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Research and Development and Intangible Property Tax Breaks in Puerto Rico

11/02/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

Tax Exemptions Under Puerto Rico’s Act 73

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

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

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

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

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

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

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

Other tax breaks include:

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

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

Puerto Rico’s Act 73 Tax Credits

The Act provides various tax credits, including:

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

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

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

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

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

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

10/12/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Tax Debt, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Step by Step Guide to Taking Your Business Offshore

07/12/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation/by Christian Reeves

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

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

Step 1: Develop a tax and business plan

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

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

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

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

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

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

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

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

For an article on taking your business offshore using the Foreign Earned Income Exclusion, see my post Move Your Internet Business to Cayman Islands.
For an article comparing the FEIE to the transfer pricing methodology available in the US territory of Puerto Rico, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

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

Step 2: Select your country of operation

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

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

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

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

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

Step 3: Form a corporation in your country of operation

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

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

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

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

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

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

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

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

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

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

Step 6: Setup banking and credit cards

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

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

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

Step 7: In-house bookkeeping and accounting

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

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

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

Step 8: Find local professionals

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

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

Step 9: Find US tax compliance

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

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

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

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

Other international tax filing obligations include:

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

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

Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.

Form 3520 – Annual Return to Report Transactions With Foreign Trusts.

Form 3520-A – Annual Information Return of Foreign Trust.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation.

Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation.

Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States.

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

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

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

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

05/28/2016/0 Comments/in Articles, International Business, Offshore Company Taxation, Puerto Rico Tax Incentives, Second Passport, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

What is the EB-5 Investor Visa

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

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

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

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

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

What is Puerto Rico Act 20 and 22

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How I can Help

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

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

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

Good News from Congress for Act 20 Business in Puerto Rico

05/22/2016/in Articles, International Business, Puerto Rico Tax Incentives/by Christian Reeves

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

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

The bill has two main provisions:

It creates a seven-member fiscal oversight board with members appointed by the president and congressional leaders that will have to approve Puerto Rico’s future fiscal plans.

It allows the island to legally pay less than 100 percent of what is owed on old debts.

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

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

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

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

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

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

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

If you’re new to the Puerto Rico tax deas, checkout my article Blood in the Streets Tax Planning for a discussion of Act 20. I’ll also summarize below.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to Maximize the Tax Benefits of Puerto Rico

05/22/2016/0 Comments/in Articles, International Business, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sidebar: Don’t Stop the Carnival is one of my favorite books about expat life.

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

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

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

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

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

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

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

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

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

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

Move Your Internet Business to Cayman Islands Tax Free

05/13/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Travel, Lifestyle and Culture/by Christian Reeves

Are you looking for a high quality of life, no taxes, and a cool offshore jurisdiction from which to operate your internet business? Ready to move you and your team to paradise for a few years to rake in the cash tax free? Then consider moving your internet business to Cayman Islands.

Cayman Islands had a tax deal you can’t refuse. Move to this business-friendly group of islands with its first-world infrastructure and amazing climate, and pay no taxes. You will also get a 5 year renewable work / residency visa for you, your staff, and their families. There are no restrictions on the number of workers you can bring with you and no requirement to hire locals.

Historically, visas and work permits were extremely difficult to obtain in Cayman. Securing residency previously required you to buy real estate of $500,000 to $1 million dollars and navigate river of red tape.

Because a residency permit and work visa are essential for the American to qualify for the Foreign Earned Income Exclusion, very few small businesses set up in Cayman.

Suffice it to say, those days are gone and now Cayman Islands is open for business. Today, you can relocate your internet business to Cayman Islands efficiently and without (most) of the impediments.

Moving a business to Cayman also gets you access to their world-class banks and credit card processing facilities that have been shut to Americans for several years now. Only US persons with a licensed business or a home on Cayman may open a account on the Island.

For example, to further reduce your contacts with the US, you might process credit cards through First Atlantic Commerce, a leading global online payment solutions provider. This enables you to accept payments in up to 145 world currencies in real-time on a 100% PCI-compliant platform. Merchant services include:

Multi-currency, multi jurisdictional settlement
Real-time processing
Virtual Terminal
Repeat and Subscription Billing
Card Number Tokenization
3-D Secure™ (bank dependent)
CVV2/CVC2/CID and AVS checks
PCI Compliant gateway

We also highly recommend banking and credit card processing services from Royal Bank of Canada.

Now on to US Taxes.

Here’s how to move your business to Cayman Islands tax free. Do it right and you and your staff can earn up to $101,300 tax free in salary. That’s right, everyone who moves to Cayman with you gets $101,300 tax free. That equates to about a 35% pay increase on your first $100,000 in salary… certainly worth hanging out on a beautiful Caribbean island for a year to earn.

You will pay US taxes on salary over $101,300. You might create defined benefit or other retirement structures to further defer tax. A small business might simply hold retained earnings tax deferred.

Even better, you and your team won’t be required to pay self employment tax or any of the US social taxes. No FICA, Medicare, or Obama taxes. That’s a savings of about 15% (7.5% to the employer and 7.5% to the employee).

Of course, you’re in business to make a profit, not just pay your employees. Any income generated by the Cayman Islands corporation can be held offshore tax deferred. If you accrue $5 million in net profits over 3 years on the island, so long as you hold them in your Cayman corporation, you won’t be required to pay US taxes.

The devil is in the details of the US tax code and I’ll get to that.

First, let me point out that I am talking about moving you and your business out of the United States and to the Cayman Islands. This is not some tax dodge using shell companies or hiding from the IRS. This is committing to the business, making the move, and earning the tax benefits.

Shell companies and offshore structures with no substance behind them are so 2000. These days, if you want to cut your US taxes, you must have employees and operations outside of the US. For most businesses, this means moving you and your workers out of the United States for a time.

Then and only then will some of the income generated by this division qualify to be held in the Cayman Islands corporation tax deferred. More on this soon….

In support of this fact, the Cayman Islands Government has granted a number of globally competitive tax holidays / tax free zones throughout the Island. They allow your businesses to establish a physical presence plus offer fast-track business licensing and visa processing. These programs attempt to eliminate the red-tape, excessive costs, and uncertainty that one would normally experience when trying to set up a business in Cayman Islands.

These tax free zones provide the following benefits:

No corporate, income, sales or capital gains tax in Cayman Islands – tax payable in the USA is a complex matter summarized below.
100% foreign company ownership permitted
A 3-4 week fast-track business licensing regime
Renewable 5-year work/residency visas granted in 5 days
Cutting-edge IT and business infrastructure
Offshore hosting & payment gateway
Minimal Government regulation
No Government reporting or filing requirements
A tech cluster with massive cross-marketing opportunities
’One-stop-shop’ Administration services
Work visas for your staff and residency permits for your spouse and children at no additional cost.

Note that you must operate your business in one of the Island’s tax free zones to get these benefits. Also, your business must be in one of the industries to which a tax holiday is available. Qualified businesses include:

Internet & Technology
Media, Marketing or Film
Biotechnology & Life Sciences
Commodities & Derivatives
Maritime Services

How to Maximize the US Tax Benefits of Moving Your Business to Cayman Islands

Let’s get back to the devil (the IRS) and those details.

The key to the offer in Cayman is the fact that you and your employees will receive work and residency permits on the island. In the past, these have been extremely difficult to get and required that you hire a proportional number of Cayman citizens.

As of 2016, Cayman understands that the days of the shell company are coming to an end. The government is moving to a service based offering that allows you to establish a real business with substance and employees who qualify for the Foreign Earned Income Exclusion. One that will pass muster with the IRS and allow you to minimize your US taxes.

Of course, you need to do your part to make Uncle Sam happy as well. You need to move your business, your workers, and yourself to Cayman Islands. You must reside on the island as a legal resident with a work permit (we have that covered for you), qualify for the Foreign Earned Income Exclusion, and obtain a license from one of their tax free zones.

To qualify for the Foreign Earned Income Exclusion, you need to move to Cayman for the foreseeable future, make the Island your home base, and stay out of the US approximately 8 months of the year.

Cayman Islands should be your home base and the jurisdiction from which you operate your business. You don’t need to spend a certain amount of time on Cayman, but you do need to be out of the United States for about 8 months a year.

This allows you to earn up $101,300 in salary from your Cayman corporation tax free in the United States, avoid US social taxes, and retain net profits from your active business in the Cayman corporation tax deferred. The fact that you are structured and licensed in one of the Cayman tax free zones means you operate tax free in Cayman also.

Note that I said net profits / retained earnings in your Cayman Islands corporation will be tax deferred – not tax free – in the United States. When you will decide to take out these retained earnings from your corporation, they will be taxed in the United States. You can decide when that occurs, but you must pay Uncle Sam some day.

The Foreign Earned Income Exclusion is a complex topic, and I have merely skimmed the surface here. For more details, see:

As you read through these thrilling posts, keep in mind that we are talking about moving you and your business to Cayman. You will qualify for the Foreign Earned Income Exclusion using the residency test and not the physical presence test.

Costs of Setting Up in Cayman Islands

I’ve been working offshore since 2000 and I can tell you that Cayman Islands is without a doubt the most beautiful tax paradise. Add to this their world class services, IT infrastructure, and top legal and business talent, and it’s an amazing place from which to operate an internet business. Cayman Islands is NOT a low cost option Cayman is the Hyatt or Nieman Marcus of the offshore world, not Wal Mart or Best Western.

Cayman is one of the more expensive jurisdictions from which to run your business. You will need to pay your employees the same as you do in a major US city like Los Angeles or New York to cover the cost of living. Everything you do, from equipment to meals to lodging, will cost about the same as the United States. And everyone will want to travel back and forth to the US to escape that Island Fever.

If you are looking for one of the most beautiful and professional spots on the planet from which to operate your business, Cayman Islands is it.

If you are looking for a place that offers low cost labor and a 4% tax rate, and you have at least 5 employees, consider Puerto Rico.

If you want to maximize the value of the Foreign Earned Income Exclusion in a lower cost city, consider Panama. Yes, Panama regardless of the BS you read about the Panama Papers.

Here is a summary of the costs of setting up your business in Cayman Islands. Note that the minimum number of employees in Cayman is one. The tax benefits described here assume you (the business owner) are the first employee. You might be the only employee or you can bring with you as many support staff as you like.

The tax free zones have created turn-key offerings that include your residency visa, work permit, and office. The total cost for all of this in a shared / group space is about $1,550 per month. The minimum term of the lease is 3 years and the first year of $18,500 is due at signing.

You can have up to two people working in the group space. If you have 3 or more employees, you will need a private office. See below.

The cost for a private office for one person with 90 to 100 sq ft., again including all permits, is about $3,000 per month on a three year contract. This includes furniture, phone system, etc. Payments are made quarterly at $9,237.50.

A three person office is $53,450 per year and a 2 person office can be either $41,250 or $49,250 per year depending on if a chooses the standard or large 2 person office. Payments are made quarterly and the minimum term is 3 years.

In addition, each resident will need to have health insurance, which starts at about $200 per person per month. Family plans are available.

And, speaking of families, there is no additional cost to bring your spouse and dependent children under 18 years of age to Cayman in this program. Their residency permits are basically processed for free and included in your office rent.

However, you might consider setting up an office and work permit for your spouse. That will allow him or her to also earn $101,300 per year tax free under the FEIE working in your family business In this way, you can double the value of the Foreign Earned Income Exclusion.

Also, your kids must be enrolled in private school in Cayman. They are not allowed to roam the streets unchecked. Private school costs about $1,300 per month and a wide range of options and price points are available.

Finally, employees are required to have some type of retirement account on Cayman after 9 months of employment. This may provide additional tax planning options.

As I said above, the cost of living in Cayman Islands will be the same or higher than a major US city. Rent in a residential neighborhood for a two bedroom will run you $2,000 to $3,000 per month. The commute would be about 20 minutes to the office. .

If you want to go big, the rent for a two bedroom on Seven Mile Beach will run you $5,000 to $6,000 per month. If you would like to scope out the area, I suggest you stay at one of the many hotels on Seven Mile.

We can have you setup and operating from Cayman Islands in about 40 days. For more information, and a quote on forming your Cayman corporation and US / Cayman tax planning, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

Cayman Islands vs Puerto Rico

Allow me to close by comparing Cayman Islands to the US territory of Puerto Rico. Puerto Rico offers a tax holiday at 4%, a tax rate which is guaranteed for 20 years. The catch is that your business must move to Puerto Rico and have at least 5 employees on the island.

If you have fewer than 5 employees, Puerto Rico is not an option. Focus on Cayman Islands or Panama.

The tax deal in Puerto Rico is very different from that of Cayman Islands. In fact, it’s the reverse of the Foreign Earned Income Exclusion described above.

In Cayman, you earn $101,300 tax free and leave the balance of the profits in the offshore corporation tax deferred.

In Puerto Rico, you draw a reasonable salary and pay tax at ordinary income rates on that money. The remaining net profits of the business are then taxed in the corporation at 4%. If you are living in Puerto Rico, you can pull these profits (less the 4%) as tax free dividends.

So, if your salary is $100,000, and your remaining profit is $2 million, you will pay about $110,000 in Puerto Rico tax (($100,000 x 30%) + ($2 million x 4%) = $110,000). This is all of the tax you will ever pay on this income.

In Cayman, the $100,000 salary is tax free. At some point, you will pay US tax at 35% on the $2 million, or $700,000. This might be years or decades in the future, but the bill will come due.

For more on this topic, take a read through Puerto Rico’s Tax Deal vs the Foreign Earned Income Exclusion.

I also note that you, as a US citizen or resident, do not need an visas or special permission to move to Puerto Rico. It’s a domestic flight and you can relocate as easily as you would from New York to Miami.

Next, your cost of labor in Puerto Rico will be 30% to 40% lower than in Cayman Islands. The same goes for your cost of living and operating the business.

Finally, Puerto Rico allows you to spend more time in the US. You should be on the island for 183 days a year, not 240 as you should with the Foreign Earned Income Exclusion using the residency test.

Conclusion

Whether you want to operate your business from an island paradise like Cayman Islands or a fiscal paradise like Puerto Rico, all tax deals these days require substance. This means a business with employees abroad adding value and working in the business.

You need to move you and your business outside of the US to maximize the benefits of the Foreign Earned Income Exclusion or of the US territorial tax offerings of Puerto Rico.

I hope you’ve found this article helpful. For more information on moving your business to Cayman Islands or Puerto Rico, please contact me at info@premieroffshore.com or (619) 483-1708 for a confidential consultation.

Offshore Tax and Business App – Free Download

12/06/2015/in Articles/by Christian Reeves

The Premier Offshore mobile app is now available in the Apple store!

And, for a limited time, it’s a free download. I just ask you give me a good rating in the app store and let me know if you have any issues.

Access my library of international tax and business articles any time from any iPhone or iPad.

Need to know the tax consequences of an investment while you’re in the heat of negotiation?
Whether you qualify for the FEIE or if you can do a 1031 exchange?
Read up on offshore inversions while your stuck on a plane?
Catch up on the latest and greatest second passport offer?
Peruse my 130 page tax and business guide before bed? I’m told it’s more effective than Melatonin and Ambian!

Download my app and you’ll have all of this and more at your fingertips.

I’ll be releasing exclusive content, offshore tracking tools and calculators, and more free downloads on the App in the coming weeks. For example, the 2016 International Tax and Business Guide will only be available on my App.

Fyi… My 2015 International Tax and Business Guide is currently available for free on the App.

I hope this application will become an essential tool for every investor, business person, attorney, accountant and expat. If you’re living, working, or doing business abroad, it will become your personal international advisor on the go.

And, if you have not succumbed to the Apple marketing machine – don’t have an iPhone or iPad – don’t worry. My Android App is in beta in the Google Play Store and will be released in a few weeks.

You can download my apple app by clicking the link below or by searching for “offshore tax” in the Apple store.

Thank you for your feedback and support!

Best Regards,

Editor, PremierOffshore.com

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

12/04/2015/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

The Puerto Rico tax deal is the inverse of the Foreign Earned Income Exclusion. Here’s why:

With a Puerto Rico tax contract you can live in the US, your first $100,000 or so in salary is taxable, with rest deferred at 4%.
If you live offshore and qualify for the FEIE, your first $101,300 is tax free in 2016 and the rest is taxable in the US as earned.

The FEIE is intended for those living abroad and operating a business that earns $100,000 to $200,000 max. The Puerto Rico deal is intended for those who live in the US or PR and net $400,000 or more.

This article will compare and contrast the Foreign Earned Income Exclusion with the Puerto Rico Tax Deal. There are still deals out there for Americans if you know how to work the system.

Here’s how the Foreign Earned Income Exclusion works:

If you live abroad and work for someone else, or have your own business, the Foreign Earned Income Exclusion is the best tool in your expat toolbox. The FEIE allows you to exclude up to $101,300 in salary in 2016 from your US taxes.

This salary can come from your own offshore corporation or from your employer. So long as the company is located outside of the US, and you qualify for the Exclusion, you’re golden.

If a husband and wife are both working in the business, they can each earn $101,300 in salary tax free for a total of $202,600. Take out more, and the excess is taxable in the US at about 40%.

Likewise, if you work for someone else, the amount you earn over the FEIE is taxable in the United States. If you work for yourself, and hold earnings in an offshore corporation, you can usually defer tax on these retained earnings.

To qualify for the Foreign Earned Income Exclusion, you must be 1) outside of the US for 330 out of any 365 days, or 2) be a legal resident of a foreign country, file taxes in that country, and travel to the US only occasionally for work or vacation.

What qualifies you a resident of a foreign country is a complex matter. For a more detailed article on the FEIE, see: Foreign Earned Income Exclusion Basics
The above assumes you are living in a low or no tax country and does not consider the Foreign Tax Credit.

The Foreign Earned Income Exclusion is an excellent tax tool for those willing to live and work outside of the US. If you wish to spend more than a couple months a year in the US, or to take out a salary of more than $101,300, the FEIE might not be your best bet.

Here’s how the Puerto Rico Act 20 tax deal works:

If you incorporate your business in Puerto Rico, you can qualify for an 4% corporate tax rate. That is to say, you can live in the US, operate your business through a Puerto Rico company, and get tax deferral at 4%.

In order to qualify, you must hire at least 5 full time employees in Puerto Rico and provide a service from the island to businesses or individuals outside of PR. Popular examples are affiliate marketers, website developers, investment funds, phone and online support providers, and any other business that is portable or operates via the internet. Really, any company that can put a division in Puerto Rico can benefit from Act 20.

If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
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

If you, the business owner and operator, live in the US, you must take a “fair market” salary that’s taxable and reported on Form W-2. This might be around $100,000, but the exact amount will depend on many factors. The remaining net profits of the income attributable to the Puerto Rican company will be taxed at 4%.

This is basically the inverse of the Foreign Earned Income Exclusion. With a Puerto Rico contract, you pay tax on your fair market salary and defer the balance at 4%. With the FEIE, the first $100,000 (or $200,000 if married and both are working in the business) is tax free and the excess is taxable at ordinary rates.

I note that the Act 20 offer is a better deal than the multinationals have in Europe. Most of them are paying about 12.5% for tax deferral. Even at 12.5%, their tax contracts are under constant attack by the US and the EU. If you want to out maneuver Apple, and get an offshore tax deal blessed by the US government, move your business to Puerto Rico!

So, what’s different about Puerto Rico? As a US territory, it’s tax code trumps the Federal Code… or, more properly put, PR’s tax code is on equal footing with the US Federal code.

This is not the case in a foreign jurisdiction. So long as you hold a US passport, you’re subject to US taxation. The IRS doesn’t give a damn about the laws of your new country. They want their cut.

The US code is clear when it comes to Puerto Rico: Income earned in a Puerto Rican corporation, or as a resident of Puerto Rico, is exempt from US taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.

The code as applied to foreign jurisdictions is incredibly complex. Try reading up Controlled Foreign Corporations, Passive Foreign Investment Company rules, and Sub Part F of the code.

I suggest a Puerto Rico tax contract is best suited to firms with at least $400,000 in net profits that can benefit from (or, at least, break-even on) three employees in Puerto Rico.

For more information on how to live in the US and pay 4% on corporate earnings in Puerto Rico, see: Blood in the Streets Offshore Tax Planning.

In contrast, the FEIE is great for those who wish to live outside of the United States and earn a profit of of $100,000 to $200,000 from a business. Additional tax deferral is available to business owners who live abroad operate through an offshore corporation.

I hope you have found this article on the Foreign Earned Income Exclusion vs. the Puerto Rico Tax Deal helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708.

Blood in the Streets Offshore Tax Planning

12/04/2015/0 Comments/in Articles, Offshore Company, Offshore Company Taxation, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

You’ve heard the adage of investing when there’s blood in the streets… to buy when all hell is breaking loose and the market is at bottom. Well, now is your opportunity for some offshore tax planning while there’s blood in the streets. An offshore tax planning opportunity that will cut your corporate rate to 4%!

Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, “The time to buy is when there is blood in the streets.” Those words are so true today in Puerto Rico and their offshore tax planning deal.

If you have not been reading the papers lately, PR is broke and the Federal Govt doesn’t want to bail them out. Specifically, the GOP says no way to a Puerto Rico bailout.

So the Feds have allowed Puerto Rico to create a Tax Incentive Strategy to try and bail out PR by offering a 20 year deal where companies only pay 4% on their retained earnings.

Yes you read that correctly only 4% – that is lower than what many very large corporations are presently paying to Ireland 12.5%. It’s the best offshore tax planning deal available to US citizens.

If you’re a small to medium sized internet business, or one that can spin off a division like marketing, call center, or similar group, here’s your chance to pay only 4% on your profits. Here’s how to make an offshore tax planning deal with a desperate government to defer tax offshore like the Apples and Googles of the world.

In fact, you can negotiate a offshore tax planning deal far better than the big guys. Most of their tax contracts in Ireland and Luxembourg are at around 12.5%.

The US government is offering you an offshore tax planning contract that allows you to live in the United States and cut your corporate tax to 4%. No need to move abroad, uproot your family, etc. It’s akin to the offshore tax planning tool generally referred to as a corporate inversion. These inversions have become all the rage where the business operations are outside of the U.S. but the headquarters and business executives remain here.

Here’s how this unique offshore tax planning opportunity works:

The U.S. territory of Puerto Rico is broke. The island is essentially bankrupt – owing creditors over $70 billion with no chance of repayment and a US bailout seems unlikely. But, as territory, PR is prohibited from declaring bankruptcy. As of December 1, 2015, they are out of cash.

Puerto Rico’s laws are a mixture of US Federal statutes and local ordinances. And that is where your opportunity exist: Income earned in a Puerto Rican corporation or as a resident of Puerto Rico is exempt from U.S. taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.

In order increase employment, motivate investment, and benefit from it’s unique position in the US code, the island offers two tax deals:

1. Start a business in Puerto Rico with at least 5 employees, apply for an Act 20 tax contract, and receive a 20 year agreement with a corporate tax rate of 4%.

2. Move to Puerto Rico, be approved for an Act 22 contract, and pay $0 capital gains tax on assets purchased after you become a resident and sold during your time on the island.

Act 22 requires you to live in Puerto Rico for at least 6 months of the year. Act 20 does not. In this article I’ll focus on the Act 20 offshore tax planning contract for business owners.

If you don’t require 5 employees, we can create a joint venture company that will share costs and benefit the group. For example, if 2 partners come together in a “captive” internet marketing firm, they could license one business under Act 20. Different classes of stock and separate bank accounts could protect each partner’s interests.

To qualify under Act 20, your business should be providing a service in Puerto Rico to corporations or individuals outside of Puerto Rico. Internet marketers, website developers, investment advisors, hedge funds, call centers, and any other type of “portable” business are good candidates.

No matter your industry, if you can spin-off a division into a Puerto Rico corporation, you can benefit from an Act 20 contract. For example, I recently assisted a manufacturing company setup a web marketing group on the island.

Next, you need to hire at least 3 full time employees in Puerto Rico. These workers must be earning the minimum wage (currently $7.25) or better, be W-2 employees and not independent contractors, come into the office each day, and work at least 40 hours per week (full time).

Then, you, as the owner and operator of the business, must draw a fair market salary from the Puerto Rican company. This salary is taxable in the U.S. because it’s earned from work you did while living in the States.

The remainder of the income you earn in Puerto Rico is taxed at 4%. In other words, net profits in excess of your salary are taxed at 4%. You may retain these profits in your Puerto Rican corporation indefinitely tax deferred… an absolutely amazing offshore tax planning deal!

This gets you to a similar place as the Microsofts of the world… low cost offshore tax deferral. In fact, you’ve out maneuvered these giants by securing a deal at 4% rather than the typical 12.5%.

Puerto Rican profits must be left in the corporation, or can be moved to an offshore subsidiary. They can be used to grow the business and generally managed as corporate capital. You may not borrow against them or otherwise personally benefit from these retained earnings. They belong to the corporation until taken out as a distribution or dividend.

Now, here’s where things get really interesting in the Puerto Rico offshore tax plan:

With a typical offshore tax plan, profits are locked in the corporation. When taken as a dividend or distribution, they come out at ordinary income rates. Lower qualified dividend rates do not apply to distributions from a foreign corporation.

Puerto Rico provides a path to tax free dividends not available in other offshore tax plans. If you decide to move to Puerto Rico after a few years of operating the business, and qualify as a resident under Act 22, dividends from your Puerto Rican corporation will be tax free.

Of course, you’re not required to move to Puerto Rico to cut your corporate tax rate to 4%. You may leave the money in the company tax deferred, take it out years or decades later and pay the tax, or continue to use it to grow the business.You can hold the Act 22 card in your back pocket should you decide to play it.

We can assist you to implement the Puerto Rico offshore tax plan in two ways.

We can setup your corporate entity, negotiate an Act 20 contract in Puerto Rico, and write a custom a game plan / opinion letter on how to operate your Puerto Rican business in compliance with PR and US tax laws.

Provide a turnkey solution in Puerto Rico with office space, employees, etc. to maximize the benefits of your offshore tax plan.

Our turnkey solution includes analysis, tax and business planning, tax opinion letter with “action plan,” Act 20 application and negotiation, Act 20 license, and opening a PR bank account. It also includes sourcing and negotiating an office lease, hiring 3 qualified employees, 12 months of employee management, and 12 months of tax and business consulting service.

We will locate and hire 5 employees to your specifications. You can interview them by Skype or in person. We will also replace these employees if they resign or are not pulling their weight, manage their time, and handle all office and employment matters.

Our turnkey solution is intended to cover all first year costs related to setting up shop in Puerto Rico except salary, payroll taxes, and office rent.

I hope you have found this article on the offshore tax planning benefits of Puerto Rico helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708.

For more information, you might read my post comparing the Puerto Rico tax deal with the Foreign Earned Income Exclusion.

International Money Lending License

02/15/2015/in Articles, Banking Offshore/by Christian Reeves

The international money lending license came into its own in 2010 when the US began pushing out payday and other lenders of last resort. A number of offshore jurisdictions welcomed them with open arms and the battle with American regulators was on.

By 2012, many of these lenders moved from offshore licenses to those issued by US Indian tribes. For example, Integrity Payday Loans got in trouble with a few US states operating as a Nevis company. They became “ a tribal lending entity wholly owned by the Flandreau Santee Sioux Tribe, a federally recognized Indian tribe that operates and makes loans within the Tribe’s reservation. All loans are subject exclusively to the laws and jurisdiction of the Flandreau Santee Sioux Tribe.”

With high risk lenders fleeing for greener pastures, offshore lending, like offshore banking post FATCA, has gone mainstream. These licenses are now used by everyone from multinationals to green energy companies, such as solar loan and lease providers to fund operations and manage their worldwide tax obligations. Where payday lenders were looking to hide, the new trend is towards those looking to operate more efficiently, make use of their offshore retained earnings, bring in foreign investors, and comply with US tax reporting obligations.

Offshore Licensing Options

There are only a few ways to accomplish these goals. You can form an international bank, a captive bank, a Panama financial services company, or operate under an international money lending license.

A international money lending license is also an alternative to a fulling licensed bank. An offshore banking license is a major undertaking requiring significant capital and backend compliance. A Panama financial services company has it’s uses, but it may not offer loans. An offshore lending license is the most efficient option for a company looking to make loans within a group of companies, or to the general public (excluding residents of its issuing country), but not offer other traditional banking services (deposit taking, investments, etc.)

A money lender can be setup in a matters of weeks and at a fraction of the cost of an offshore bank. Also, corporate capital, costs of operation, and government oversight are significantly reduced.

For more information on a fully licensed bank, see my 2015 post: Best Offshore Banking License Jurisdictions.

There are several countries offering international money lending licenses. I will focus Belize below, but a proper analysis of your needs, number of investors, number and size of your loans, and your business model, should be undertaken before selecting a jurisdiction.

Belize International Money Lending License

Licenses available in Belize include:

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

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

A company operating under an international lending license in Belize may lend up to $5,000 per transaction and was originally written by politicians for payday lenders. Loans by an international money lender must have an initial repayment period of less than one year and shall not be secured by title to real property, a motor vehicle, tangible personal property, or any other type of collateral other than the Loan Agreement and ACH authorization agreement. Also, loans made under this license shall be made to consumers for household purposes and personal expenses only (and not for commercial purposes).

In other words, you may offer short term unsecured loans of less than $5,000 to individuals, but not businesses.

A Belize international money lending license require capital of $50,000. This amount may be increased by the IFSC depending on your business model and history. Capital reserve ratios and applicable discounts apply. The application process runs about 3 months. A complete business plan with financial projections and a proven track record in your market niche are required.

A Belize money brokering license might be a workaround to the maximum amount and term of the international money lending license. If the money being lent is coming from shareholders / partners in the business, rather than outside investors, Belize might allow you to broker the loans from your partners to your clients.

I say “might” because there are no businesses currently operating in this manner under the money brokering license. In fact, there is only one license currently active in Belize. I suggest such an application should be from a more “traditional” business, such as solar panel loans, rather than a higher risk category like payday advances.

Another, more common use of the money brokering license is to broker loans from Belize banks to your clients, earning a commission on each.

Other Offshore Licensing Jurisdictions

Another alternative to the Belize international money lending license is the British Virgin Islands Financing and Money Services License. This allows you to conduct any size lending business with persons resident in BVI and abroad. There is no maximum loan amount in the BVI statute.

For more information, see: British Virgin Islands Financing and Money Services License

Note that any regulated lending business will need to follow strict capital reserve and ratio requirements. Audited financial statements are due annually, and some jurisdictions require quarterly reporting.

The above describes international lending licenses. I suggest that the best license for an offshore leasing company is the Panama Financial Services License, which I will cover in another post.

Raising Money for an Offshore Lending Business

If you wish to raise capital for your offshore lending business, you will need a master-feeder offshore fund or similar structure. This is because your lending license does not allow you to take deposits from people other than partners in the business. Nor does it allow you to solicit investors.

With an offshore master-feeder fund, accredited or super accredited investors (as defined by the US SEC) may invest in your US entity and non-US persons and US tax exempt investors (IRAs, etc.) may invest in your foreign entity. Both of these feed into the master fund, which in turn invests in to your offshore lending company.

By linking a master-feeder fund to an international lending license, you can raise unlimited amounts of capital while minimizing compliance costs and regulatory oversight. You might find it advantageous to operate a fund in a jurisdiction separate from the lending company. For example, the fund could be in Cayman or Belize with the lender domiciled in BVI.

Raising capital through a fund allows you to earn a commission on the appreciation in the fund and from the primary lending business. Typical master-feeder funds earn 2% of the money under management and 20% of the appreciation after a hurdle rate ( LIBOR+2 or some similar published rate).

Conclusion

In 2015, the world of offshore licensed entities is as complex as it is diverse. Careful consideration of the available licenses and your business model must be undertaken before selecting a jurisdiction. Each country and license type is intended for a specific use and capital ratios and regulations vary widely.

Add to this FATCA, IRS reporting, tax compliance, SEC issues, and anti-money laundering statutes, and you will find that going offshore with a licensed lending company requires the support of a professional experienced in both US and international regulations.

I hope this article has beens helpful. For more information on an international money lending license, an international banking license, or an offshore master-feeder fund, please phone me at (619) 483-1708 or email Christian Reeves at info@premieroffshore.com.

Prepare for an Offshore IRS Audit

11/17/2014/0 Comments/in Articles/by Christian Reeves

There’s no worse feeling in the world than coming home to a letter from the IRS telling you that you are being audited … until you get notice of an offshore IRS audit. No matter how organized you are, you should fear the great IRS. If you have unreported accounts or become the subject of an offshore IRS audit, you need to take steps to protect yourself.

In this article, I’ll explain what you can do to prepare for an offshore IRS audit. If the collector is closing in, you have options. If the government isn’t at your door today, use these tips to structure your offshore affairs before trouble finds you.

First, you need to figure out how scared you should be. If you have an unreported offshore account or offshore company, you should be very afraid … a 10 out of 10. If you had more than $10,000 in an offshore account, even for one day, you face serious risk if you didn’t file an FBAR.

If you used an offshore incorporator to form your offshore company that doesn’t provide U.S. tax compliance, you should be concerned … anywhere from a 5 to 8 out of 10. This is because you might have failed to file a form or two. Even if you submitted the Foreign Bank Account Report (FBAR) and paid tax, you could be facing hundreds of thousands of dollars in penalties for not reporting the structure.

Second, you need to determine your risks. Are there any unfiled returns or forms? Any unreported income the auditor might find? Have you underrated your income or overstated your expenses? Are your records well organized and ready for an offshore IRS audit? If they are all stuffed in to the shoebox under your bed, the answer is no!

Finally, I strongly recommend you get help when facing offshore IRS audit. Only an experienced professional is capable of identifying these risks and determining how likely they are to come to light in the exam.

While I certainly appreciate your perusing this site, and my many articles on offshore filing, I am writing on their general use. When facing someone from the government whose only mission in life is to take what you have, you should hire a professional, even a tax attorney, to represent you. He or she will analyze your specific situation, identify weaknesses, and develop a comprehensive plan to deal with the offshore IRS audit.

Even if you think your risks are minimal, or you don’t have the money to hire a tax lawyer, at least consult a professional. Let them review the audit request, and consider your situation. Find out if they believe you can handle the agent on your own. This might cost a few hundred dollars, but will give you peace of mind. Be honest and tell them all the good or bad during the consultation.

Prepare for an Offshore IRS Audit

Whether you’re going in to battle alone, or with a tax lawyer by your side, here are my recommendations on how to prepare for an IRS audit that includes offshore transactions or international investments.

Don’t be a snitch! Never volunteer information in an IRS audit and this goes double in an offshore IRS audit. The agent is NOT your friend. He’s there to find errors and extract a penalty for those mistakes. While you must always be honest, only answer questions that are asked. Never volunteer new information or expand on a subject beyond the question. You might think you are helping, but you’re just making things worse.

The same goes for documents. Never give more paper than is requested. You might think it shows good faith, and you’d be wrong again. More documentation just gives them more ammunition. More chances to find an error or a discrepancy.

If you take my message to heart and hire a tax professional to do battle with the IRS, you might never speak to the agent. When I was representing clients in offshore IRS audits, I never let the agent get near them. All communications went through me and me alone. I minimized the information exchanged and did my best to keep the auditor focused on areas that were our strengths … and away from those that were of concern.

Review your bank statements. Go through your bank statements and understand each and every deposit. Those that are income should be identified as such. Those that are nontaxable, such as loans and gifts, should have supporting documents. The first line of attack in an offshore IRS audit is the bank statement, so be ready to prove up all nontaxable items.

At the same time, identify and find documentation for all business expenses. If you deducted it, have an invoice or receipt ready to go. Never be caught off guard when the agent asks, “What’s this payment for?” Have an answer with proof ready.

Remember that, so long as you are a U.S. citizen, the IRS has a right to audit your offshore company and international business activities. Therefore, you must maintain records of income and expenses for offshore transactions just as you would for a U.S. based business.

I understand that sometimes practices in foreign countries conflict with your desire to document expenses. For example, it is common to pay employees in cash in South America, but it’s hard to prove this as an expense to the IRS.

What I’ve found successful in offshore IRS audits is a log book. Keep a book of each cash payment including the date, employee (independent contractor), brief job description, amount, and their signature. So long as you keep a signed log, cash payments will usually be accepted by the IRS.

Don’t file a tax return during an offshore IRS audit. If you file new or delinquent returns during an exam, the audit will usually expand to add those years. If you file a return claiming foreign sourced income during an audit, you might be admitting to a crime … something you should never do. If your audit is going on around April 15, get an extension for last year’s return until October 15.

If you have unfiled returns, the agent will probably ask you to file them with him. Assume they’ll be audited and be prepared to prove each item. If you have unfiled returns and offshore issues, see Rule 1: Hire a Professional Immediately.

Foreign Earned Income Exclusion (FEIE): If you are living and working abroad, and qualify for the FEIE, you can earn nearly $100,000 per year tax free in a salary. However, if you don’t file a return, and get mixed up in to an offshore IRS audit, you can lose the FEIE entirely. That’s right, if you don’t take the FEIE you can lose it if you’re audited. If the IRS hasn’t contacted you yet, remember, use it or lose it and file as soon as possible.

Get your records in order. Begin to get your documents and supporting proof together the day you receive the IRS letter. Don’t delay and don’t put it off. I can’t tell you how many people hide their heads in the sand for weeks after receiving an offshore IRS audit notice. Don’t waste a minute. Get ready to meet the enemy in combat as soon as possible. The day of reckoning is coming and you are well behind in the count. You need every second to get ready.

It will take longer to organize your paperwork than you expect. Also, being proactive will give you time to develop a plan of defense and order any missing documents from banks, brokerages, etc. Remember that you never want to answer a question with “I don’t know.” You need to be ready and organized on day 1 to show you’re not the easy target the auditor is looking for … not a pushover who’ll go quietly, but rather someone who’s prepared and knows his rights.

* Note that all records must be printed. The IRS auditor won’t accept electronic files.

Try to be nice. Even if you have to fake it, be nice and courteous. Most IRS auditors are just doing their jobs … which, unfortunately, is to separate you from your money. They view you as one of their 100+ cases. Don’t be rude or do anything to get on their bad side. Remain one of 100. There is no reason to draw their ire or special attention.

If you are unable to deal professionally with an offshore IRS audit, don’t get involved and see rule 1 again. Hire a professional and stay out of the room. One of a tax lawyer’s more important skills is to treat the auditor with respect and direct them away from areas of concern.

Have a payment plan in mind. If you think the auditor will find your undocumented expenses or unreported income, have a plan to deal with the resulting tax bill. If offshore IRS audit will result in a balance due, you need to be ready to pay up. If you can’t pay now, have installment agreement ready.

For more information on setting up a payment plan, I suggest you read through www.taxdebtrelief247.com. This blog has quite a bit of quality information on how to deal with the collection division of the IRS.

I also recommend How to Settle with the IRS by Goldstein and Ofstein, and Stand Up to the IRS by Frederick Daily. Both of these books are available on Amazon.

You can find my book on international tax and business for American expats on this site (see the bookstore). It includes detailed information on battling the IRS in an offshore audit and settling with collections.

I hope you have found this post on offshore IRS audits helpful. Feel free to email me at info@premieroffshore.com with any questions or suggestions. If you require a tax attorney experienced in these matters, I will be happy to provide you with a referral.

How to Close an Offshore Company

11/14/2014/in Articles, Offshore Company/by Christian Reeves

Did you form an offshore company but the business didn’t go as planned? Do you need to close an offshore company? There are two ways to go about this.

To close an offshore company that’s never done any business and has not yet opened a bank account, “allow it to die a natural death.” This is what we in the business call it when you stop paying the annual fees (usually about $800 per year).

An offshore company dies a natural death and is struck from the register of companies when you don’t pay the annual fee for two years. After 12 months, the company is listed as inactive. After 24 months it is usually deactivated.

Remember that you have no personal liability for the annual fee of an offshore company. While your incorporator (including Premier) will send you bills, you are under no legal obligation to pay them. If you have no other considerations, this is the best way to close an offshore company.

Though, let’s look at some of those “other considerations.”

You must continue to file your U.S. offshore company tax returns (usually IRS Form 5471) so long as you have a bank account or conduct any type of business. When you are ready to close an offshore company that was active, or one with a bank account but no business, you need to file a final U.S. return.

This requirement doesn’t affect your ability to allow the offshore company to die a natural death once your filing obligations are over. You can still close the offshore company by not paying the annual fee so long as you file your US forms.

The same goes for the Foreign Bank Account Form (FBAR). If you have $10,000 in an offshore bank account, even if it’s only for one day, you must file an FBAR. I suggest that anyone required to file an FBAR must also file their corporate tax returns.

Also, while you are obligated to file these forms, you should not close an offshore company. Your entity should always be in good standing in years you are obligated to file U.S. tax returns and/or FBAR forms.

So, if you have any bank accounts or assets outside of the United States held by the offshore company, it should remain in good standing. Once you liquidate those assets, keep the company active through the end of that calendar year. When you have no more U.S. filing or reporting obligations, go ahead and close the offshore company.

Of course there are exceptions to this general advice. If your business or offshore company has a carry-forward loss, or there are shareholders who demand you formally close, you need to file forms to close the offshore company. In this case, you should expect to spend $1,500 to $2,500 to dissolve the company. Additional fees may apply if your shareholders require certified documents.

Panama Tax Review

11/10/2014/0 Comments/in Articles/by Christian Reeves

If you’re an American living, working, or investing in Panama, the Panama tax system is your friend. The Panama tax code may allow you to live tax free in Panama and, possibly, in the United States. This Panama Tax Review will explain how to reduce your worldwide tax bill.

Before getting in to specifics, it’s important to note that Panama, like all civilized nations (not the U.S.), taxes you on your local income. Only America taxes its citizens on their worldwide income.

So, if you move to Panama and open a restaurant, you pay income tax on your profits. You will also be subject to payroll and social security taxes. This is the same result you get in the United States.

However, if you move to Panama, and structure your business properly, you won’t pay Panama tax on foreign incomes. If your business is selling a product to clients in the United States, all income earned in Panama is foreign source (from the U.S.) and not taxable in Panama. If you are selling to individuals in Panama and the United States, only those sales to Panamanians are taxable.

This is the opposite result you get with a U.S.-based business. When you operate from America, and sell to people outside of the country, 100% of the income earned by your company is taxable here. Even if you move abroad Uncle wants his cut. Though, this article will help you minimize that tax bill.

This article is focused on the Panama tax rules for those living, working, or investing in Panama. If you retire to Panama, but don’t buy real estate there, then you should have no Panama tax issues.

Introduction to Panama Tax

Panama taxes its citizens and residents on income earned within its borders. You, the American citizen, become a Panama tax resident if you live in Panama for more than 183 days within a calendar year. If you don’t operate a business in Panama, or purchase real estate there, it’s unlikely their tax laws will affect you.

Panama has no wealth, inheritance or gift taxes. Therefore, it’s an excellent jurisdiction in which to form an international trust (called a Panama Foundation, but it functions under U.S. laws as a foreign or grantor trust). Such a structure will allow you to protect your savings and minimize U.S. estate taxes by facilitating transfers to heirs and moving assets out of your taxable U.S. estate.

Also, interest from bank accounts, Certification of Deposits, and most forms of investments are tax free. If you buy and then sell stock on the Panama exchange, no tax will be charged. No tax is due when you sell stock on a foreign exchange either, but the point here is that buying and selling stock within Panama, even on their exchange, does not bring you in to their tax system.

At this point, you might be wondering how Panama earns money. Well, residents pay tax on local income, corporations pay tax on gains derived from business transactions within Panama, and just about everything sold in Panama is subject to a 7% Value Added Tax (VAT). And, of course, they make buckets of money from the Panama Canal.

Taxation of Real Estate Transactions in Panama

Real estate transactions within Panama are taxed as capital gains. There is only one rate for such gains, 10%. No differentiation is made between long term and short term capital gains.

This Panama tax rate of 10% on the net profit from the sale is the general rule for real estate. You can also elect a 3% rate on the gross sale price. Here’s how it works.

Just like in the United States, you pay capital gains in Panama on net profit earned when you sell real estate. If you buy a condo for $250,000, put $25,000 of improvements in to it, and sell it for $300,000, your gain is $25,000 and your tax due is about $2,500 … simple enough.

* You will also pay a 2% transfer tax at the time of sale. This is based on the sale price or the assessed value, whichever is higher. Your transfer tax is increased by 5% for each full calendar year you hold the property.

The government ensures compliance with its tax laws by requiring the buyer to withhold 3% of the purchase price and pay that over to the tax authorities. You, the seller, file a return to claim a refund the next year. In the example above, the buyer would withhold 3% of $300,000, or $4,000, and you will file a refund for $9,000 – $2,500 = $6,600.

If this 3% on the gross sale price is lower than the 10% capital gains tax on the net profit, you may elect to not file a return. You have the choice of paying the 3% or 10% rate on the sale of real estate.

So, in the example above, if you bought the property many years ago for $20,000, didn’t make any improvements, and sold it for $300, 00, you would choose to pay the 3% tax of $9,000. The 10% tax on the net gain would result in a bill of $28,000.

VAT in Real Estate: I will conclude this section on Panama tax by noting that VAT applies to short term rental income. If you rent out your condo for a term of six months or less, you will pay 7% VAT, VAT doesn’t apply to rental contracts longer than six months.

Personal Income Tax in Panama

If you operate a business in Panama, work for a local company, have employees in the country, or draw a salary, you need to understand their personal income tax rules.

Panama’s tax code is much more efficient than that of the United States. They have only three tax brackets:

If you earn $0 to $11,000, you pay zero tax.
If you earn $11,000 to $50,000, you pay 15% on the amount owner $11,000 (that is to say, the first $11,000 is tax free).
If you earn over $50,000, you pay $5,850 on the first $50,000 plus 25% on the amount over $50,000. So, your Panama tax rate on a salary of $150,000 would be $5,850 + $25,000 = $30,850 less any deductions.

Each person is allowed a standard deduction of $800. Other allowed reductions include mortgage interest, charitable and political contributions, and unreimbursed medical expenses.

You’re not required to file a return if your only income is from salary (you have no capital gains, etc.) and you don’t wish to take any deductions other than the standard at $800. In that case, the employer withholds the required amount from each paycheck and no return need be filed.

If you wish to file a personal income tax return in Panama, it is due March 15. You may request an extension until May 15.

Employment Taxes in Panama

If you have employees in Panama, be ready to pay significant employment taxes. Social Security and employment taxes are a primary revenue sources for Panama and a reason they are willing to offer corporate tax deals … to increase employment and employment taxes.

* Employment taxes in Panama are about 30% higher than United States. However, the cost of labor is less than 25% of major cities in America, so the employment tax expense is relatively minimal.

As the employer, you pay employment tax of 12% on wages. Also, you must withhold 9% from the employee. Therefore, total employment tax in Panama is 21%. This compares to 15% (self-employed) to 17% (with Obamacare) in the United States.

Also, you are obligated to pay a one month bonus to each employee each year. So, when you calculate costs per employee, you will take the base salary times 13 (not 12 months) and add 21% for employment taxes.

For example, if your employee earns $1,200 per month, they’ll cost you $1,200 x 13 months = $15,600 in salary and $1,872 in employment taxes.

Corporate Tax in Panama

The Panama tax rate on corporations is 25% compared to 35% in the United States. Panama taxes only local source income. There is no Panama tax on income from outside the territory, even if that money is deposited in to a Panama corporation and account.

Most of my readers will avoid corporate tax in Panama all together. It should only apply if you are selling goods or services to Panamanians. If all of your sales are done through the internet to persons in the U.S. and Europe, you may have no Panama source income.

Also like the United States, corporate income tax usually applies to money you leave in the company … retained earnings held by the Panama Corporation. If you do have Panama source income, you may be able to eliminate corporate level tax by withdrawing your net profits as salary. You will pay personal income taxes but avoid double taxation.

However, if you operate a “large” business within Panama, and your Panama source gross income is $1.5 million or more, you may be subject to alternate minimum corporate tax.

First, I note that corporations are taxed on their net business income. You may deduct salaries, as well as all “ordinary and necessary” business expenses … just as you do in the United States.

However, if you gross more than $1.5 million in Panama source sales, you will be required to pay minimum corporate income tax of 4.5% on those gross sales.

* Another way to express Alt Min tax in Panama is that your large business pays tax on local sales minus 95.5%. If your local sales are less than $1.5 million, you are exempt from Alt Min tax in Panama.

Let’s say your Panama Corporation earns $2 million in local income. It’s your first or second year of operation and your deductible expenses are more than $2 million … so you have a tax loss for the year. Panama Alt Min tax comes in and requires you to pay 4.5% on $2 million, or about $90,000 in corporate taxes.

That means you’ll pay at least 4.5% on local sales in a large business. If 25% on net profits results in more tax being due than 4.5% on gross sales, then you pay Panama tax at the 25% rate.

In order to deter untaxed transfers between Panama corporations and any other tax shenanigans to minimize tax on local source income, Panama taxes/dividends, loans and advances. A 10% withholding tax applies to dividends between corporations on income derived from local sources. Also, a 10% tax is levied on loans or advances to corporate shareholders. If these transfers are done in a structure involving bearer shares, a 20% withholding tax (rather than 10%) applies.

If you can prove that the income being transferred is foreign source (earned in transactions outside of Panama), these taxes do not apply. In that case, there is no withholding on dividends, loans or advances.

* These corporate tax laws apply to companies operating within Panama City. Special rules apply to businesses within the Colon Free Zone, City of Knowledge, Panama Pacifico (my favorite tax free region), or any of the other free zones within the country.

* Special rates may apply to corporations with local gross sales of less than $200,000. These “small” businesses pay a lower blended personal/corporate rate.

Taxation of Americans in Panama

There is no Panama tax on bank interest, CDs, U.S. retirement distributions, or income derived from sources outside of Panama. Therefore, most of you won’t be subject to Panama tax unless you invest in local real estate.

Unfortunately, Uncle Sam wants his cut no matter where you live and/or invest. Though, you do have tools at your disposal to reduce your U.S. tax bill.

First, you can make investments in Panama through your U.S. retirement account. By forming an offshore IRA LLC, you can defer U.S. tax in a traditional IRA or eliminate it all together in a ROTH IRA.

Next, if you live in Panama, and will qualify for the Foreign Earned Income Exclusion (FEIE), you can draw a salary from your active business of about $100,000 per year ($200,000 husband and wife), retain the balance in your Panama Corporation, and pay no U.S. tax. You will find a number of articles here on the FEIE and operating through an offshore corporation to reduce or eliminate U.S. tax.

If you are living in Panama, you might bill your customers through an offshore company formed in another jurisdiction. When your sales are to persons in America and you are living in Panama, bill through a corporation in Belize. Then, draw a salary of up to the FEIE from that Belize Corporation to eliminate Panama employment taxes.

* This only works for you, the U.S. person living in Panama. Don’t try it with Panamanians or you might find yourself in trouble with the local authorities.

I hope you’ve found this Panama Tax Review helpful. If you have any questions, or would like assistance moving you or your business to Panama, please give us a call or send me an email to info@premieroffshore.com.

The Foreign Earned Income Exclusion 2015

10/30/2014/0 Comments/in Articles, Offshore Company Taxation/by Christian Reeves

The Foreign Earned Income Exclusion 2015 has finally hit six figures. The FEIE for 2015 is $100,800, up from $99,200 for 2014. The FEIE is the best way to minimize your US taxes as an Expat and the most important tool in your tax kit.

This means that each American living and working abroad, who qualifies for the Foreign Earned Income Exclusion in 2015, can earn up to $100,800 in salary without paying personal income tax. If that salary comes from a US employer, then you still pay social and employment taxes (7% deducted from your check and 7% paid by your employer). If you are self employed and don’t have a corporation, then you pay self employment tax at 15%.

Basically, if you have a US structure, or are self employed without a foreign corporation, you pay 15% tax + Obamacare and other charges on your 2015 salary. The FEIE only cuts out your personal income taxes.

If you work for a foreign employer, or you operate your business through an offshore corporation, then you can avoid this 15%+ tax. It is possible to use the Foreign Earned Income Exclusion 2015 with an offshore corporation and pay zero to Uncle Sam on income of $100,800. If a husband and wife both operate the business and qualify for the FEIE, you can take out $201,600 in salaries tax free!

Next, if your profit exceeds $100,000 or $200,000, you can retain earnings in the offshore company and defer US taxes on that income. This tax deferal is a major benefit of living and working abroad for high net worth business owners.

Let’s say your net profit is $300,000 in 2015. You and your wife take out $200,000 in salary using the FEIE. This leaves $100,000 in untaxed profits. If you hold this money in the offshore corporation, you can defer US tax until you take a distribution. If you draw it out as salary, commissions, dividends, or in any other form in 2015, you will pay US taxes at about 32% (Federal).

For a 100+ page book on expat tax issues and how to maximize the FEIE 2015, please join my mailing list.

My posts on the Foreign Earned Income Exclusion for entrepreneurs include:

Finally, if you’re a glutton for punishment, I recorded a 3 hour dissertation on the Foreign Earned Income Exclusion for the Overseas Radio Network. See my ORN page.

I hope this post has been helpful. Please send an email to info@premieroffshore.com if you have questions about forming an offshore corporation or maximizing the FEIE as an entrepreneur.

Chile’s Tax & Economic Climate

10/24/2014/in Articles, Latin America/by Christian Reeves

The republic of Chile is one of the most business friendly nations on earth… as tax and business efficient as it is long. Chile’s focus on high-tech start-ups has brought a wealth of talent and business to this nation that is vying to be the Singapore of Latin America.

Chile is one of the longest countries on earth, spanning the southern portion of South America. It borders Argentina (primarily), as well as Peru and Bolivia. Its capital city Santiago boasts an ever growing population of 6 million and Chile has a total population of nearly 18 million… which is several times larger than my Panama at around 3 or 4 million depending on who you ask.

Chile is one of South America’s most stable and prosperous nations, leading Latin America in a number of important categories: human development, business and economic competitiveness, income per capita, economic freedom and a low perception of corruption. All of these combine to make Chile a dynamic and business friendly nation.

The two criteria I’d like to focus on are competitiveness and income per capita. As to income, it is just over $20,000 on average and nearly double many nearby nations. While this means labor is not as cheap as it is in, say, Panama, it also means that the work force is better educated, better trained, and more efficient.

Chile is especially competitive in technology start-ups and export. Exports to Asia and the U.S. account for 60% of the nation’s economy and Chile is pushing hard to become the center for tech start-ups in Latin America. For more information on this, please see my previous post on Chilecon Valley.

As a result, the once challenged Republic has become one of the most dynamic nations in the region. They’re now listed as a “high-income economy” and a “developed country” by the World Bank (as of July 2013, so a recent development). It is also the nation with the highest degree of economic freedom in South America, and 7^th world wide.

As I look around the globe, I believe Chile to be one of the best places to form a new internet based business, or any business focused on high quality labor… rather than call centers and repetitive tasks.

And Chile’s economy has prospered, even during the recent downturn. Real GDP growth has been 4% to 5.7% over the last decade and the national debt is only 3.9% of GDP. It seems like many of Chile’s northern neighbors could learn a thing or two about how to run a country.

Driving this growth is a business friendly tax system which is compatible with the U.S. code and the Foreign Earned Income Exclusion. Basically, you can set up a business and operate tax free for 3 to 6 years before needing to deal with the local tax authorities.

First, Chile taxes local source income at 30%, where local means products and services sold in Chile. If you sell to customers outside of Chile (in the U.S., for example), this is foreign sourced income to Chile and not taxable in certain cases.

* For U.S. tax purposes, it doesn’t matter where your customers are located (in the U.S., for example), only where you and your business are based.

Next, wages you take out of a Chilean corporation are taxed at 0% to 40%, with the higher rate applying to a salary of $12,500 per month. Though, you are allowed to be a resident of Chile and draw a salary from a foreign corporation, which would not be taxed by Chile.

So, if your income and sales are made through a Belize offshore corporation, you draw a salary of $99,200 per person from that company, and qualify for the U.S. Foreign Earned Income Exclusion, you won’t pay any tax in Chile or the United States. You’re allowed by both the U.S. and Chile to retain earnings in excess of this amount in the offshore corporation and will only be taxed when you take a distribution.

I have assumed you are familiar with the FEIE. If this is new to you, or you are wondering what I am on about, please take a few minutes to read one of my more detailed posts on the topic.

As I said above, foreigners in Chile are taxed on international income after they have been tax residents for 3 or 6 years (the standard period of 3 years can be extended to 6 by filing a few forms.). During this time, the FEIE model works no matter how much you earn in salary, capital gains, or from any other source outside of Chile.

Once your 3 or 6 year honeymoon period is over, then you will pay tax in Chile if your foreign salary (from a Belize company) is over $153,000. So, the U.S. FEIE gives you $99,200 in 2014 and the equivalent Chilean tax tool gets you $153,000, tax free. This is why I say the tax code in Chile is designed to work seamlessly with the U.S. system.

Here are a few more tax benefits of living, working and doing business in Chile. For some of you, they may greatly outweigh the FEIE.

– Gaines from the sale of shares in a Chilean company held for more than 1 year are tax free.

– Gains from publicly traded companies are tax free.

– The sale of real estate is tax free (no capital gains, but VAT will apply).

– Reimbursements from housing, travel and all other expenses paid by your employer are tax free. Allocations from you employer are taxable as local salary, so some planning is advised.

If you are operating a business through a Chilean corporation, and have local profits, your corporate tax rate is 20%. Distributions to you are taxed at 35%, but you get a credit for the 20% tax paid by the entity… which should net to about a 15% personal income rate on corporate distributions. In the U.S., this would be 30% at the corporate level and then 40% + your state’s tax at the personal level.

Those of you who follow my columns know that Premier is based in Panama City and San Diego. If I were starting over, or about to launch a new division (which we are doing right now), I’d give serious consideration to doing that in Chile.

The climate of Chile is quite similar to California, if not the mirror opposite in terms of season. With everything from a dominant Pacific coast to some of the world’s driest desserts, Chile has just about all of the ecological diversity as did California 75 years ago. Chile’s summer is from December to February, autumn is March to May, winter, June to August and spring, September to November. Temperatures in the valley surrounding Santiago can get up there, but nothing compared to California’s Central Valley or El Centro areas (temperatures in parts of CA can be 115°F several times a year, and I’ve had the joy of 120°F on occasion).

When thinking about where to place a business, you need English speaking talent and telecommunications infrastructure. Chile has the most advanced telecom system in South America with an advanced microwave radio relay facility and its own satellite system that includes 3 earth stations. That is all to say that Chile’s telecom system doesn’t rely on the U.S. (NSA).

As of 2012, there were 3.3 million land lines and 24 million cellular phones, with all of the latest and best technologies available in Chile. According to the International Telecommunications Union, 62% of the population uses the internet, making Chile the country with the highest internet percentage in South America.

So, from my previous article, we know that Chile has the people and government sponsored programs to support your business. They also have an efficient tax system and the telecom infrastructure you require. Add to this the fact that Chile is focused on freedom and privacy, and I’m sold. Chile is not a banking center like Panama, and thus not as beholding to the U.S. and its push to control the world’s financial transactions.

* For more information on nations dependent on U.S banking and the dollar, see my posts on France and Russia’s attempt to replace the U.S. dollar and America’s $9 billion attack on BNP Paribas and FACTA.

If your business model requires the lowest cost labor available, such as a call center, then Chile might not be for you. If you need higher caliber tech oriented employees, strong IT and telecom systems, and a larger market than is available in Panama, you should consider a look at Chilecon Valley. If you’re looking to diversify out of the U.S., Panama and Chile are both strong contenders… but Chile is several more steps removed from Uncle Sam in terms of financial and personal freedom when compared to Panama.

I hope you have found this series on Chile interesting. For additional information on moving your business out of the United States, please give me a call or send an email to info@premieroffshore.com. We will be happy to work with you to structure your affairs in an efficient and U.S. tax compliant manner. All consultations are confidential.

The Foreign Pension Tax Trap

10/08/2014/in Articles, Taxation/by Christian Reeves

If you’re working abroad for a foreign company, watch out for the foreign pension tax trap. If you get caught, you might be paying double tax on your retirement income… once when earned by the U.S. and once at distribution in your country of residence.

First, let me say that this is not meant as a definitive guide on foreign pensions. A proper analysis would review every tax treaty out there and thus be longer than War and Peace. My intent is to identify the issues faced by U.S. expats with a foreign pension so that you may go to your local tax person, or Human Resources department, to discuss how to avoid the foreign pension trap.

Second, these issues do not concern expat entrepreneurs or business owners. Presumably, you would utilize a U.S. qualified pension plan or defined benefit plan for yourself and avoid these problems.

Of course, if you are operating a small business, and your income is less than the Foreign Earned Income Exclusion ($99,200 in 2014), you don’t need to be concerned with a pension, be it foreign or domestic.

Now that I’ve buried the lead in the 5^th paragraph, let’s talk about the foreign pension tax trap. If you work for a foreign company, and have the option of taking a foreign pension, you need to understand the general rules (described here), the foreign tax credits available, timing issues, and specific tax treaty provisions between your country of employment and the United States, before agreeing to put cash in to a retirement program.

The reason a foreign pension can become a tax trap for the American expat is:

1) some foreign pensions are not compatible with the U.S. tax codes, 2) no treaty applies, and 3) your income is taxed in the U.S. as earned and taxed at distribution in your country of residence, which means the foreign tax credit may not be available.

So, while the foreign pension may appear to give you better tax treatment in your country of employment, if may result in double taxation. Here’s why:

The general rule is that a foreign pension is not a qualified retirement plan (QRP) for U.S. tax purposes. Therefore, contributions are not deductible on your U.S. tax return.

Because you are taxed on your worldwide income as earned, and because the income which flows in to the nonqualified plan is not deductible, it is included in your U.S. adjusted gross income and taxable here.

So, if you are earning $50,000 in salary and 15,000 in retirement benefits in France, the income reported on your U.S. tax return is $65,000. You might have foreign tax credits to offset the $50,000, but no credits to cover the $15,000.

Then, when you withdraw that $15,000 from your account in France, you pay tax on it there. Well, more than three years has likely passed and you are no longer able to amend your U.S. personal income tax returns to claim this credit. So, you were taxed once in the U.S. when earned and then again in France when distributed.

That is to say, these general rules require a U.S. expat in a foreign pension plan to include in income the amount of the contributions made by him or her, as well as any contributions made by the employer to the extent vested. Because you will probably need to pay tax in the foreign country when you take a distribution from the plan, it is possible that the contribution will be double taxed… but at different times. This timing issue creates a mismatch of income and the availability of the foreign tax credit in the United States.

Relief may be available to some U.S. expats, but not all. Several U.S. tax treaties cover foreign pension plans and, at least, eliminate double taxation. You should discuss the availability of a tax treaty with your pension coordinator before signing up and getting caught in the foreign pension tax trap.

And, even if these treaty provisions exist, they will be limited to U.S. IRA amounts. That is to say, they are limited to U.S. QRP levels of contribution from you and your employer, AGI limitations, and will have distribution requirements. If your foreign pension is more generous, or has terms that are significantly different than a U.S. IRA, you are in for a very complex tax situation.

If you’re really lucky, you’re working in a country with an advanced pension treaty. These exclude contributions to a foreign pension plan from your U.S. income, just as if the plan were in the United States. Though, such treaties are typically with countries that offer retirement plans on terms similar to those found in the U.S., and whose tax rate is higher or about the same as in America.

At the time of this post, the countries with advanced pension provisions in their tax treaties are the U.K., Germany, the Netherlands and Belgium.

Another area of concern with a foreign pension is whether a withholding tax will be levied on you by your country of employment. As an expat worker in a foreign land, it is likely the government will want to ensure your compliance by withholding any taxes payable… especially if you have returned to the U.S. after retiring or completing your work contract.

In many cases, the default rate of withholding is 30%. If a tax treaty applies, this might be reduced to 15% (such as in the U.S. – Canada treaty). There are even some treaties that eliminate the withholding tax all together, so be sure to discuss this issue with your representative.

The last consideration facing expats with foreign pensions are your U.S. reporting obligations. It is possible you will need to file a foreign trust return (IRS Form 3520 and 3520 – A) to report the existence of the foreign pension. If you have signature authority over the account, you probably need to report it on your Foreign Bank Account Report. In some cases, IRS Forms 8938 and 8606 may apply. Your filing obligations on your country’s applicable treaty and how your foreign pension is structured. All I can tell you with certainty is that you should look carefully before getting in to a foreign pension arrangement and seek out the counsel of a qualified representative.

As you can see, tax planning for a foreign pension or foreign retirement plan is a complex business. We at Premier do not offer foreign pension plans. We can help the U.S. entrepreneur to form his own U.S. QRP or defined benefit plan and maximize the value of being offshore.

Likewise, if you already have a U.S. retirement plan, and are moving or investing offshore, we can help get your IRA out of the United States. This is usually done by forming an offshore LLC or Panama Foundation and investing your U.S. IRA in to that structure. Once this is complete, you’ll have checkbook control over the account and your investments. Though, you are required to follow U.S. rules governing investments, act as the fiduciary of the account, and on distribution.

If you would like more information on taking a U.S. IRA offshore, pleas see my Self Directed IRA page (upper right menu of this site). If you would like to set up an offshore corporation, or create a QRP for your international business, and you qualify for the Foreign Earned Income Exclusion (are a U.S. expat), we will be happy to work with you. Please give us a call or send an email to info@premieroffshore.com.

UBIT: IRA As a Dealer in Real Estate

09/23/2014/in Articles/by Christian Reeves

If you’re going to invest in one or two rentals with your IRA, then you won’t have a tax problem. You can operate these properties through a U.S. LLC (if domestic) or an offshore LLC (if abroad) and net profits will flow back in to your retirement account tax free.

If you buy in to a hotel, acquire land that you divide up and build homes on, or buy a multi-unit apartment building, which you improve and convert to condos, then you are probably a dealer in real estate and expected to pay 35% in Unrelated Business Income Tax (UBIT) to the IRS. That is to say, if your IRA operates as a dealer in real estate, you must pay 35% tax on your profits. Then and only then does the net flow in to your retirement account, to be taxed again on distribution (if a traditional IRA, or tax free in a ROTH).

Let’s take a step back for a moment. UBIT is a tax levied on IRAs that operate as a dealer, any kind of active business, purchase real estate with a mortgage, or use any kind of leverage in a brokerage account owned by the IRA.

In the case of an IRA buying with a mortgage or using leverage, UBIT applies to the portion of income driven from that leverage. If you purchase a rental with $100,000 down and $100,000 from a non-recourse mortgage, then 50% of your net profits will be taxed at 35% and 50% will flow in to your retirement account tax free.

In the case of an IRA doing business, including the business of a real estate dealer, 100% of your net income is taxable. You’ll need to file a corporate return, or a UBIT return, pay the tax, and report the after tax net as gains in your retirement account.

Now, here’s the problem. The IRS hasn’t bothered to define what makes an IRA a dealer in real estate. All we know is that it is someone in the “business” of real estate, rather than someone who is a simple “investor.” The bottom line is that being defined as a dealer, and thus getting to pay UBIT, is based on your intent.

If your intent is to buy, refurbish and sell multiple units, you are probably a dealer. If you buy a single family home and turn it into a rental, you are not a dealer. If you build up your rental portfolio to 20 units, or adopt a “flip this house” model, you have probably flipped your way in to UBIT.

If your intent is to invest, then no special planning is required. You simply form an offshore limited Liability Company and invest your retirement account in to that entity. From there, you control the transactions and can write checks on your account for the improvements, collect the rents, etc.

If your intent is to engage in a business, or if there is any risk of the IRS classifying you as a deal now or in the future, you need a UBIT Blocker Corporation added to your international structure. An offshore UBIT blocker corporation is one of the few remaining loopholes available to Americans and will eliminate UBIT.

A UBIT Blocker corporation eliminates the 35% UBIT tax by moving the transaction it in an offshore corporation in a tax free jurisdiction. It effectively converts the ordinary income earned in to dividends or other payments from the corporation to the retirement account. The UBIT Blocker moves income from “ordinary” and “unrelated” categories in to traditional investment returns. As such, business income, including profits from an IRA classified as a dealer in real estate, can avoid UBIT.

Please note that this requires the business be entirely offshore. The IRA, the LLC, the UBIT blocker, AND the real estate must all be outside of the U.S.

I hope you’ve found this post on UBIT helpful. For more information, please give us a call or send an email to info@premieroffshore.com.

Chile: An Entrepreneur’s Paradise

08/27/2014/in Articles/by Christian Reeves

Chile is now one of the best countries in South and Central America for tech startups. As you will see in this article, it is blowing past my Panama… at least in attracting tech start-ups.

Termed “The Chilecon Valley,” Santiago, Chile has become the entrepreneurial hub of Latin America by focusing on talent… and backing up its policies with cash. As a result of these government programs, it’s attracting many tech professionals from the U.S. and elsewhere.

In tech, the world’s most valuable resource is talent. Chile doesn’t have the talent, but they’ve found a way to import it. While the U.S. turns away many of the best and brightest by denying them residency and visas, Chile is welcoming them with open arms. Tech geniuses come to Stanford, Harvard and MIT, only to find that the U.S. won’t allow them to stay when their schooling is over. Chile is cashing in on our loss by giving out residency permits to anyone who will add to the country’s emerging tech industry… and then giving out grants to get these businesses up and running.

Want to move your startup to Chile? Talk to Start-Up Chile first. They offer a government sponsored program that may award a grant of $40,000… and all the visas you need… if you come to their fine country. As your business becomes more mature, they have additional government funded seed capital programs and investment rounds. For those moving on to the big leagues, Chile has convinced many of the best venture capital firms to visit Chile to hear pitches from these businesses.

This program, which began in 2012, has funded over 1,000 companies and entrepreneurs from 37 countries. Of these, around 1/5^th are local businesses and about 1/4^th are American. The rest are from anywhere and everywhere on the globe. This has created a very “Californian” vibe along the Pacific coast of South America and a vibrant expat entrepreneurial community. Like Paris in the 1920s and 1030s was the home of a great expat writing revolution, led by the likes of F. Scott Fitzgerald and Earnest Hemingway, Chile is leading the way for the best and brightest in tech that don’t feel welcome in Silicon Valley.

The differences between Chile and Panama are: 1) Chile is focused on tech start-ups while Panama has targeted call centers; 2) Panama wants you to hire local, where Chile will allow you to bring in as many of your own people as you like… from your home country or elsewhere (i.e., India).

Panama’s visa programs are for executives, while Chile’s are for anyone.

What does Chile get out of the program? Other than the obvious short term financial benefits of bringing in successful people, they require recipients of the grants to coach local businesses. They expect you to give back some of your time. Since 2012, Start-Up Chile has held 500 meetings and 1,200 workshops and conferences focused on improving local talent.

Also, these programs have led to a number of joint ventures between Chilean and international businesses that would’ve been unattainable just a few years ago. This, and the influx of international talent which is often hired by Chilean companies, has had a positive and lasting impact on local businesses.

But Chile has some tough competition coming on. Brazil has been working towards becoming a tech mecca for the last few years, and, now that the World cup with its billions in investment is completed, this nation is pushing hard. With aspirations of being the China of Latin America, Brazil offers better infrastructure and local resources, and an economy 10 times larger than Chile’s, but also a much more dense bureaucracy… one that can be impenetrable for foreign investors.

Whether or not Brazil is successful in its efforts, I suggest that Chile will remain a strong option for tech start-ups. For me, the focused community and a government that looks to make my life easier, rather than one that’s constantly looking over my shoulder (Uncle Sam), is all I need to know to say that Chile is a great place to set up an offshore tech business.

Brazil might become the China of Latin America, but Chile will be the Singapore… which is where I would rather be. Brazil has the local market base, but Chile has the privacy and community I want, plus a more educated workforce.

As the U.S. pushes out foreign-born talent, some might say in favor of the huddled masses coming through the Mexican border, you can expect the likes of Chile and Brazil to become even more important players on the world tech stage.

In fact, the U.S. has cut its skilled worker visas to 65,000 per year, down from 100,000 in 1999, and made the process nearly impossible to navigate. Back in the days of Reagan (the good ole days to some), these visas took 18 months to procure. Now, one can wait as long as 10 years!

The U.S. should be focused on winning the global war for talent, but obviously has decided to focus on other matters. Tech firms hoping to compete with lower cost and more efficient programs in South America might find themselves losing to Chilecon Valley and the like.

I hope you’ve found this post interesting. If you’re considering moving your business out of the United States, we can help structure it in a manner that is tax efficient and compliant. Feel free to call or email us at info@premieroffshore.com with any questions. All consultations are confidential and free.

Next up will be a review of Chile’s economy tax system, which was designed to go hand in hand with the U.S. Foreign Earned Income Exclusion.

Avoid the ObamaCare Tax, Offshore Edition

08/22/2014/in Articles, Taxation/by Christian Reeves

The new ObamaCare tax, called the Net Investment Income Tax, or NIIT, hits U.S. residents and expats alike with a 38% levy on most forms of investment income. If your taxable income in 2014 was $200,000 (single) or $250,000 (joint), the ObamaCare tax is coming your way.

These rates are fixed and will not increase with inflation.

The ObamaCare tax applies to the following forms of income:

interest,
dividends,
capital gains,
rental and royalty income,
non-qualified annuities
businesses classified as passive activities, and
income from investment and trading businesses.

Assuming you don’t want to pay any more than necessary to the Obamanation, there are a number of ways to amputate the ObamaCare tax. For example, you can get a divorce or cancel the wedding to avoid the marriage penalty. Two single people may earn up to $400,000 before paying in to ObamaCare, compared to a married couple who start contributing to the cause at $250,000.

If you have residency or citizenship outside of the United States, and can qualify to file as a nonresident alien, you will avoid the ObamaCare tax all together, regardless of your income. That’s right, the NIIT doesn’t apply to nonresident aliens.

If your spouse won’t go for a divorce, and you don’t qualify as a nonresident alien, here are a few other suggestions:

One way around the ObamaCare tax is to give appreciated property to your heirs. If their incomes are below the $200,000 and $250,000 thresholds no NIIT will be due. This can also have significant estate planning and asset protection benefits.

As you may know, when you donate property to your children, who are minors or full-time students up to age 24, they must pay capital gains at your higher rate. However, the ObamaCare tax does not apply to this kiddie tax.

Another solution to the NIIT is to form a Family Foundation and donate appreciated property to that Foundation. This allows you to maintain control over the property, take a deduction for the fair market value on this years return, and then transfer small portions each year to a charity. This allows you to maximize your deduction and avoid both the capital gains and NIIT taxes… all while maintaining control over the assets.

If you don’t need to control the distributions over a number of years, you can achieve the same benefits by donating the appreciated property to a traditional charity.

You can also cut out the ObamaCare tax by lending money to your onshore or offshore business. Interest income from a third party is taxable under the NIIT, but interest coming from your own business is not. This is a rather strange differentiation, but should motivate you to invest in your business.

Along the same lines, if you take an active roll in a business, rather than being a passive partner, dividends and royalties from that company are not subject to the ObamaCare tax.

An active roll, or, more properly, material participation, means that you spend at least 500 hours per year in the business, you are the primary worker, or you can show a consistent work history in the company. Special care should be taken when converting from passive to active, as other taxes might outweigh the NIIT. But, it is quite possible for this to save you money.

If your business is offshore, and you qualify for the Foreign Earned Income Exclusion, then you should be taking out the full exclusion each year to maximize the benefits of being offshore. This means you (and you spouse) should be taking $99,200 in tax free salary from your offshore company in 2014 and holding any excess as retained earnings in the offshore corporation.

The ObamaCare tax doesn’t apply to this salary. As you will be an active participant in the business, which is why you qualify to take the FEIE, you will also avoid the NIIT on interest, dividends and royalties this business generates. When combined, these savings should be major incentives to invest in your offshore company.

If your offshore company needs cash, take the full FEIE salary and lend back whatever is requires.
Note that these benefits do not apply to an onshore or offshore company in the business of trading financial instruments or commodities.

Keeping the trend going, you can rent property to your business and avoid the ObamaCare tax on these payments. The NIIT usually applies to rental income, but not if it comes from your onshore or offshore company.

Leaving offshore companies behind, you can also avoid the ObamaCare tax when you sell your real estate by doing an exchange rather than a traditional sale. A Section 1031 exchange allows you to swap one like-kind property for another and defer the capital gain until you sell the acquired property. A 1031 exchange also defers the ObamaCare tax for as long as you hold the property.

“Like-kind” means that the property you swap for must be similar to the one you are giving up. So, you can transfer one business property for another, one rental for another, etc. However, you may not swap a U.S. property for a foreign property. You must swap a U.S. property for another U.S. property… and you may exchange a foreign property for another foreign property. The foreign properties need not be in the same country. The only requirement is that they both be outside of the United States.

My last suggestion on how to eliminate the ObamaCare tax is that you might sell your losing stocks and use these tax losses against your winners. This common tax mitigation strategy works against the NIIT as you may net capital gains against capital losses and calculate the ObamaCare tax on the net. Even better, you can use a carry forward loss against current year gains to keep the NIIT at bay.

I hope you have found this article on cutting out the ObamaCare tax helpful. If you have questions about forming or operating an offshore company, please contact me at info@premieroffshore.com. I will be happy to work with you to structure your offshore business and keep it in compliance with the Internal Revenue Service.