary forms.

Another red flag is your charitable donations. The IRS keeps statistical data by income bracket on this category. The further you get from the standard deviation, the higher your chance of an audit. If you give 5% of your income to charity, with no non-cash donations, your audit meter will hardly register a beep. Give 50% of your adjusted gross income in donations of clothing and personal affects, and I guarantee you will be audited…possibly before you have time to cash the refund check.

Next on the list of red flags are rental real estate losses. If you have a loss from one foreign or domestic property of less than $25,000, your risks are minimal. If you claim to be a real estate professional so you can take larger losses, or because your income from other sources exceeds $150,000, then your risk of an audit is very high.
The last major caution is to day traders and those claiming to be professional traders of their own accounts. I understand that the desire to be considered a professional trader can be strong, and I field a number of calls from those wishing to do this “business” offshore.

Those who trade in stocks and securities as professionals have big time advantages over the rest of us. Their expenses are fully deductible and their profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and aren’t subject to the $3,000 cap on capital losses.

But, to be a professional trader, and not just a simple investor, you must regularly and continuously trade stocks. It must be your primary business and you should be spending about 30+ hours a week trading, researching, and working on your craft. If you aren’t that involved, you are not a trader.

And the IRS realizes that it can be quite difficult for a person trading his own portfolio to prove he is a professional, so they are easy targets…often fish in a barrel.

If you are reporting your business on Schedule C, rather than an onshore or offshore corporation, you have a significantly higher risk of audit compared to someone who is properly structured. The favorite categories on this form are home office deduction, automobile expenses, notoriously hard to prove and often estimated by clients, and meals and entertainment. Did you actually bother to keep all of your receipts and write down who you met with and why? Keep it “simple” and get a corporation.

Why will a corporation reduce your chances of an audit? Let’s say you reported $200,000 on Form 1120. You will be grouped together will all of the other corporate entities. At $200,000, you are probably a small fish in a big pond. But, report that same profit on Schedule C, you are probably a medium to large fish to the self-employed audit group in the IRS. In other words, not many are making $200,000+ on Schedule C, but the number of corporate entities earning more than that is significant.

As someone who has handled hundreds of IRS exams over the years, I believe that these categories cover 90% of the non-random audits. If you want to know how to avoid an IRS audit, focus on compliance and your corporate structure. I will give you a few more examples below, but as we move on, the effect on your chances of an audit get less.

Hobby losses are major red flags, but one most people manage to avoid. You must report income from a hobby (such as horse racing) and you can deduct expenses up to the amount of that income. You are prohibited from deducting expenses in excess of that income. So, if you are considering racing ponies in Panama, don’t deduct them on your U.S. return.

The same is true of gambling. U.S. casinos will report your wins, and you are allowed to deduct your losses to the extent of those wins. You should never take a loss from gambling, though some try on Schedule C by calling it a business. Keeping in mind that you must be able to prove your losses, usually with a gambling log, you can deduct foreign losses against U.S. wins. If you took $100,000 from a lucky streak in Las Vegas, and gave it all back to the Trump Casino in Panama City in the same year, you can net losses against wins to break-even.

Just about any small business has a high risk of audit. This is especially true of bars and restaurants with cash transactions. In fact, these establishments often get hit by the IRS, State tax board, and employment tax board in the same year.

If you are in a business offshore, and pay your employees or consultant’s in cash, you will have a tough time if the tax man comes calling. You must prove all expenses to the U.S. IRS, so you should try to pay by check or wire whenever possible and have an invoice or receipt in the file. If not possible, then a signed receipt may get you by.

I will conclude with this: if you are living, working, or investing offshore, and have been filing all of the proper forms, you have nothing to fear from the IRS. If you have been lax in your reporting, then you might just find yourself at the top of the IRS hit list. Did you miss an FBAR or two? Do you have foreign real estate in a corporation that you did not report? You should get these issued resolved before FACTA arrives in full for on January 1, 2015.

If you are considering filing your delinquent forms, please take a look at my article on the voluntary disclosure program. If you qualify as an expat, and you owe no tax to the IRS, you might get away with zero penalties.

Feel free to contact me for a confidential consultation on any of these issues. You can reach me at info@premieroffshore.com or by calling (619) 483-1708.

Seize Your IRA
Christian Reeves

Foreign Earned Income Exclusion 2014

/in , /by

Good news for those American’s living and working abroad. The Foreign Earned Income Exclusion in 2014 has been increased to $99,200. This means that you can exclude up to $99,200 in salary for 2014 on Federal income tax return if you are a resident of another country or are abroad for 330 out of 365 days.

  • This article from 2014 contains some valuable information. For 2015 FEIE numbers, please see: FEIE 2015

If a husband and wife both qualify for the Foreign Earned Income Exclusion in 2014, they each may deduct up to $99,200 this year. That means a husband and wife team may earn up to $198,400 from their offshore corporation.

Unfortunately for retirees and investors, this exclusion only applies to earned income, which is income from a business or a salary. If you are drawing that salary from a corporation formed in the United States, social taxes will still apply. If you are operating a business without a corporation, then Self Employment Tax at 15% will still apply.

  • Note that the exclusion applies to salary from any foreign corporation. It does not matter if you own the company or you work for someone else.

The Foreign Earned Income Exclusion for 2014 does not apply to passive investments or capital gains. If you are an American living and working abroad, the U.S. wants its cut of your investment profits. If pay taxes to another country (such as when you sell foreign real estate for a capital gain) you get a dollar for dollar credit and are not double taxed by America. For more information on foreign real estate transactions, see my article U.S. Tax Breaks for Offshore Real Estate.

This amount of $99,200 is the maximum exclusion you can qualify for. If you earn less than the exclusion, you may not carry forward the unused portion. For example, if your salary is $60,000 in 2014, you may only exclude $60,000. You may not carry over the balance of $39,000 to 2015.

If you earn more than $99,200, you must pay tax on the excess for the right to carry that U.S. passport. So, if you earn $299,200 in 2014, you will pay U.S. tax on $200,000 at about 38%, or $76,000. If you are operating a business through an offshore corporation, you might be able to retain earnings in that company and thereby defer U.S. tax. For more information, see: Eliminate U.S. Tax in 5 Steps with an Offshore Corporation.

Since 2006, the FEIE has been pegged to inflation, so we expect it to increase each year ever so slightly. The Foreign Earned Income Exclusion for 2014 increased by about 1.6% from 2013 and about 2.5% from 2012. So, we might expect an increase of 2% in 2015. Which is to say that the Foreign Earned Income Exclusion for 2015 might be about $101,184.

Here are Foreign Earned Income Exclusion amounts from 2014 back to 1998.

  • Tax year 2014: $99,200
  • Tax year 2013: $97,600
  • Tax year 2012: $95,100
  • Tax year 2011: $92,900
  • Tax year 2010: $91,500
  • Tax year 2009: $91,400
  • Tax year 2008: $87,600
  • Tax year 2007: $85,700
  • Tax year 2006: $82,400
  • Tax years 2002-2005: $80,000
  • Tax year 2001: $78,000
  • Tax year 2000: $76,000
  • Tax year 1999: $74,000
  • Tax year 1998: $72,000

I hope you have found this article helpful. If you would like more information, I suggest you read start with the Tax Benefits of Going Offshore. Feel free to contact me at info@premieroffshore.com with any questions or article requests. As always, you may leave questions in the comment section below and I will respond online.

Offshore Roth Conversion
Christian Reeves

IRS Automatic Extension for Expats: April 16 is the First Day of the Expat Tax Season

/in , /by

Because of the IRS automatic extension for Expats, today, April 16, is the first day of the Expat tax filing season. While those of us stuck in the U.S.A. must file and pay by April 15, Expats get an automatic two month extension.

This two month automatic extension for Expats is more valuable than the standard six month extension to file your taxes. See, the six month extension allows you to file your return on October 15, but it does not extend the time to pay your taxes. If you pay after April 15, penalties and interest will apply.

If you are living abroad, you have two extra months to file and pay without getting hit with any fees by the ever generous IRS. This means you have an extra two months to use that cash before it goes in to Uncle Sam’s coffers.

If you use the automatic two month extension for Expats, make sure the IRS knows that you qualify so you don’t get stuck fighting over an erroneous bill. There is no form available to put them on notice, so you need to attach a letter to the front of the return with your name (or names if a joint return), foreign address, and social security number(s). Either tell the IRS that you are employed in Country X, or that you are a tax resident of Country Y and thus your return is due on June 15.

This extension is only for those who are resident or working in another country as of April 15th. If you were living abroad in 2013, and returned to the U.S. in January of 2014, you may not take the IRS Automatic Extension for Expats.

If you need more than two months, you can use IRS Form 4868 just like the rest of us gringos to get the standard 6 month extension. Of course, you will be expected to pay by June 15 and, if you pay after that date, interest and penalties will apply. For a rough estimate, paying after June 15 will cost about 4.5% per month in fines.

  • For more information on Form 4868, see the IRS website.
  • For information on late filing penalties, see this section of the IRS site.

You should also keep in mind that the two and six month extensions don’t affect your FBAR filing deadline. You must report your foreign bank account by June 30th, no matter when you file your personal return. If you need to report a foreign bank account, checkout my article on New FBAR Filing Requirements for 2014.

If you are operating a business through an offshore corporation and filing Form 5471, this form is attached to your personal return. Thus, extending your personal return automatically extends the time permitted to file your corporate return. No additional extension is required.

However, the two month and six month extensions above do not apply to offshore trusts. If you file Form 3520-A or 3520, these are due on March 15 and can be extended until September 15 using IRS Form 7004 (see the IRS website for more information).

Finally, if you are an Expat who is going to qualify for the Foreign Earned Income Exclusion late in the year, you can get a special extension from the IRS to file after the October 15 deadline. To use this extension, you must file IRS Form 2350 by April 15, and pay any expected tax due by April 15 (that’s right, not June 15 when using this extension). For more information, see Extension of Time to File in Order to Qualify for the Foreign Earned Income Exclusion.

When might someone need this FEIE extension? Let’s say you leave the U.S. on November 1, 2014 and want to use the 330 day test to qualify for the FEIE on income earned abroad from November 1, 2014 to December 31, 2014, as well as get credit for those days to qualify in 2015. In that case, you must file your 2014 return 30 days after you qualify for the FEIE, which would be December 2, 2015. You may not file your 2014 return until you actually qualify for the FEIE…you may not assume you will qualify.

For those of you who love trivia, here is the origin of the automatic extension for Expats to file their Federal tax returns. Under the mail box rule, your tax return is received by the IRS when you place it in the mail box. Lawyers also call this constructive receipt.

When you mail your tax return in the U.S. on April 15, it arrives at the IRS in just a few days. If you are out of the U.S., it might take a very long time in deed to go from China to a package to Uncle Sam using standard international post. The automatic extension for Expats came about as the longest time the IRS would allow a package to arrive from overseas. So, back in the day, the IRS was to receive your return by June 15, whereas you needed to post your return by April 15 from the U.S.

Today, those using the automatic extension for Expats can mail their return and payment on June 15…it need not be received on that date. If you will be sending in a paper return on this date, I strongly recommend you use FedEx or another courier service to avoid significant delays.

As electronic filing has become the norm, the justification for the automatic extension for Expats has changed. Today, it is explained as the extra time Expats might need to collect documents and file their local returns so that they know how to make use of the Foreign Tax Credit and related deductions.

As we get ready for the Expat tax filing season, please take a minute to read through my tax page. Feel free to send me an email at info@premieroffshore.com or call (619) 483-1708 if you would like for us to prepare your U.S. Expat tax return. We are experts in Forms 5471, the new FBAR, Form 2555, and all the others those living, working and investing abroad must come to terms with.

design

أفلام الجنس

/in /by

غالبًا ما تعرض الأفلام الجنسية مشاهد جنسية صريحة ، لكن بعضها يستهدف جمهورًا أكثر عمومية. هذه الأفلام ليست بالضرورة عن لقاءات جنسية حقيقية. بدلاً من ذلك ، فهم يدورون حول كيف يقودنا هوس مجتمعنا بالجنس إلى الجنون. على عكس لقاءات الحياة الواقعية ، تميل هذه الأفلام إلى التركيز على مخاطر الإدمان الجنسي.

أصبح لارس فون ترير معروفًا بأنه سيد xnxx  الاستفزازي. تشتهر أفلامه بتصويرها الجرافيكي للجماع واعتبرت “المحرض الكبير” للسينما الحديثة. يتميز فيلمه الشبق ، وهو فيلم مدته أربع ساعات عن مدمن للجنس ، بنكاح غير مقلد. على الرغم من ذلك ، فإن المشاهد الجنسية للفيلم أكثر دقة مما قد يوحي به عنوانه الحاد.

Dark Horse Ranch هو فيلم جنس كلاسيكي آخر ، على الرغم من تعرضه للحطام في الغالب بسبب أداء إليزابيث بيركلي الجدير بالملل. الفيلم يصور فتاة الإستعراض وثقافة الدعارة في لاس فيغاس بلا روح. أفضل مشهد هو عندما تمارس شخصية بيركلي ، نومي مالون ، الجنس مع مدير ترفيهي أنيق في حوض سباحة في سين سيتي ، يكتمل بأشجار النخيل المزيفة بأضواء النيون.

لدى British Sex Films مجموعة رائعة من الأفلام ومجموعات الصور. إذا كنت تبحث عن المزيد ، فتحقق من شبكة Real Sex Pass ، التي تضم آلاف الأفلام. يمكن دفق هذه الأفلام أو تنزيلها وهي متوافقة مع معظم الأجهزة. الاشتراكات سريعة وسهلة ، والإلغاء سهل.

تم تضمين الأفلام الجنسية في الأفلام منذ العصر الصامت. العديد منها كوميديا ​​رومانسية ، وأفلام إثارة مثيرة ، ودراما شهيرة. ومع ذلك ، ليس لديهم عادة ميزة فنية. تهدف هذه الأفلام إلى ترفيه الجمهور وتحفيز رغباتهم الجنسية. من المهم أن تتذكر أنه يجب دائمًا عرض الأفلام الجنسية في سياقها. لا ينبغي أن يشاهدها الأطفال الذين تقل أعمارهم عن 18 عامًا.

في حين أن العديد من الأفلام تستهدف الجمهور الأصغر سنًا ، إلا أن بعضها يستهدف جمهورًا أكبر سنًا. من أكثر الأفلام الجنسية ديمومة فيلم “ميلف” ، الذي أشاع مصطلح “جبهة تحرير مورو الإسلامية”. تعد جبهة مورو مثالاً رائعًا على كيف يمكن للجمهور الاستمتاع بفيلم جنسي لا يأخذ نفسه على محمل الجد. يعود نجاح الفيلم في جزء كبير منه إلى المودة تجاه الشخصيات المركزية ، التي تحملت عددًا كبيرًا من الإهانات ، بما في ذلك التبول في الأماكن العامة وتناول سوائل الجسم.

العار فيلم عظيم آخر. إنه فيلم مكثف من إخراج ستيف ماكوين وبطولة مايكل فاسبندر. إنها عالية في الدراما ، ومنخفضة الدعابة. تتمة للعار ، The Shagger ، لها نفس الممثلين ، لكن نسخة من إخراج Ben Stiller.

نوع فرعي شائع آخر هو الإثارة المثيرة. يتضمن هذا النوع الفرعي أفلامًا مثل Dressed to Kill و Angel Heart. كلاهما مشهور في الولايات المتحدة. والجاذبية القاتلة أدت إلى ظهور مصطلح “مرجل الأرنب”! والعديد منها أكثر من مجرد أفلام جنسية.

Chile
Christian Reeves

Should I use an Offshore Corporation or Offshore LLC?

/0 Comments/in , , /by

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

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

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

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

Benefits of an Offshore Corporation

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

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

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

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

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

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

Benefits of an Offshore LLC

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

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

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

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

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

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

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

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

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

Retire Abroad
Christian Reeves

New FBAR Filing Requirements for 2014

/0 Comments/in , /by

As you, the American with investments abroad, get ready to prepare your 2014 tax return, there are important new FBAR filing requirements for 2014. Some of these FBAR filing requirements are cosmetic and others could get the misinformed in hot water.

Note: If you have no idea what an FBAR is, you might check out my general article on filing requirements for those living, working, or investing abroad. If you want to learn how to legally avoid the FBAR, click here.

First, let me tell you how your accountant or CPA thinks. The foundation of tax preparation for professions is SALY…prepare the return the Same As Last Year to reduce the risk of an audit.

So, when your preparer pulls out your file, he or she will be thinking SALY and will reach for the same old forms to file. When new FBAR filing requirements for 2014 are announced, but don’t get much press, tax preparers without many Expat clients can get caught unprepared.

It may be up to you to educate your preparer on the FBAR and these New FBAR filing requirements for 2014. Here they are:

Not one to bury the lead: IRA owners don’t need to file an FBAR in 2014!

For those of you with Offshore IRA accounts, the IRS has finally come out and said that IRA owners and beneficiaries do not need to file an FBAR. Whether an offshore IRA needed to file an FBAR was never clear, so we all aired on the side of caution and filed it year after year. Well, that burden has been lifted (see below).

The cosmetic change is that the name of the form has changed. The official name of the FBAR changed from Treasury Form TD F 90-22.1 to FinCEN Form 114. I’ll bet not many people even noticed, as we all refer to it as the FBAR.

The big change to the FBAR for 2014 is that it must now be filed online. No more paper allowed. So, when your preparer pulls out your file and grabs the same old forms, you may be in for penalties.

That’s right, if you or your preparer are unaware of the change and mail in SALY, you could face significant penalties for filing late…or not filing at all. So, be sure to talk to your tax man or woman!

Note: the deadline for the electronic FBAR filing did not change and remains June 30. If you file your FBAR with your personal return on April 15, all is well. If you procrastinate and get an extension for your personal return until October 15, your FBAR is still due on June 30. That’s right, the extension of time to file your personal return does not apply to the FBAR.

Do you prepare your own returns? Do you want to sound cool when you explain things to your preparer? Then here is how to file an electronic FBAR in excruciating detail.

To file an electronic FBAR:

  1. Go to http://bsaefiling.fincen.treas.gov/main.html.
  1. Click “File an Individual FBAR” on the left side of the page.

  1. You will then be brought to the screen below, where you can download a PDF version the FBAR (FinCen Form 114). This PDF allows you to type information into the form and save the results (wow, a fillable PDF form – modern technology fresh from 2001!)

  1. Fill in FinCen Form 114 PDF. You will need your information, including social security number and date of birth, as well as your bank name, address, account number, and highest balance for the year. Be sure to save the document when you are finished. If you are unsure what information you need to enter in a certain field, you can move the mouse cursor over that field, hold it for a moment, and a box of text will pop up explaining what you need to enter. See the picture below for an example.

  1. Once everything is filled out correctly, go back to the first page digitally sign the document, save and validate it, and then finalize it for submission.

  1. When you’re ready to submit the form, go back to the page from Step 3 and click the link to “Submit FBAR.” This will take you to the submission page, where you’ll need to enter some contact information and then upload the finalized PDF. The process is not complete until you submit the form.

As you can see, the government has taken a simple form, which could be filled out a a 5th grader and mailed in, and turned it in to a computer nightmare for some. How many of those preparing their own returns will be confused and confounded by this new fangled technology? It will be an interesting year.

New FBAR Filing Requirements for 2014 – Who Must File?

Anyone who is a “U.S. person” must file an FBAR and enjoys the honor of paying U.S. tax on their worldwide income. Basically, this is anyone with a U.S. passport, green card, or someone who lives in America for 6+ months in the year.

If you are not sure you qualify as a U.S. person, please read: Who is a US Person?

The list of those exempt from filing an FBAR has also been updated and codified. For many of you, the most important statement is that IRA owners and beneficiaries are not required to file an FBAR.

Here is the complete list:

  • Certain foreign financial accounts jointly owned by spouses;
  • United States persons included in a consolidated FBAR;
  • Correspondent/nostro accounts;
  • Foreign financial accounts owned by a governmental entity;
  • Foreign financial accounts owned by an international financial institution;
  • IRA owners and beneficiaries;
  • Participants in and beneficiaries of tax-qualified retirement plans;
  • Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
  • Foreign financial accounts maintained on a United States military banking facility.

To be clear, the above list is not necessarily new FBAR filing requirements for 2014. I am saying that the IRS finally listed the exceptions on their website and ended the debate, especially in regard to IRA owners and beneficiaries. For more information, see IRS.gov.

I hope you have found this article helpful. Please post any questions or suggestions in the comments below. I will personally respond to every inquiry.

Give Up US Citizenship
Christian Reeves

Americans Give Up US Citizenship in Record Numbers

/0 Comments/in /by

Record numbers of Americans gave up US citizenship in 2013. As the IRS mafia becomes ever more hostile to its citizenry, Americans give up US citizenship in record numbers. In 2013, 3,000 Americans lined up at embassies around the world to renounce their citizenship and get Uncle Sam out of their pockets for good. This is an increase of well over 200% in the last year, up from 933 renunciations in 2012, 1,780 in 2011 and 235 in 2008.

Why did so many Americans give up US citizenship? The three most common reasons given were 1) the IRS, 2) the IRS, and 3) the IRS.

Let’s take a step back: America is about the only country in the world that taxes its citizens on their worldwide income, regardless of where they live. So long as you hold a U.S. passport, the IRS wants its cut. And the IRS has become very hostile in attacking American’s abroad and those offshore accounts, putting a number of them in prison over the last few years. Of course, these attacks are limited to average people and not big corporations, who have record amounts of cash offshore.

This attitude has resulted in some very unreasonable tax assessments. For example, I have met many people who have never set foot in the U.S., but whose parents wanted them to have a U.S. passport at birth, who have been caught in the IRS mill. Once in the government’s sites, they were forced to pay enormous fines and penalties, in addition to the tax due. Adding insult to injury, some of these people had their bank accounts seized and real estate sold at auction to pay in to the Obamanation.

Then there are the laws targeting offshore banks. If you are a U.S. citizen, you are not wanted at most financial intuitions. Of those banks that will do business with you, most will hit you with extra fees, such as $500 to open the account and a $300 per year special assessment to cover compliance costs.

Finally, there is the invasion of privacy. As an American, you have zero right to privacy in your financial dealings. In fact, nearly all offshore banks will report your transactions to the IRS.

  • If an offshore bank fails to report your transactions, they are on the hook for major fines or being locked out of the banking system all together. Considering this risk, and the high cost of compliance, it’s no wonder that Americans are persona non grata.

HOW TO GIVE UP US CITIZENSHIP

If you are thinking of giving up your US citizenship, there are several hoops you must jump through. First, you don’t just show up at the embassy, burn your passport, give the ambassador the finger, and go along your way. You must complete a complex process and receive a renunciation letter before you are free. This might include an audit of your last 3 to 5 years of tax returns and an in-depth review of your finances to ensure you are paid-up.

  • Before you open a new account as a free man or woman, the bank will want proof that you have renounced your U.S. citizenship. Even if you have a second passport, you must prove that you gave up your US citizenship. Therefore, getting this renunciation letter from the consulate is of the utmost importance. It also ensures the IRS will not come after you years later looking for more cash.

Second, you might need to pay an exit tax. If your worldwide assets exceed $2 million, or your average tax bill over the past five years has been more than $151,000, a tax may be due on unrealized capital gains.

Basically, you will be required to file a final U.S. return as if you have sold all of your assets for fair market value and you will be taxed on that gain the year you give up US citizenship. Calculating this cost to escape is simple for those who hold major stocks. If your assets include private investments, real estate that has not easily appraised, or you have other issues in determining fair market value, you could be in for a battle with the IRS.

Third, you must have a second passport in hand before you give up your US citizenship.  If you give up your US passport and don’t have another ready and waiting, you will be a person without a country and it will become impossible to travel or immigrate.

If you don’t already have a second passport, there are three ways to get one.

By nationality or family history: If your parents or grandparents were born outside of the U.S., you might be able to get naturalized in their home country. For more information on this option, I suggest you read up at Live and Invest Overseas.

Earn your second passport through residency: If you move to a country like Ireland, Panama, Chile, New Zealand, or Singapore, you should be able to gain citizenship within 3 to 9 years (assuming the rules don’t change while you are waiting).

Of the residency programs that I have investigated, I believe the best is the favored nation’s residency permit linked to a teak investment in Panama. This requires a minimal investment of $15,000 and allows you to gain residency immediately. Citizenship should be processed in 4 to 5 years. For more information on this program, please contact me at info@premieroffshore.com.

Pay for it: You can purchase citizenship and a second passport from St. Kitts and Nevis, Dominica, and a few other nations. Most of the available programs require you to have no criminal history and cost anywhere from $165,000 to $300,000, depending on family size and other factors.

For a detailed description of the available economic citizenship programs, please see my Second Passports page. You will find the requirements and costs for Dominica and St. Kitts on this page. If you have issues in your past and need a more lenient jurisdiction, please contact me for a consultation.

I hope this information has been helpful. As the IRS becomes ever more hostile to its populace, I believe we Americans will have fewer and fewer escape and banking options. I also predict it will become very challenging to move assets out of the United States. If you would like to know more about how to give up US citizenship, please contact me at info@premieroffshore.com for a confidential consultation.

benefits of an offshore company
Christian Reeves

Benefits of an Offshore Company

/0 Comments/in , , , /by

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

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

Offshore Company for Those Living in the U.S.

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

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

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

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

Offshore Company for Those Living and Working Abroad

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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