Tag Archive for: International Tax

IRS Targets Bitcoin
Christian Reeves

The US Government is Targeting Bitcoin

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The US government has launched an all out war on Bitcoin and battles are raging on several fronts. The purpose of this war is to either kill Bitcoin so that the dollar remains dominant or, failing that, to control Bitcoin such that the government maximized taxable income and eliminates your ability to transact in private.

It’s early days yet in the war on Bitcoin. But, the writing’s on the wall. The only way for you to salvage some level of privacy is to move your Bitcoin offshore. Set up an offshore company and hold your crypto account in the name of the company.

Here are the 4 primary lines of attack the US government has on Bitcoin today. You can rest assured that new agencies will jump into the fray once they find a way to take what’s yours.

  1. IRS taxing bitcoin as a capital asset and not a monetary instrument.
  2. The SEC treating bitcoin as cash so they can regulate ICOs.
  3. Applying civil asset forfeiture rules to Bitcoin.
  4. Requiring you to report your Bitcoin every time you enter or exit the United States.

Let’s start with the IRS. The Service recently declared that Bitcoin and cryptocurrency are assets, not cash and not currency. This means that, when you exchange Bitcoin for FIAT currency, you must pay tax on the gain.

If you held the Bitcoin for less than a year, you pay short term capital gains tax at your standard rate. This is probably around 35%. If you held the Bitcoin for more than a year, you pay the long term capital gains rate on your profit, which is probably 23.5% (20% if Trump repeals Obamacare taxes). These are the Federal rates and your State will also tax the gain.

Had the IRS classified Bitcoin as a currency, they wouldn’t be able to tax you when you convert Bitcoin to dollars. By calling Bitcoin an asset, the IRS can tax the conversion (or more properly, the sale of the asset).

  • Only currency investments are taxable, such as FX traders, and not basic conversions. That is to say, if you buy foreign currency as an investment, then the gains are taxable.

Then there’s the Securities and Exchange Commission (SEC). If the regulator had determined Bitcoin to be an asset, rather than a cash or cash equivalent, they might not have had jurisdiction to control ICOs. For the reasons why this might have been the case, see: Crowd Sale vs ICO – What’s Legal?

Suffice it to say, if Bitcoin were an asset, all ICOs might have been considered crowd sales and thus outside the purview of the SEC. Of course, this is unacceptable… all investments must be watched over and controlled by our government – so, Bitcoin is cash to the SEC.

To those of us who write on these topics, both of these lines of attack were obvious. Each US agency will define Bitcoin in whatever way allows them to exert control and levy fines to generate more income. That’s the nature of the beast… to a hammer, everything looks like a nail.

Here’s the regulation of Bitcoin that no one saw coming:

Introduced last month, the Combating Money Laundering, Terrorist Financing and Counterfeiting Act of 2017, will force you to report your Bitcoin each time you leave or enter the United States. That’s right, you will be required to fill out a form telling the government how much Bitcoin and cryptocurrency you have each and every time you cross our border.

When I first saw comments on this legislation, I didn’t believe it. I’ve been writing about government overreach since 2000 and still thought this must be an error. It took me days, and a lot of research, to accept that this level of insanity was possible.

When you cross a US border with $10,000 or more in cash or cash equivalents (diamonds, coins, checks, letters of credit, etc), you must report to the government by filling out a form. Of course, filing this form will likely subject you to scrutiny at the airport and unwanted attention from the IRS later.

In most cases, the government has been reasonable in applying this rule. For example, if you’re traveling with collectable coins, you only report if the face value of those coins is over $10,000. So, reporting was generally for those transporting cash and very rarely intruded into the lives of everyday Americans.

The new rules targeting Bitcoin basically allege that cryptocurrency is always with you. Unlike an offshore bank account, where cash is held outside of the US and must be reported once a year, Bitcoin is literally travels with you inside of your laptop. Regulators believe that Bitcoin is stored in your laptop, phone, hard drive, or USB storage device, and is thus crossing the border with you.

This claim that Bitcoin is always with you is key to the government’s attempt to force reporting. If Bitcoin, which is cash or cash equivalent and not an asset in this case, travels with you, the government can force you to report. If it’s cash sitting on the blockchain, and all you have on your laptop are the codes to access that “cash,” no reporting can be required.

That is to say, you don’t need to report how much you have in your bank accounts simply because you’re username and password to access those accounts is stored on the laptop. You can only be required to report what you are physically carrying with you carrying when you cross the border.

And the same law that requires you to report your Bitcoin allows the government to take it from you. Bitcoin will become subject to the asset forfeiture laws. The government can seize your Bitcoin if 1) you fail to report it, or 2) you report it and they believe you obtained it illegally.

Note that I said, they “believe.” The government can take your Bitcoin and then force you to prove how you earned it. The burden of proof falls on you in a civil asset forfeiture case (YouTube video by John Oliver)… and you must be willing to spend big money on lawyers to have any chance of success.

What can you do to protect your Bitcoin?

These are all the ways the US government is targeting Bitcoin. And the only thing you can do to protect your coins is to move them out of the United States and out of the government’s reach. Remember that the US government can seize any cryptocurrency “stored” in a US exchange by issuing a levy or seizure order.

The US government can’t easily seize assets held outside it’s borders. For example, the IRS can levy any bank or brokerage in the US, and any institution that has a branch in the US. So, if you have cash in a bank in Panama, and that bank has a branch in the US, you’re at risk.

The solution is to form an offshore corporation or trust to hold your wallet. Then use only Bitcoin firms located out of the United States… those without ANY ties to the US and can’t be intimidated by Uncle Sam.

The same goes for buying Bitcoin in your retirement account. First, form an offshore IRA LLC. Then move your account into an international bank that doesn’t have a branch in the United States. Then setup an offshore wallet and buy your coins.

I should point out that buying Bitcoin in your IRA is one way to beat the IRS at their own game. Because crypto is an asset, you pay capital gains tax on each and every transaction. However, if you buy Bitcoin in your IRA, you defer or eliminate capital gains tax. Because cryptocurrency is an asset, you can buy and sell it inside an IRA.  For more, see How to move your IRA offshore in 2017.

The fact that Bitcoin is an asset also means you can take advantage of the tax benefits available in the US territory of Puerto Rico. Basically, if you move to Puerto Rico, spend 183 days a year on the island, and qualify for Act 22, all crypto gains on coins acquired after you become a resident will be tax free. See: Move to Puerto Rico and Pay Zero Capital Gains Tax.

I hope you’ve found this article on how the government is targeting Bitcoin to be helpful. For more information on taking your IRA offshore, setting up an asset protection structure, or moving to Puerto Rico, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to protect your coins and keep more of those crypto profits.

International Real Estate
Christian Reeves

Where to buy international real estate

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This article on where to buy international real estate isn’t going to be a list of countries with the highest returns. And it’s not a pitch trying to sell you the development that pays us the highest commission. Instead, this post on how to buy international real estate is how to narrow down your potential markets and maximize returns.

Finding the right country and right property in an up and coming neighborhood is a very personal endeavor. By following these recommendations on where to buy international real estate, you might increase your return on investment by 20% to 30%. That is, by beginning the search in with a solid strategy, your ROI on international real estate investments may increase significantly.

Here’s how to increase your ROI on international real estate investments by selecting the right country:

Remember that US citizens are taxed on our worldwide capital gains. No matter where you invest, the US government will want it’s cut of your profits. Even if you live abroad, you still pay US tax on your capital gains. Assuming Trump does away with the Obamacare tax, your long term Federal capital gains rate will be 20%.

That is to say, you will pay at least 20% in capital gains tax when you sell your international real estate investment property. It doesn’t matter that this investment is outside of the US, you still pay long term cap gains tax.

What about foreign taxes paid, you ask? You get a dollar for dollar tax credit on your US return for any capital gains tax paid in the country where the property is located. So, if you pay 15% in capital gains tax to Brazil, this leaves only 5% for Uncle Sam.

Another way to say this is, so long as the country where you buy international real estate has a capital gains rate equal to or lower than the United States, you will not pay more than 20% in tax on the sale. Your country of investment gets first crack, and the IRS takes what’s left, up to 20%.

Therefore, the best way to increase your ROI, all things being equal, is to buy international real estate in a country with a capital gains rate of 20% or less. If you buy in Austria, with a rate of 27%, the property must appreciate 7% more than one in Brazil to end up with the same amount of money in your pocket after the sale.

The list of countries with capital gains rates of 20% or less is quite significant. See: Capital Gains Tax by Country. But that’s just the beginning of this strategy. Here’s how to pay zero capital gains tax on your international real estate investments, thereby increasing your ROI by 20% or more.

There are two ways to pay zero capital gains tax to the US on your international real estate investments:

  1. Buy foreign real estate in your IRA or defined benefit plan, or
  2. Buy international real estate inside a US complaint offshore life insurance policy.

You can take your IRA offshore by transferring the account into an offshore IRA LLC. Once your retirement savings is out of the United States, you can use it to invest in international real estate or just about any other asset you wish. For more on how to by foreign real estate in an IRA, see: Here’s how to take your IRA offshore in 6 steps.

Foreign real estate purchased inside of a traditional IRA will be tax deferred and international real estate inside of a ROTH IRA will be tax free. Because you don’t pay US capital gains tax on the sale, you want to invest in countries with low or zero capital gains rates.

That is to say, when buying international real estate with your offshore IRA LLC, focus on countries with low capital gains rates because your US rate is zero.

If you buy real estate in Brazil through an IRA, you pay 15% to Brazil and zero to the IRS. If you purchase real estate in Barbados or Belize, you pay zero capital gains tax to these countries and zero to the IRS. This is because Barbados and Belize, along with several other countries, don’t tax capital gains.

Therefore, when making the investment through an IRA, a property in Brazil must generate a 15% higher return than one from Belize or Barbados to net out to the same after tax profit.

Note: Be careful when buying international real estate in countries that don’t have capital gains taxes. These nations sometimes have high stamp duties, transfer taxes or property taxes. These taxes aren’t deductible using the US Foreign Tax Credit against your US capital gains tax. If the choice is a 10% transfer tax or 10% capital gains rate, you prefer the capital gains tax because it’s deductible dollar for dollar on your US return. With a transfer tax, you pay 10% to the local government and 20% to the IRS.

The other method for eliminating US capital gains taxes on international real estate purchases is to buy through an offshore life insurance policy. Setup a US compliant policy, usually with an investment of at least $2.5 million, and you have the equivalent of a large IRA without the investment caps or distribution requirements.  

If you hold foreign real estate inside a life policy until you pass, that property transfers to your heirs with a step-up in basis. They pay zero tax if sold immediately, or only pay tax on appreciation that accrues after your death. In essence, an international life policy held until your death operates as a ROTH IRA.

If you terminate the policy while you’re alive, you had tax deferral while the policy was in place. An offshore life insurance policy in this case functiones like a traditional IRA.

I’ll close with this: President Trump is talking about reducing the US capital gains rate to 10%. If you believe this is likely, then you want to purchase foreign real estate in countries that have tax rates of 10% or less. If the US cuts its rate to 10%, and you buy in Brazil, you’re overpaying by 5%.

I hope this information on where to buy international real estate has been helpful. For more information on taking your IRA offshore, setting up a US compliant life insurance policy, or to be connected to an international real estate agent, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

tax on bitcoin
Christian Reeves

Tax on Bitcoin Transactions

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In this post I’ll talk about how the United States taxes bitcoin transactions and how you can reduce or eliminate those taxes by planning ahead. Bitcoin and cryptocurrencies are generating massive returns, but are very volatile. Proper tax planning must take both of these issues into account.

The US Internal Revenue Service declared Bitcoin and cryptocurrency capital assets back in 2014. This is significant because, by treating Bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-keeping and taxes on its use.

That is to say, from a federal tax perspective, Bitcoin and other cryptocurrency are not considered “currency.”  On March 25, 2014, the IRS issued Notice 2014-21, which stated that, “Virtual currency is treated as property for U.S. federal tax purposes.”  

The notice further reads, “General tax principles that apply to property transactions apply to transactions using virtual currency.”  

In other words, the IRS is treating the income or gains from the sale of a Bitcoin as a capital asset, subject to either short-term (ordinary income tax rates) or long term capital gains tax rates, (20% tax rate assuming Trump repeals the Obamacare tax).

Fyi… in July of 2017, the US Securities and Exchange Commission ruled that cryptocurrencies are a currency. As a result, ICOs are regulated by the SEC.

Tax Reporting for Bitcoin Transactions

When you sell a Bitcoin, you must report the purchase price, purchase date, sale date and sale price on Schedule D of your personal return. If you’re audited, you must provide documents to prove your basis in these Bitcoins.

For example, if you bought Bitcoins in 2015 and sell them in 2025, you must keep your purchase “documents” until at least 2029, when your audit statute expires. The IRS usually has 3 years to audit your return after it’s filed.

You also need to decide which coins you sold when you report the transaction. For example, you bought two bitcoins in 2015, two in 2016, two in 2017 and two in 2018. Then you sold one coin in 2018. Which coin did  you sell?

Since Bitcoin is taxed as personal property, you can chose from two accounting methods. You can select the coin sold using first-in-first-out (FIFO), last-in-first-out (LIFO), or to sell specific tax lots that are most efficient under the “specific share identification” method used for stocks. For more information, see: Bitcoin Tax Guide: Trading Gains And Losses – LIFO, FIFO, Offsetting Lots.

Under LIFO, you would have sold one of the coins you purchased in 2018 in that same year. Under FIFO, you would have sold one of the coins you purchased in 2015 in 2018.

Which accounting method you choose can make a major difference on your taxes. FIFO is the most common and spreads your tax obligations more evenly over the years assuming steady growth. LIFO can defer taxes, but can also result in major spikes in taxes owed.

Once you select a reporting method for your Bitcoin transactions, you must stick with it. If you go with FIFO, you must use that each and every year. You can’t switch methods year after year. For example, you can’t switch from LIFO to FIFO because you want to maximize your crypto gains because you have a large capital loss in a particular year.

Stop Paying Taxes on Your Bitcoin Transactions!

Because Bitcoin sales are taxed as a capital gain, there are three ways you can stop paying taxes on your bitcoin transactions. They are:

  1. Invest through your IRA,
  2. Invest through a life insurance policy, or
  3. Move to the US territory of Puerto Rico.

If you have a sizable IRA or retirement plan, you can buy Bitcoins through this account. Because Bitcoin is a capital asset, you’re allowed to hold coins inside your IRA. Most US IRA providers don’t allow Bitcoin, but you can take your IRA offshore and buy using an international wallet.

When you buy Bitcoin in a traditional IRA, you get tax deferral. You’ll pay tax on the gain when you take your distribution. When you invest through a ROTH IRA, you get tax free… you never pay tax on the gain.

Of course, buying Bitcoin in an IRA isn’t always possible or good practice. Most young investors don’t yet have significant cash in their retirement accounts. Also, Bitcoin is highly volatile and most investment advisors don’t recommend gambling with your retirement savings.

If you buy Bitcoin in an offshore IRA using leverage or a loan, you need to watch out for Unrelated Business Income Tax on the gains. For more on this, see: What is UBIT in an IRA.

Leverage on Bitcoin contracts is generally not available in the United States. The CFTC does not permit American retail customers to trade leveraged Bitcoin contracts on Bitcoin exchanges, thus investing through an offshore IRA LLC with a UBIT blocker can be a significant advantage to a sophisticated investor.

Another way to buy Bitcoin tax free is in an international life insurance policy. If you invest at least $1.5 to $2.5 million, you can get a US compliant life policy that allows you to control your investments.

Like the IRA, this policy gives you tax deferred growth if you cancel it during your lifetime. It also gives you tax free similar to a ROTH if you hold it until your death and transfer the assets to your heirs.

Offshore life insurance is a very powerful and complex tax planning tool. For more, see: Benefits of Private Placement Life Insurance.

The third way to stop paying tax on your Bitcoin transactions is to move to the US territory of Puerto Rico. If you move out of the United States, spend 183 days a year in Puerto Rico, and otherwise qualify for Act 22, you pay zero tax on gains on assets acquired after you move to the territory.

First, note that the United States taxes its citizens on our capital gains no matter where we live. If you move to Colombia, you still pay US tax on your crypto gains because the US taxes you on your worldwide income. So long as you have a US passport, you pay tax on your Bitcoin transactions.

The ONLY exception to this tax on worldwide income is the US territory of Puerto Rico. Section 933 of the US Tax Code excludes Puerto Rico source income from US tax, which allowed Puerto Rico to create it’s own tax rules.

Because the territory is in dire financial shape, they’re doing everything possible to attract high net worth investors. You can move to Puerto Rico, pay zero tax on your capital gains, and never pay US tax on those profits, even if you return to the States after a few years.

Puerto Rico’s tax incentives present a truly unique opportunity for US persons to benefit from the territory’s financial hardship. For more, see: How to benefit from Puerto Rico’s bankruptcy.

For example, you can set up a business on the island and cut your corporate tax rate by 90%. An internet business operating from Puerto Rico will pay only 4% in corporate tax on its PR sourced income. For more, see: Changes to Puerto Rico’s Act 20.

You might also like to read through: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

I hope you’ve found this article on how the US taxes Bitcoin, and how to eliminate that tax, has been helpful. For more information, please contact me at info@premieroffshore.com or (619) 483-1708. 

stop paying capital gains tax
Christian Reeves

3 Ways to Stop Paying Capital Gains Tax

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Here’s how to stop paying capital gains on your stock transactions. You can legally stop paying capital gains tax tomorrow by following these simple steps. If you’re tired of the IRS taking 20% of your stock gains, here’s how to cut out Uncle Sam.

First, this article is not about how to reduce or defer capital gains tax. This is how to stop paying the IRS immediately and forever. You already know that you can defer gains by investing through your IRA or by taking losses against gains to reduce taxes.

Also, this post is not about the usual US tax tools that so many write about. If you want the same old boring ideas, read Forbes. If you want to pay zero capital gains tax, stick with me.

Since this website is Premier Offshore, let me remind you that we US citizens are taxed on our worldwide income no matter where we live. Moving offshore does not reduce your US capital gains tax. If you sell stocks or foreign real estate while you’re a resident of a foreign country, you must pay Uncle Sam 20% (less taxes paid to the foreign country).

Here are the 3 ways to legally stop paying capital gains tax:

  1. Give up your US citizenship (expatriation),
  2. Setup an offshore life insurance policy to hold your investments, or
  3. Move to the US territory of Puerto Rico.

I’ll go through each of these in turn and show you how to stop paying capital gains tax.

Expatriation

I won’t spend much time on giving up your US citizenship. This is one of those things that many talk about but few actually do. We love to hate the IRS, but not many of us (myself included) have the guts to burn our blue passports.

Giving up your US passport is expensive and time consuming. If you’re net worth is $2 million or more, you’ll need to pay capital gains tax on all of your appreciated property. This exit tax locks in most high net worth individuals.

And you’ll need a second passport in hand before you renounce your US citizenship. While this seems obvious, about 50% of the calls I get to expatriate don’t have a second passport. It’s impossible to give up your US citizenship and become “stateless.”

If you want to buy a second passport, you can get one from Dominica for about $120,000. If you prefer an investment, you can invest $500,000 to $550,000 in St. Lucia government bonds, and pay $50,000 in fees.

If you want to prepare an exit strategy, and have a few years, you can earn citizenship by becoming a resident of a foreign country. For example, if you’re from a top 50 country (such as the United States), you can invest $20,000 in Panama’s green initiative and receive legal residency. You can apply for citizenship and a passport after 5 years of residency.

The bottom line is that, if you give up your US citizenship, you can stop paying US capital gains taxes once that process is complete. Getting to that point will be a long road if you don’t already have a second passport.

Offshore Life Insurance

Any investment made inside a life insurance policy is either tax deferred or tax free. If you close out the policy during your life, you’ll pay tax on the distribution, therefore it’s tax deferred. If you hold the policy until your death, then the gains pass to your heirs tax free (considering the step-up in basis they receive).

An offshore private placement life insurance policy provides you with maximum asset protection and a nearly unlimited capacity for tax free or tax deferred growth. A life policy has no investment cap, income limitation, or distribution requirement. A private placement policy is basically an unlimited ROTH IRA or defined benefit plan that can pass to your heirs tax free.

You can invest millions of after tax dollars into a US compliant offshore life policy and pay zero capital gains on the appreciation. In fact, the minimum investment for these policies is often $1 to $2.5 million.

I also note that you can borrow against most offshore life insurance policies. This means you can access the cash in times of need without incurring a tax cost.

But, offshore life policies are expensive. If you can create a large enough policy, and you generate solid returns, they can be a very valuable tool.

Move to Puerto Rico

Moving to Puerto Rico is the easiest way to stop paying capital gains tax. Move to this US territory today and stop paying capital gains tax immediately! You don’t need to give up your US passport and you don’t need to buy an expensive life insurance policy.

Here’s what you need to do to stop paying capital gains tax by moving to Puerto Rico:

  1. Move to Puerto Rico,
  2. Break as many ties with your home state as possible,
  3. Spend 183 days a year in Puerto Rico,
  4. Sign up for and be approved for Act 22,
  5. Buy a home in Puerto Rico within 2 years of receiving your Act 22 decree, and
  6. Donate $5,000 a year to a charity in Puerto Rico (new as of July 11, 2017).

Do these things and you can stop paying capital gains tax to the United States immediately.  You pay zero capital gains tax on assets acquired after you move to Puerto Rico.

Note that this tax deal is available on passive gains that can be categorized as Puerto Rico sourced income. In most cases, this is gains on stocks. It does not apply to US real estate or US rental profits. These are always US source income.

And only Puerto Rico can make you this offer. As I said above, when you move to a foreign country, you pay US tax on your worldwide capital gains. You won’t be double taxed because of the foreign tax credit, but the IRS always wants it’s cut.

Because of its unique status as a territory, Puerto Rico sourced income is not taxed by the United States. That is, residents of Puerto Rico pay tax to their local government and not the IRS. See IRC Section 933.

This means that Puerto Rico is free to charge it’s residents whatever tax rates it wishes. Because of it’s pending bankruptcy, the government is making you an offer you can’t refuse: move to Puerto Rico and pay zero capital gains tax on assets acquired after you become a resident.

So, if you want to stop paying capital gains tax, and don’t want to give up your US citizenship or buy an expensive life insurance policy, consider moving to Puerto Rico.

And Puerto Rico’s offer doesn’t stop with Act 22. You can also move a business to Puerto Rico and cut your corporate rate to 4%. Under Act 20, you pay only 4% on Puerto Rico sourced business income. For more on Act 22 and 20, see: Changes to Puerto Rico’s Act 20 and Act 22.

To qualify for Act 20, your business should be providing a service from Puerto Rico to people or companies outside of the island. Act 20 companies are usually online businesses or other portable businesses that can be easily re-domiciled to Puerto Rico.

Just about any portable business can qualify for Puerto Rico’s Act 20. Even one man internet marketers or one woman sales sites can get the 4% rate. This is because the government just changed the law to allow for one person businesses. See: Puerto Rico Eliminates 5 Employee Requirement.

Conclusion

If you’re just done with the US and it’s tax laws, consider buying a passport and dumping Uncle Sam. If you don’t want to move out of your state, and you have a few million dollars to invest, set up an offshore life policy to eliminate capital gains tax.

If you’re willing to spend 183 days a year in Puerto Rico, moving to the island under Act 22 is the easiest and best way to stop paying capital gains tax immediately.

For more information on any of these options, please contact us at info@premieroffshore.com or call us at (619) 483-1708 for more information. 

Puerto Rico Act 20 no employees
Christian Reeves

Puerto Rico Eliminates 5 Employee Requirement

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

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

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

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

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

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

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

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

Puerto Rico Eliminates 5 Employee Requirement

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

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

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

New Risks of Act 20 in 2017

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

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

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

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

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

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

Getting Money Out of Puerto Rico Act 20 Company

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

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

Conclusion

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

Changes to Puerto Rico’s Act 20 and Act 22
Christian Reeves

Changes to Puerto Rico’s Act 20 and Act 22

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Article 3: Definitions;

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

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

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

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

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

Criteria includes but is not limited to:

(i) job creation;

(ii) investment of capital;

(iii) direct or indirect contributions to the economy.

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

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

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

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

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

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

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

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

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

Act 45 Approved July 11, 2017

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

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

Article 3. – Procedures.

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

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

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

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

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

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

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

tax free as an affiliate marketer
Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

perpetual traveler
Christian Reeves

How to Escape the Perpetual Traveler Tax Trap

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Under the US tax code, a perpetual traveler is a US citizen or green card holder living outside the United States who doesn’t becomes a tax resident of another country. Being labeled as a perpetual traveler limits how many days you can spend in the US and can cause all kinds of problems for expats. Here’s how to escape the perpetual traveler tax trap.

A perpetual traveler is someone who travels from place to place never putting down roots. A perpetual traveler doesn’t have a residency visa, doesn’t file taxes in any country other than the United States, and never spends 183+ days in any one country.

The problem being labeled a perpetual traveler is that you can only spend 35 days a year in the United States. Spend one day more and you lose 100% of the tax benefits of living abroad. The international tax benefits that come from living abroad are no prorated over the time you spend abroad… you either qualify for the exclusion and get to take the full deduction or you don’t and get the joy of paying US tax on 100% of your income.

Let’s take a step back… We US citizens and green card holders are taxed on our worldwide income no matter where we live. Also, there’s no benefit to living offshore when it comes to capital gains. We always pay US tax on our passive income and dividends no matter where we live.

  • The only exception for capital gains on the planet is the US territory of Puerto Rico.

Business income and your salary from an active business conducted outside of the United States is eligible for significant international tax breaks. The tax benefits of operating a business offshore are:

  1. The Foreign Earned Income Exclusion allows you to exclude up to $102,100 in salary from Federal income taxes in 2017. A husband and wife working in this offshore business can exclude over $200,000 combined.
  2. You can hold / retain foreign sourced business income in an offshore corporation tax deferred.

To qualify for the FEIE, you must meet the physical presence test or the residency test. The physical presence test is, in theory, very simple: be out of the United States for 330 days during any 12 month period. That’s all there is… easy enough, right?

I say the physical presence test is simple in theory because everyone tries to push the boundaries and spend more time in the United States. Family emergencies, vacations, business meetings, flight delays, I’ve heard it all.

Unfortunately, the FEIE physical presence test is very rigid. If you’re off by even one day, and spend only 329 days abroad, you lose the entire exclusion. Because most Americans try to push the boundaries, the IRS loves to audit expats who take use the physical presence test.

The second and more reliable way to qualify for the FEIE is through the residency test. You can exclude up to $102,100 in salary from work performed outside of the United States if you’re a tax resident of another country.

A “resident” is someone who makes a foreign country their home and their home base. It’s where they return when they travel, where they have residency, and where they intend to be for the foreseeable future. A resident also breaks as many ties to the United States as possible.

The benefit of being a tax resident is that you don’t need to watch your days in the US so closely. You can spend 3 or 4 months a year in the US without issue. You’ll only have trouble if you spend more than 6 months or 183 days in the United States.

As I said above, the FEIE physical presence / 330 day test is easy to calculate and difficult to implement. The residency test takes work and commitment to qualify for but allows you to spend as much time as you need in the US and greatly reduces your probability of an IRS audit.

With all of that said, in order for a perpetual traveler to qualify for the Foreign Earned Income Exclusion, they must be out of the United States for 330 days a year. This is a challenge and increases your risk of an audit.

The solution to the perpetual traveler tax trap is to gain legal residency in a country that won’t tax your business profits. Find a country that you can make your home base and won’t tax your business. For a list of possibilities, see: Which Countries Tax Worldwide Income?

In my experience, the easiest tax free country for a US citizen to gain residency in Panama. Panama won’t tax your foreign sourced business profits. That is, they won’t tax sales to people and companies outside of Panama. Of course, if you sell to locals, you’ll pay tax in Panama.

And the most efficient residency visa in Panama is the friendly nations reforestation visa. Invest $20,000 into Panama’s green initiative (which means to buy $20,000 worth of teak trees) and get residency. This is by far the lowest cost and lowest investment required in any developed country.

The key to escaping the perpetual traveler tax trap is residency in a zero tax country. Do your research and you’ll find that Panama is the most efficient choice for a home base.

I hope you’ve found this article on how to escape the perpetual traveler tax trap to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to set up offshore and connect you with local experts for the friendly nations reforestation visa.

Foreign Base Company Service Income
Christian Reeves

How to Eliminate Subpart F Foreign Base Company Service Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

tax free income the legal way
Christian Reeves

Pay Zero Income Tax the Legal Way

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

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

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

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

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

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

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

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

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

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

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

Offshore Captive Insurance Company

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

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

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

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

Offshore Life Insurance

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

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

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

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

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

Offshore Business

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

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

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

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

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

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

Move to Puerto Rico

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

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

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

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

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

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

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

Conclusion

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

Foreign Base Company Income
Christian Reeves

Foreign Base Company Income

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

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

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

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

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

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

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

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

Foreign Personal Holding Company Income

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

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

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

Foreign Base Company Service Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EB-5 Investor Visa
Christian Reeves

Changes to the EB-5 Investor Visa in 2017

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The US EB-5 investor visa is one of the lowest cost residency to citizenship programs on the planet. Yes, you heard me right… you can buy US citizenship for a fraction of the cost of other top countries. Here’s how the EB-5 investor visa is going to change in 2017 and why it will still be a great bargain.

As of today, March 25, 2017, you can get US residency by starting a business in the United States with a $1 million investment and employing 10 people. If you set up that business ins a “distressed” area, your investment goes down to $500,000.

Compare that to Austria. The government of Austria will grant you citizenship with an investment of EUR 3 to 10 million in a business which will employ a “substantial number of people.” The investment amount is negotiated on a case by case basis. Most end up investing about EUR 5 million… 5 times more than the United States.

For reference, Australia, the UK, and Canada also have comparable investment programs at $1 million to $5 million. Malta is about $1.2 million, but it’s a very different offer. For more on this EU passport, see: Second Passport from Malta

Here’s how the US EB-5 investor visa works. You setup your own business which will employ 10 people, or invest in someone else’s business which will employ that number.  Many very large projects, including hotels, resorts, call centers, etc. qualify for EB-5 status. Really, any for profit business that needs a lot of employees is a good EB-5 investor visa opportunity.

Once that business is up and running, you apply for your EB-5 investor visa. This gets you and your family (spouse and dependent children) into the United States. You enter on a residency visa and receive your green card shortly thereafter.

So long as the business is active, and employees at least 10 people, you will maintain this residency. After 5 years of residency, you can apply for citizenship.

Those using the EB-5 investor visa are guaranteed citizenship at the end of 5 years of residency. There are no quotas or limits… stick to the terms of your agreement and you and your family will receive US passport(s).

The US EB-5 program is the most popular residency program in the world. It’s raised at least $8.7 billion and created 35,150 jobs since 2012. The program issues a maximum of 10,000 green cards a year and 90% of the applications come from China.

That’s the US investor visa today. Here’s how the EB-5 investor visa is likely to change in 2017.

Expect the $500,000 distressed option to go up to $1.35 million. Bottom line, this program was supposed to help poor areas with high unemployment. In practice, all the cash went to fancy hotels and resorts. Thus, the investment amount is going up, way up.

For those starting businesses that are not in designated low income areas, the minimum investment is going from $1 million to $1.8 million.

When might these changes come into effect? The EB-5 investor visa program is up for renewal on April 28, 2017. I expect changes to the program shortly thereafter.

Two items of note:

First, remember you must keep your business going throughout your residency period. Once you have your passport, you can shut it down. This means you must keep 10 employees working for 5 to 6 years. If the business makes a profit, great – you can take out your earnings. If you lose money, you’ll need to invest more to reach break-even or profitability.

I can’t see starting a business that will employee 10 people from day one with less than $2 million. The original investment amount was set in 1990, when $500,000 to $1 million was real money. Today, it would be difficult to reach ramen profitability with that capital and 10 employees.

Second, the investment requirement is NOT the highest cost associated with the EB-5 investor visa for a high net worth person. The real cost is in taxes, taxes and taxes.

Only the United States taxes its citizens and green card holders on their worldwide income. Once you have that residency visa, you’ll pay US taxes on 100% of your income, no matter where you live and no matter where it’s earned.

None of the other countries mentioned here, such as the UK, Austria, Australia, and Malta, tax nonresidents on income earned abroad. You only pay tax in Austria if you are living in Austria. Get your passport and live elsewhere and you pay zero.

So, someone living abroad might be paying zero tax on $3 million a year in business income with an Austrian passport. If they sign up for the US EB-5 investor visa, they’ll pay 35% to the United States, plus another 10% to their state. This means you’re paying $1,350,000 in taxes on $3 million of income each and every year for the right to a US passport.

There is one way to get your US passport and cut your tax rate from 40% to 4% on business income and 0% on capital gains. Set up in the US territory of Puerto Rico. For more on this topic, see:

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

Where to start an EB-5 business

I hope you’ve found this article on the United States EB-5 investor visa helpful. For more information on this, or setting up a business in Puerto Rico, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

tax planning for payday lenders
Christian Reeves

International Tax Planning for Payday Lenders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

how to report foreign salary
Christian Reeves

How to report a foreign salary or international business income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trump Tax Plan for Expats
Christian Reeves

Trump’s Tax Plan for Expats

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DATA SOURCE: WWW.DONALDJTRUMP.COM

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

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

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

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

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

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

self employment tax
Christian Reeves

How self employment tax works when you’re offshore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PFIC investment
Christian Reeves

What is a PFIC Investment – Passive Foreign Investment Company

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

First let me define a few terms around PFIC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are a few exceptions to the PFIC investment penalties…

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

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

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

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

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

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

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

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

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

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

Which Countries Tax Worldwide Income?
Christian Reeves

Which Countries Tax Worldwide Income?

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When you’re planning a move abroad, you need to consider the tax laws of your country of citizenship and your country of residence. The key to a solid expat move is to determine which countries tax worldwide income and avoid them whenever possible.

There are four basic tax groupings of countries. I won’t consider the 22 countries that don’t tax citizens or residents. You can find that list here.

Here’s the 4 tax categories:  

  1. Countries that tax citizens and legal residents on their worldwide income no matter where they live. These countries also tax residents on their worldwide income.
  2. Countries that tax residents on their worldwide income. This is called a residential or physical presence tax system.
  3. Countries that tax citizen residents on their worldwide income but not foreign residents.
  4. Countries that tax residents on their local source income but not foreign source income. This is called a territorial tax system.

The only major nation that taxes its citizens (and green card holders) regardless of where they live is the United States. So long as you hold a U.S. passport or green card, the Internal Revenue Service wants its cut of your profits and capital gains.

  • Some lists of countries that tax citizens and legal residents on their worldwide income include Libya, North Korea, Eritrea and the Philippines. The tax systems of these countries are not well developed and data is limited.

The United States taxes all U.S. persons on their worldwide income. A U.S. person is a citizen, green card holder (who is a legal resident but not necessarily present in the United States), and residents. A resident is anyone who spends more than 183 days a year in the United States.

If you’re living and working outside the United States, and qualify for the Foreign Earned Income Exclusion, you can earn up to $102,100 in salary during 2017 free of Federal income tax. If your salary is more than the FEIE, you will pay US tax on the excess.  

Also, the FEIE only applies to your salary. You will pay US tax on capital gains, dividends, rents, royalties, and passive income no matter where you live.

Category two includes countries that tax residents on their worldwide income. In most cases, a resident is anyone who spends more than 183 days a year in the country. If you’re not living within their borders, you won’t pay tax to these nations, even if you’re a citizen.

I should point out that the “183 days” test is the standard definition of a resident. Some have more complex tests to determine who is and who is not a tax resident. For example, Colombia uses your presence in the country and the following:

1. Staying continuously or non-continuously in Colombian jurisdiction for more than 183 calendar days during a 365 day period (1 year);  
2. 50% or more of your income comes from Colombian sources;
3. 50% or more of your assets are held in Colombian Territory;
4. 50% or more of your assets are managed from Colombian Territory;
5. Having a tax residence in a jurisdiction declared as “tax haven” by the Colombian government.

The best known category two residential taxation countries are Australia, Austria, Brazil, China, Colombia, Japan and Mexico. The residency tax system is the most common and a complete list can be found here.

Category three, countries that tax foreign residents differently than citizen residents, technically includes only Saudi Arabia, Cuba and Philippines. However, some countries impose worldwide taxation on residents only after they have been in the country for several years. So, this category can vary by your situation.

When you’re moving abroad and looking to reduce or eliminate income taxes, you want to move to a category 4 country. These nations are on a territorial tax system and tax only your local source income.


If you live in a category 4 country, operate an online business from a territorial tax country, and don’t sell to locals, you won’t pay income tax to your country of residence. If you move to a territorial tax country and open a restaurant, you will have local source income and thus pay tax on your profits.

The most “business friendly” territorial tax system is in Panama. Other options include Belize, Costa Rica, Hong Kong, Malaysia, and Singapore. For a complete list, click here.

Those are the four tax systems available, with territorial and residency based taxation being the most common. Your objective should be to become a resident of a category 4 country and be a tourist or visitor in countries who would want to tax your business income.

There’s a fifth option you if you plan to spend a lot of time on the road.

You can elect to become a perpetual traveler, as so many internet marketers and entrepreneurs with portable businesses do. If you keep moving, never spending 183 days a year in any one country, you never become a tax resident and are not subject to their income tax reporting or paying requirements.

A perpetual traveler might split her time between Europe, Canada and Asia, or between the United States, Mexico, and South or Central America, never becoming subject to any of these countries tax laws. This option has become popular with nomad internet professionals.

I have two important notes for perpetual travelers:

The first is for Americans. Remember that the U.S. taxes its citizens on their worldwide income, including perpetual travelers. If you go this route, you need to qualify for the FEIE using the 330 day test and not the residency test. Here’s a detailed article on the FEIE for US citizen perpetual travelers. It’s much easier to qualify for the FEIE if you’re a resident of a foreign country for U.S. purposes, even if you spend less than 183 days in that nation.

The second is for everyone else. Several countries will attempt to tax you based on citizenship if you’re a perpetual traveler with no tax home. While their legal standing to require a tax home is unclear, I have seen many nomad clients go to battle with their home country on this issue.

Therefore, I suggest all perpetual travelers become residents of a country with a territorial tax system for the purpose of reporting (or defending your status) to your country of citizenship. Becoming a resident of Panama, while spending only a few days a year there, can simplify your worldwide tax picture.

Panama has one of the lowest cost residency programs. If you’re from a top 50 country, you can become a resident with an investment of only $20,000.

I hope you’ve found this article on which countries tax worldwide income to be helpful. For more on how to setup an offshore company or plan an international trust, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

offshore trust tax
Christian Reeves

Offshore Trust Tax Status and U.S. Tax Filing Requirements (Form 3520-A)

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An offshore trust owned by a U.S. person must file Form 3520-A and a variety of other reports to remain in compliance with the IRS. Here are the tax filing requirements for offshore trusts with U.S. owners.

First, allow me to define a few terms around offshore trust tax reporting:

Settlor or Grantor: The person or persons creating and funding the trust. The terms settlor and grantor are synonyms for estate planning and the U.S. tax code.

Owner of an Offshore Trust: The settlor is the owner of the trust until his death. Once the trust passes to the heirs, they become the owners for U.S. tax purposes.

Grantor Trust: A grantor trust is considered a disregarded entity for income tax purposes. Any taxable income or deduction earned by the trust will be taxed on the grantor’s tax return. The settlor(s) or grantor(s) are the beneficial owner of the trust for tax purposes until his or her death.

Beneficial Owner: The owner of the assets of the trust for tax purposes. More specifically, Any person treated as an owner of any portion of a foreign trust under the grantor trust rules (Sections 671 to 679 of the U.S. Tax Code).

U.S. Person: Any U.S. citizen, green card holder, or tax resident. This article is focused on offshore trusts owned by U.S. persons. The rules are different for offshore trusts owned by non-resident aliens who become U.S. persons after the trust is funded.

Tax Resident: Any person who spends more than 183 days a year in the United States.

Now let’s get to the U.S. tax filing requirements of offshore trusts with U.S. owners.

We start from the position that U.S. persons are taxed on their worldwide income, no matter where it’s earned and no matter where they live. So long as you hold a U.S. passport or green card, or are a U.S. resident for tax purposes, the IRS will expect you send them their share each year.

Next, all offshore trusts with U.S. owners are grantor trusts for U.S. tax purposes. This means that all income earned within an offshore trust is taxable to the grantor. Likewise, this means that the settlor is considered the beneficial owner of the trust assets for tax purposes.

Note that I repeatedly write, “for tax purposes.” The settlor may not be considered the owner of the assets for liability and litigation purposes. Also, she might not be the owner of the assets for estate planning purposes. This article on the U.S. tax status and filing requirements of offshore trusts looks at these matters only from the point of view of the IRS.

This all means that the settlor or owner of an offshore trust must pay U.S. tax on the taxable gains earned within the trust. This includes capital gains from stock trading, rental income from real estate, and the gain realized on the sale of any trust assets.

Of course, it’s possible for an offshore trust to have non-taxable gains. For example, profits earned within a U.S. compliant offshore insurance wrapper are not taxable to the owner.

The bottom line is that, any income earned within an offshore trust which is not within a tax exempt structure is taxable to the owner. Taxes are not deferred until the profits are brought into the United States, they’re due when the gains are realized.

U.S. Tax Filing Requirements for Offshore Trusts

The most important filing requirement for an offshore trust with a U.S. owner is Form 3520-A.

An offshore trust treated as a grantor trust for U.S. tax purposes must file IRS Form 3520-A each year. Gains, losses and ownership are reported to the IRS on this form. It doesn’t matter whether there were transactions or gains in the trust, Form 3520-A must be filed each and every year.

Failure to file Form 3520-A, or filing an incomplete or inaccurate Form 3520-A  can result in a penalty of the greater of $10,000 per year or 5% of the gross value of the trust assets owned by U.S. persons. That means that the minimum penalty for failing to file this form is $10,000 per year.

An offshore trust where the settlor is alive and a U.S. person will be 100% owned by a U.S. person and the penalty for failing to file Form 3520-A will be 5% of 100% of the trust assets. In the situation where the settlor has passed and one or more of the beneficiaries are not U.S. persons, the penalty will apply only to the portion of the assets owned by U.S. persons.

Note that an offshore trust with U.S. owners must also file Form 3520 to report changes in ownership and certain transactions involving the trust. Failure to file this subform will result in an additional penalty of the greater of $10,000 per year or 5% of the gross value of the trust assets owned by U.S. persons.

So, failure to report an offshore trust in a year where both Form 3520-A and Form 3520 are required can result in a total penalty of $20,000 or 10% of the gross assets. Miss these forms or file them incorrectly for a few years and the penalties add up quickly.

Foreign Bank Account Report (FBAR)

The most basic offshore form is the Report of Foreign Bank and Financial Accounts, Form FinCEN 114, generally referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

The $10,000 amount is the value of all offshore bank and brokerage accounts combined. If you  have 4 offshore accounts, each with $4,000, your total offshore balance is $16,000 and an FBAR report is due each year.

The penalty for failing to disclose an offshore bank account is $10,000 for each non-willful violation. If the violation is intentional, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. A separate penalty will be imposed for each year you failed to report the international bank and/or brokerage account associated with your offshore trust.  

In addition to filing the Foreign Bank Account Report, your offshore account must be disclosed on Form 1040, Schedule B of your personal tax return.

Other Tax Forms for Offshore Trusts

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations. If your trust owns a foreign corporation, Form 5471 will be required.

A foreign corporation or limited liability company owned by an offshore trust should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity.

Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities. If your foreign trust owns an offshore Limited Liability Company, you might need to file Form 8858. If not this form, then Form 5471. Which form is required is determined using the instructions to Form 8832.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation. If your offshore trust invests in a U.S. business, or in an offshore corporation that does business in the United States, you may need to file Form 5472 to report U.S. source income.

Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation. Form 3520 is generally used to report transfers to an offshore trust. Form 926 can be required if you transfer property into a foreign corporation owned by your trust.

Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States. Whether this Form 8938 is required will depend on many factors, such as the value of your foreign assets and whether you’re living in the United States or abroad. I won’t go into the details here. Suffice it to say that most offshore trusts are large enough that Form 8938 is required.

Conclusion

Because of the complex web of tax forms and rules that apply to offshore trusts, the severe penalties for getting it wrong, and the potential to use an offshore trust as a tax planning tool (when combined with an insurance wrapper) or as a way to minimize estate tax, I strongly suggest you hire a U.S. expert to form your structure.

Only a U.S. tax and asset protection lawyer is qualified to design and implement an offshore trust for an American citizen or resident.

Only a professional with years of experience in the field should be hired to quarterback your asset protection team.

Only a U.S. lawyer can build an asset protection trust to protect you from U.S. creditors. If your risks are in the United States, so must be your legal counsel.

Only a U.S. tax expert is qualified to keep your offshore trust in compliance.

Only an attorney experienced in both offshore planning and U.S. taxation can assist you with pre-immigration planning using offshore trusts.

Sure, it’s cheaper to hire an offshore trust agent. Take a read through the penalties for failure to file or report again, and then consider whether the savings are worth the risk.

Here’s the bottom line: If you can’t afford to do it right, don’t do it at all. If the amount of assets you want to transfer offshore don’t warrant hiring a U.S. lawyer, then don’t go with a trust. Plant your first flags offshore in a less costly and less complex structure.

For example, if you will move $100,000 offshore, go with a Panama Foundation rather than an offshore trust. The cost savings will be significant and the Foundation offers many of the same asset protection benefits. Also, a Panama Foundation is a great way to hold active trading accounts and businesses, which don’t play well with offshore trusts.

If you want to take a U.S. retirement account offshore, use an offshore IRA LLC rather than an international trust. Your setup and ongoing costs will be a small fraction of those associated with a properly designed trust.

Finally, it’s possible to invest offshore and legally report nothing to the IRS. If you buy foreign real estate, or hold gold offshore in your name, there will be no IRS reports to file. Stick to gold and real estate, avoid offshore structures, and do not have an offshore bank accounts with more than $10,000, and your investments will remain totally private.

Assets within an offshore corporation, including gold and real estate, must be reported on Form 5471. The above refers only to assets held in your name without a corporate structure, LLC, or foreign trust. For more, see: Offshore Privacy Exists!

I hope you’ve found this article on the U.S. tax status and IRS filing obligations of offshore trusts to be helpful. For more information on building an international asset protection structure, please contact me at info@premieroffshore.com or call us at (619) 483-1708 for a confidential consultation.

stop paying payroll tax
Christian Reeves

How to Stop Paying Payroll Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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