Tag Archive for: Offshore Business

Dollar Will Fail

The Offshore Tax Inversion

What the heck is an offshore tax inversion and why should I care?  The inversion has been all over the news and was even called “un-American” by our President today (July 25, 2014).  Here is everything the small to medium sized business owner needs to know about the tax inversion.

Where a large corporation is headquartered is called its tax home.  Its tax home is usually where its “brain trust” is located… where its President, CEO, CFO, and primary decision makers reside, often the tax home of a world-wide conglomerate.

Where a corporation tax home is located determines which laws guide the business.  So, if your tax home is in the United States, then the U.S. laws control.  If you move your headquarters to a country that is business friendly and has less onerous lax laws, then that nation’s laws govern.

An offshore tax inversion occurs when a large corporation headquartered in the U.S. acquires another large corporation located in a tax friendly jurisdiction, such as Ireland.  Then, they move the decision makers to Ireland, turning it in to their headquarters and thus their tax home.

Once the offshore tax inversion is complete, U.S. tax laws only apply to any officers or production facilities located here.  Most tax inversions are done to save many hundreds of millions in taxes on worldwide income and to get away from the complex sections of the U.S. tax code, such as the Controlled Foreign Corporation and Passive Foreign Investment Company rules.

A tax inversion can be compared to an individual changing his citizenship and moving out of the U.S.  All U.S. citizens are taxed on their worldwide income.  If you dump your U.S. passport and move to a country with more favorable tax laws, you probably won’t pay tax on your worldwide income… just on your local income.

In much the same manner, a corporation changes its domicile and tax home through an offshore tax inversion.  Once its headquarters are moved, it only pays U.S. tax on its remaining U.S. operations.

While the offshore tax inversion is used by large corporations to get out of the U.S. tax system, there are other provisions of the U.S. code that allow smaller businesses to do the same.

Those of us with a smaller operation can take our business and ourselves offshore, qualify for the Foreign Earned Income Exclusion, and earn up to $99,200 per year free of Federal Income Tax using an offshore corporation.  If we leave some employees in the U.S., we will pay some tax to the U.S.  If we get rid of all U.S. ties, we can eliminate U.S. tax all together… even if our sales are to U.S. persons.

  • Tax is based on where you and your business are located, not by where your customers are.

If you are thinking about moving your business offshore, please start by browsing my articles on the Foreign Earned Income Exclusion.  Basically, you need to move abroad and become a resident of another country or be out of the U.S. for 330 of 365 days to qualify.

Next, you can form an offshore corporation and draw a salary up to the FEIE amount.  If a husband and wife are working in the business, and both qualify, each can take a salary and you’ll (basically) get to earn $200,000 free of U.S. tax.  If your business profits exceed this amount, you may retain earnings in your offshore corporation and defer U.S. tax for as long as you like.

You’ll find a number of articles on this site describing how to take your business offshore.  If you have any questions, please send an email to me at info@premieroffshore.com.

Offshore business tax reporting

Offshore Business Tax Reporting Summary

If you’re operating a business outside of the United States, your offshore business tax reporting obligations can be daunting.  Failure to comply can result in significant interest and penalties, the loss of your business, and even the loss of your freedom.  Here is a brief description of the most common offshore business tax reporting obligations.

The first and most important offshore business tax reporting obligation is not about paying taxes, but reporting where your assets are located.  FinCEN Form 114, commonly referred to as the FBAR, requires you to disclose your foreign bank accounts if you have more than $10,000 offshore.  This form requires the name of the bank, account number, account size, address of the bank, and whether you own the account.  Failure to file FinCEN Form 114 can result in a penalty of up to $100,000 per year and 5 years in prison.

The next non-tax offshore business tax reporting obligation is IRS From 8939, “Statement of Specified Foreign Financial Assets.”  This one expects you to disclose all assets and investments you hold outside of the United States.  It is only required if you have “significant” assets abroad, so check the instructions for the filing requirements.  They vary depending on where you live (in the U.S. and abroad) and whether you are married or single.

There are several exceptions to Form 8939.  For example, you do not need to report gold you hold in a vault nor real estate that you hold in your name.  For more information, please see my articles on gold and offshore real estate.

The balance of your offshore business tax reporting obligations are in concert with your personal income tax return (Form 1040) and the forms are attached there, too.  For example, you should be drawing a salary from your offshore company of up to the Foreign Earned Income Exclusion and retaining earnings in excess of this amount ($99,200 for 2014).  To accomplish this, you will attach Form 2555, “Foreign Earned Income,” to your personal return.  This form requires information on your employer (the offshore company you own), your salary, foreign residency if any, and your travel days to and from the United States.

The largest (in terms of number of pages) offshore business tax reporting item is IRS Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.”  This is a full blown corporate tax return, akin to IRS Forms 1120 and 1120-S.  It will require information on the owners and shareholders of the offshore business, as well as Profit and Loss and Balance Sheet data.  It includes a variety of forms and schedules and is attached to your personal income tax return.

Because Form 5471 goes in with your personal return, it is due whenever your 1040 is due.  If you’re living in the U.S. on tax day, you need to mail it by April 15.  If not, you can get an automatic extension to October 15.  If you are living outside of the U.S., you get an extra two months to file.

If you will use an offshore Limited Liability Company to hold intellectual property, or to manage personal investments, you will file IRS Form 8858, “Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.”  This form allows you to create subsidiaries of your parent corporation and eliminates corporate level tax on passive investments that you wish to flow through to your personal 1040 or Form 5471.

Finally, if you will hold your business inside an offshore trust for estate planning, privacy and asset protection purposes, you may need to file IRS Forms 3520 and 3520-A.  These will allow you to hold your offshore business in an offshore asset protection trust and may provide significant tax benefits if your estate is over $5 million.

The bottom line of IRS Forms 3520-A and 3520 is that income from the trust will flow through to the settlor’s personal income tax return (your 1040).  Only at your passing will your heirs need to begin reporting and paying tax, albeit at a stepped up basis.

I hope you’ve found this post on offshore business tax reporting interesting.  See our tax section (top right of the website) for more detailed information.  If you are interested in receiving these posts by email, please sign up for our free email newsletter.


Controlled Foreign Corporation Defined

If you are doing business offshore, you need to understand the IRS Controlled Foreign Corporation rules.  It is these tax laws that allow you to retain earnings from an active business offshore.  These same rules force you to pay tax on passive income.  If you have a non-U.S. partner, then avoiding the Controlled Foreign Corporation rules is great international tax planning.

Any business that is incorporated outside of the United States with a U.S. shareholder or shareholders directly or indirectly owning or controlling more than 50% of the entity and is a Controlled Foreign Corporation for U.S. tax purposes (Section 957 (a)).

It is important to note that it is more than 50% of the vote or control, which is another way to say ownership or control of the company.  So, while you might assign nominee directors and voting proxies to an offshore corporation, so long as a U.S. person is pulling the strings (control), the entity is a Controlled Foreign Corporation.  Back in the day, nominees were powerful tools.  Under current IRS rules, they are of little value.

Indirect ownership of a Controlled Foreign Corporation can also refer to shares held by your children.  Even if they are not U.S. persons (you are living outside of the U.S. and they don’t hold U.S. passports), the attribution rules mean the offshore company you and your kids control is a CFC.  See Section 958(b).

These same attribution rules apply to ownership of the offshore company by a foreign trust.  Most offshore trusts are taxed as grantor trusts.  In that case, the settlor of the trust (presumably you) is deemed to be the owner of the shares of the company because you control the trust.

If the offshore company is owned by an offshore trust that is not a grantor trust, your heirs are usually the beneficiaries.  In that case, ownership is attributed back to you, the settler, and, again, the offshore company held by the offshore non-grantor trust is considered a Controlled Foreign Corporation.

What Does Being a Controlled Foreign Corporation Mean?

So, what does it mean to you, the American business person operating abroad, that your offshore company is a Controlled Foreign Corporation?  It means that the subpart F anti-deferral rules defined in Section 951 of the U.S. tax code apply.  These rules disallow continued reinvestment by forcing the distribution of certain types of income, summarized as passive income.  It also means that these types of income, regardless of whether actual corporate dividends are paid, will not be eligible for U.S. income tax deferral as retained earnings.

Now, let me translate that into English.

Because your offshore company is categorized as a Controlled Foreign Corporation, you don’t get to defer U.S. tax on passive income and capital gains the business generates.  Assuming you are living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can defer U.S. tax on active business income by holding it in the company, but not passive income.

Also, if you have passive income, such as capital gains and interest on your investments, and you don’t pay it out to the shareholders, those owners are still required to report and pay tax on it.  This often frustrates partners because they are paying tax on money they did not receive, but that’s offshore tax law for you.

Let’s say you are living and working in Panama, and operating your business through a Belize entity to minimize or eliminate tax in Panama.  That company nets $300,000 in profits this year (2014).  You and your wife are both working in the business and both qualify for the Foreign Earned Income Exclusion.  Both you and your spouse should take out the maximum Foreign Earned Income Exclusion as salary from the Belize company.  Let’s round that up to $100,000 each, for a total of $200,000.

As a result, the offshore company has left over profits of $100,000.  The Controlled Foreign Corporation rules allow you to keep that $100,000 in the corporation and not pay U.S. tax on it until you take it out as a dividend or in some other form… which is great for you.  You are operating free of tax in Panama and free of current tax in the United States because of your structure.  Your U.S. taxes are deferred for as long as you leave the cash in the offshore company.

Now, let’s assume you’ve built up $1 million in retained earnings in your offshore company over a few years.  That cash generates $30,000 per year of interest income (a 3% return from your bank).

Because your offshore company is a Controlled Foreign Corporation for U.S. tax purposes, that $30,000 is taxable on your personal income tax return, Form 1040.  If you distribute it out to yourself, you have $30,000 in hand with which to pay the tax.  If you leave this interest income in the offshore company, you still must pay the tax.

There is only one way to avoid this Controlled Foreign Corporation issue.  If your business partner is not a U.S. citizen and not a U.S. resident, and he or she owns 50% or more of the venture, then the company is not a Controlled Foreign Corporation and may be eligible to retain passive income.

Note that you are still required to report an offshore company which is not a Controlled Foreign Corporation to the IRS on Form 5471.  So long as U.S. persons hold 10% of an offshore company, you will have U.S. reporting requirements.

I hope you have found this article on Controlled Foreign Corporations to be helpful.  For assistance in structuring your offshore company or business, please give us a call or send an email to info@premieroffshore.com.  We will be happy to work with you to structure your affairs.

You can find additional information on this site on how to eliminate your U.S. filing obligations, such as Form 5471, the FBAR, and others… assuming you have a partner or spouse who is not a U.S. person for tax purposes.

Currency Transaction Report

IRS Currency Transaction Report

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

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

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

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

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

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

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

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

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

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

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

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

Best Offshore Company Jurisdiction

Which is the Best Offshore Company Jurisdiction?

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

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

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

Best Offshore Company Jurisdiction for Privacy and Protection

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

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

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

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

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

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

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

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

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

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

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

Best Professional Services for Offshore Companies

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

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

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

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

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

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

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

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

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

Best Offshore Company Jurisdiction for Businesses with Employees

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

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

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

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

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

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

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

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

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

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

Tax Issues for Offshore Company Formations

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

The bottom line on U.S. taxation is:

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

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

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

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

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

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

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

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

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

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

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

Local Reporting Requirements

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

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

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

World Image

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

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

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

Offshore Company Specialists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore Captive Insurance Company

The Mini Offshore Captive Insurance Company

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

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

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

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

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

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

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

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

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

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

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

Offshore Captive Insurance Company Must Provide Insurance

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

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

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

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

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

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

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

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

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

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

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

Uses of a Mini Offshore Captive Insurance Company

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

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

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

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

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

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

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

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

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

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


Should I use an Offshore Corporation or Offshore LLC?

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

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

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

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

Benefits of an Offshore Corporation

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

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

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

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

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

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

Benefits of an Offshore LLC

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

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

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

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

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

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

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

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

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

benefits of an offshore company

Benefits of an Offshore Company

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

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

Offshore Company for Those Living in the U.S.

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

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

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

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

Offshore Company for Those Living and Working Abroad

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Offshore Company Jurisdiction

Where to Incorporate Your Offshore Company

Before forming an offshore company, give some thought to where you will incorporate that entity and where you will operate the business. Of course, these don’t need to be the same country…you may do better to incorporate in one jurisdiction and operate from another. The following article will help you select the best jurisdiction for your offshore company.

Offshore Company Tax Tip: If you are an American living and working abroad, the country where you form your company does not make difference. It should be somewhere that will not tax your business and will not require you to file any tax forms. To put it another way: your only reporting requirements should be to your home country of the United States and not to the country where you form your offshore company.

I have developed the following offshore company formation checklist based on my own experiences through the years of operating a number of businesses in five countries, as well as in structuring the affairs of a wide variety of clients around the world.  

The first list are business reasons to select your country of operation:

Offshore Company Tax Issues – Start your business in a country that will not tax your income. Of course, if you open a bar selling beer to the locals in Belize, they will tax you. I am referring to a business that sells a product or service to people outside of your country of operation…usually an internet based business. There are a number of countries that will not tax offshore company foreign sourced income in that case.

Time Zone – One of the most overlooked issues is the time zone. You should operate your business from the same time zone as your clients. If you are selling to the US, then you should be in South or Central America. I can’t tell you how many clients started up an internet business from Asia, only to give up the night shift and move to Panama after a few months.

Banking – Your offshore company can open an account at any number of international banks around the world. The account need not be in your country of incorporation. Of course, you will need a business account in your country of operation. To open that account, you may be able to use your offshore corporation from another jurisdiction, or you may be required to form a local corporation. Never put business income in a personal account…you must use an offshore company!

Tax Tip: I suggest that your offshore company bill your clients and receive payment outside of your country of operation. Then, you should only bring in funds necessary to operate your business, leaving the balance as retained earnings in the offshore structure.

For example, if you operate your business in Panama, bill your customers from a Belize corporation and send only the minimum necessary from Belize to Panama to avoid tax in Panama.

World Image – The way your country of incorporation is perceived by perspective clients might be relevant to some entrepreneurs. This is the country listed in contracts and other documents, so customers will see it. Your country of operation can be kept private, but your country of incorporation will be public knowledge.

Cost of Labor and Office Space – Of course, you will expect labor to be significantly cheaper offshore, but you might be surprised that office space is quite costly. Quality office space in Panama City costs about the same as in my home city of San Diego, California.

Availability of Labor – While cost of labor is low, the demand for English speakers is high. You may find it challenging to hire good people in certain countries. I also note that labor is rather transient in many countries. English speakers are in demand and often move from job to job in search of a dollar more an hour.

Availability of Professionals (CPAs & Lawyers) – One of the most overlooked aspects of starting a business offshore is the need for quality LOCAL counsel. You must have someone nearby who can advise you on leases, employment law, local taxation, and any number of issues. Going in blind, or expecting things to work as they do in the US, is a very common gringo mistake. Don’t be that guy or gal…find a few local experts on which you can rely. We at PremierOffshore.com can get you started, but there is no substitute for local knowledge.

Quality of Telecom and internet – Be sure your office has excellent internet and telecom facilities. You never want to sound like you are in a banana republic!

Availability of Computer Equipment – You might be surprised how expensive it is to import quality computer equipment in to some counties. I have had desktop systems, including monitors, stashed in my large checked cases on many occasions.

In addition to the business checklist above, careful consideration should be given to the quality of life offered in your country of operation. The following are the personal considerations of forming an offshore company and operating a business outside of the United States.

  • Can you learn the language?
  • Is there a community you will fit in to?
  • Can you adapt to the culture / speed of life?
  • Can you adapt to the weather?
  • Is the country accessible by air in 1 day?
  • Can you live with the security concerns?

Now, let’s apply these offshore company criterion to doing business in Panama City, Panama.

For myself and PremierOffshore.com, we decided to form an offshore company in Panama, operate from Panama, and form our offshore corporate billing entity in Belize. While the heat and humidity in Panama City is challenging for a San Diegan, the quality internet and low cost of labor won out. Also, escaping the heat to Medellin, Colombia is only a 30 minute flight!

I hope this article has been helpful and given you some ideas on how to select the jurisdiction for your offshore company and your offshore business. Please contact me at info@premieroffshore.com with any questions or to arrange for a confidential consultation.

Spain tax guide

Spanish Tax Guide: Tax Implications of Living, Working and Investing in Spain

Spanish Tax Guide – this is the first in our country tax guide series.

Spain emerged from five years of recession in mid-2013, and now is one of the hottest investment options around. Real estate and investment markets are still priced near the bottom, but are on the upswing, employment is improving, and the government’s austerity measures are growing the economy.

Spain’s economy, the fourth-largest in the EU after Germany, France and Italy, crashed in 2008 when a real-estate boom went bust, taking down much of its banking system and raising doubts about the country’s solvency. The gross domestic product, which briefly rebounded in 2010 and 2011, has shrunk 7.5% in the past five years.

Investing in Spain is still not for the faint of heart. Its tax system is one of the most complex in the world, still boasts one of the highest rates in Europe, faces staggering budget deficits which have resulting in “wealth taxes” for residents and nonresidents alike, and the economic rebuilding has just begun. In an interview with The Wall Street Journal, Spain’s Prime Minister Mariano Rajoy said “Spain is out of recession but not out of the crisis,” cautiously touting the effects of budgetary and structural overhauls that have been among the deepest in the euro zone. “The task now is to achieve a vigorous recovery that allows us to create jobs.”

There are strong signs of recovery, and thus opportunity for international investors. Labor costs have been reduced, exports are on the rise, and the current-account deficit, once 10% of GDP as cheap money poured in to fuel the building boom, has turned to surplus. However, GDP growth is expected to increase by .5% to 1% in 2014.

High corporate and personal taxes on your worldwide income, and possibly your worldwide assets, are a major issues for anyone moving to Spain. Unwilling to cut government spending, Mr. Rajoy’s right-leaning government chose to raise taxes. According to the Cato Institute, “Following the tax increase, Spanish individuals will be paying one of the highest personal income tax rates in Europe. For instance, from 2012 onwards, only Sweden and Belgium, with 56.4% and 53.7%, respectively, will have a higher top marginal income tax rate than Spain, which stands at 52%. However, if one takes into account local surcharges imposed by some Spanish regional governments, the top marginal rates rise further. In Catalonia, for example, the top tax rate is 56%.”

For just about any income, Spanish tax rates are higher than in France, Britain, Italy and Germany, they say, adding:

“All of those countries enjoy a considerably higher income per capita than Spain and thus can more easily withstand higher taxes than a poorer country. With Rajoy’s tax hike, Spain suffers from the worst of both worlds: very high taxes combined with decreasing income and employment levels. At 23%, Spain has the highest unemployment rate in the European Union.”

Spain’s immensely complex tax regime means that the well organized and researched resident entrepreneur might take advantage of a number of planning opportunities. While Spain has one of the highest tax rates in the EU, it has one of the lowest effective tax rates. The official corporate tax rate, for example, is 30% but large Spanish companies pay about 8% on average. This compares favorably to the US effective corporate rate of 12.6% for 2013.

  • There are few planning options available to non-residents…who basically pay a 21% flat tax without deductions.

Spanish Tax Primer

A resident of Spain is liable for tax on their worldwide income at scale rates after any available allowances and deductions. A non-resident of Spain is liable for Spanish income tax only on Spanish income, and possibly Spanish assets, generally at fixed rates with no allowances for deductions.

If you spend more than 183 days in Spain during the calendar year, or your “center of economic or vital interest” is in Spain, you are a resident for tax purposes. Depending on where you live, personal income tax on wage and business income will range from 24.35% to 56%.

  • “Vital interests” usually refers to someone whose spouse lives in Spain and they are not legally separated, and/or their dependent minor children live in Spain.

If you are a tax resident of Spain, income “derived from savings,” such as interest income and capital gains, are taxed at 21% to 27%. Specifically:

  • Up to €6,000: 21%
  • Excess from €6,000 up to €24,000: 25%
  • Excess from €24,000: 27%

By comparison, non-residents pay 21% on capital gains and 24.75% on investment income earned in Spain. Where residents are taxed on their worldwide income, nonresidents are taxed only on income earned in country.

As a tax resident, you might also get the joy of paying a wealth tax on your worldwide assets. This levy varies from year to year and has come and gone in various forms since 2008. In 2014, each person is generally allowed assets of €700,000 and a personal residence of €300,000, so a husband and wife might be able to hold up to €2 million before paying the wealth tax. If you are caught up in this toll, you will be required to pay a tax equal to 0.2% to 2.5% of your total assets.

Spain’s wealth tax is quite complicated, varies from region to region, has been repealed and brought back from the dead more than once, and might finally be eliminated in 2015. In some areas, allowances are reduced and, if you are fortunate enough to live in Madrid, you pay no wealth tax at all…I guess that’s where the politicians call home. If you are at risk of the wealth tax, you should contact a local expert.

Taxation of Real Estate for Residents and Non Residents

If you are a tax resident and own a rental property in Spain, net income earned is taxed at ordinary rates, which are 24.35% to 56% rate. You are allowed to deduct ordinary and necessary expenses, which include interest on loans used to acquire the property, repairs and maintenance, leasing fees, etc. Spain allows you to depreciate the value of the home or structure on the land at up to 2 – 3% of the purchase price, but you may not depreciate the value of the land. 3% results in a depreciation rate similar to the United States (33.3 years in Spain compared to 27.5 years in the US) and more “generous” that the 40 year depreciation schedule Americans are allowed for foreign property.

If you are not a tax resident and own rental properties in Spain, net income is taxed at a rate of 24.75%. If you are not a resident of the EU nor a resident of Spain (ie. you are a US resident for tax purposes), you may not deduct any expenses against your rental income.

If you are not a resident of Spain, you pay 21% in capital gains tax on the profits from the sale of your real estate and 24.75% on other types of investment income. But, be careful because local capital gains tax (which is levied by the town hall where the property is located and depends on local values) may also apply. This should be considered before making a purchase.

  • 3% of the gross sale price is held back by the buyer and paid over to the Spanish tax authorities. If 3% of the gross is more than 21% of the net (more than the total tax due), you can file a claim for refund.

In addition to the tax on net rental income, you will pay property tax at 1% to 2% per year based on the value of the property. This rate varies by municipality and you should take it in to account when considering properties from different areas. You should also look in to whether you must pay cantonal property tax in addition to the general property tax described above.

There is also a special assessment on real estate owned by non-residents. If you are not a tax resident of Spain, you will pay 3% per year on the value of the property for the right to own property in Spain.

When you go to sell the property, you will pay capital gains tax as described above. Because Spain’s capital gains rate is equal to or higher than the United States, you will probably not owe capital gains tax to Uncle Sam on the transaction. This is because, in most situations, the Foreign Tax Credit will come in and eliminate a double tax.

Spain will also hit you with a Stamp Duty on the transfer. In most cases, this is 0.5% rising to 1% in some autonomous regions and can reach up to 6%! It is paid by the buyer, but you should take it in to account when valuing your property. A property with a small duty might garner a higher price than one with a 6% toll.

Finally, if you own significant real estate in Spain, and you are not a tax resident, you may still get to pay the wealth tax on your assets in Spain. That’s right, if you own rental properties worth more than €700,000 in 2014, you are required to pay a tax based on their value. The levy starts at 0.2% and jumps to 2.5% quickly. It is uncertain whether this tax will apply after 2014.

Taxation of Rural Land

Many of these taxes do not apply to rural land (land primarily dedicated to farming). For example, transfers of rural land and used buildings on that land are exempt from the 21% tax described above. Used for this purpose means that the building is transferred for the second or subsequent time, except when the building is acquired for rehabilitation, and the property is classified as rural by the taxing authorizes.

In many cases, the transfer of rural land will be taxed at around 7% and property taxes will apply at 2% per year. Though, this is an estimate and can vary by region. You should seek the advice of a local attorney before purchasing rural land…and be aware that is extremely difficult to obtain a permit to build in land zoned as rural.

Tax Summary

As a resident living and working in Spain, you are facing personal income rates that cap at an astounding 57% and capital gains taxed at 21% to 27%. However, you can make use of a number of deductions and exclusions that may get your effective rate down to that of the UK and France…now, there’s something to aspire to in tax planning!

If you are a non-resident, you will enjoy a 21% to 24.75% flat tax with very few deductions (unless you are an EU resident). When you consider that owning rental properties in the US generally reduce your taxes (mortgage interest, expenses and accelerated depreciation often exceed rental income), rather than increasing them as is the case in Spain for a nonresident, one should think long and hard before buying a Spanish rental.

As a non-resident, you will also pay a special 3% tax per year, and a property tax of 1% to 2%. Therefore, a non-resident’s carrying costs may be as high as 5% of the assessed value each year.

When you purchase real estate in Spain, the buyer is responsible for a scaled transfer tax of 8 – 10%, and this usually jumps to 12% for new builds (property acquired from the builder / developer). When you sell the property, you pay 21% on the net gain plus an average stamp duty of 1.5%. Local and municipal taxes may also apply.

Finally, when a non-resident sells their property, a special 3% withholding on the total sale price must be held back by the buyer.

I hope you have found this tax review helpful. I’d like to end with an interesting caveat in the Spanish tax code:

  • Because of the extremely high transfer taxes, buyers and sellers might be incentivized to misreport the sale price, with the buyer giving cash on the side to the seller to make up the difference. Well, if the tax authority can prove that the transfer was reported at less than 50% of its fair market value, the government has the right to buy that property for the value reported in the sale.

I hope you find this article helpful. Please contact me at info@premieroffshore.com with any questions or article requests.

Offshore Captive Insurance Company

Can I Invest in a Business with my IRA?

Surprisingly, yes you can invest in an active business with your retirement account. There are a many caveats and limitations, but you can usually lend money to a business, purchase shares in a corporation or LLC, or buy in as a partner receiving a share of the profits (flow-through structures).

Now, let’s talk about those limitations:

First, if you are investing in a business in the United States, your IRA can’t own shares of an S-Corporation.  This is not an IRA rule, but rather a U.S. corporate statute which requires owners of S-Corps to be U.S. persons. In other words, no foreign person (for tax purposes), entity, or tax exempt /preferred structure may invest in a business structured as an S-Corp.

Next, you can’t invest in a business of which you are a highly compensated employee. Basically, the IRS wants to make it difficult for you to take money out of your retirement account as salary and thereby circumvent the distribution rules.

A highly compensated employee is an individual who:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2012 or 2013), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

I note that, if you draw a salary from a business you invest in using your IRA, you open yourself up to audit on that issue. This is especially true if you also take expense reimbursements and other payments that could be categorized as salary. I always recommend clients not take a salary when investing through a retirement account. And, if you do take a salary, to keep very good accounting records on all transactions to ensure they are below the threshold.

Next, your retirement account is prohibited from investing in a business of which you own or control more than 50%, or which is owned or controlled by any “disqualified person.” The first part of this rule is simple enough: you may own up to 50% of a business or corporation through your retirement account. To put it another way, you can’t invest in an entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by you…straightforward enough.

Now, let’s talk about who else (other than you, the owner of the account) is a disqualified person. In this section, the IRS is attempting to limit any conflicts of interest involving your IRA and related parties and to ensure all transactions benefit the retirement account and not the IRA owner.

A “disqualified person” (IRC Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA owner, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

A disqualified person is defined as follows:

  • A fiduciary, which includes the IRA holder, participant, or person having authority over making IRA investments,
  • A person providing services to the plan such as the trustee or custodian,
  • The employer who created the plan or an employee organization any of whose members are covered by the plan,
  • A spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren of a disqualified person,
  • An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by a disqualified person, and
  • A 10 percent owner, officer, director, partner, joint venture, or highly compensated employee of a disqualified person.

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

What will happen if you (whether by accident or intentionally) break one of these many rules? If the IRS finds out, the consequences will be swift and severe. Specifically, if an IRA owner or his or her beneficiaries engage in a prohibited transaction at any time during the year, the account stops being an IRA as of the first day of that year and major penalties apply.

This means that the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is includible in his or her income.

In addition, the IRA holder or beneficiary would be subject to a 15% penalty, as well as a 10% early distribution penalty, if the you are under the age of 59 1/2.

The prohibited transaction rules are extremely broad and the penalties harsh (immediate disqualification of entire IRA plus penalty). Thus, if you invest in an active business, you must be cautious when engaging in transactions that could be considered self-dealing or result in a direct or indirect personal benefit. Whenever you consider a complex transaction, it is important you consult with a qualified expert.

Let’s conclude with a few comments on the tax consequences of investing in an active business. If you purchase shares, and sell them for a capital gain, the profit flows in to your retirement account as any other investment – tax free to a ROTH or tax deferred in a traditional IRA. Likewise, if you lend money to a business, the interest earned passes up to your retirement account tax preferred.

If you invest in a joint venture, mutual fund, or partnership, such that you receive distributions of profits or income, rather than capital gains, your tax picture becomes more complex. Obviously, the IRS won’t let these profits go in to your retirement completely untaxed.

In other words, when you invest in a business by purchasing shares, the value of those shares go up or down based on the net income of the business. The business is earning money, paying corporate tax on its net profits, and then distributing out any after tax gains as dividends or stock appreciation. Thus, the IRS gets its cut first, then the investors benefit.

When a business operates as a partnership, untaxed net profits flow through to its members on Form K-1 to be taxed on the partner level rather than the partnership / entity level. If a retirement account were allowed to receive flow-through profits, then it would be possible to defer or eliminate tax on those profits all together.

Note: It is not possible to operate a business in the U.S. untaxed, but it is possible offshore.

To prevent this, the IRS invented “Unrelated Business Income Tax” or UBIT. In essence, UBIT is a tax at the corporate rate of 35% on profits in a retirement account on income which is not related to the accounts primary purpose of investing.  Income from an active business that is not capital gains, but ordinary income, mean the IRA is operating a business and are thus these profits are UBI and taxed at 35%.

So long as you can live with the tax consequences, your IRA may invest in partnerships, LLCs, and mutual funds (but not S-Corps). To prevent a reporting mess at the IRA level, you should form a U.S. UBIT Blocker corporation, make the investment and pay the tax from that entity, and pass through “related” income or investment returns to the retirement account.

If you invest in an offshore business, which is not taxable in the United States, then you can eliminate UBIT entirely by forming an offshore UBIT Blocker. This is where IRA tax law gets really interesting.

Let’s say you want to invest in a business partnership in Panama, will own 30% of that structure, and operating profits will be passed to you without being taxed by that country. If you form an offshore IRA LLC, an offshore UBIT Blocker corporation, and make the investment from this corporation, you can eliminate UBIT.

This is because the active business profits are earned by an offshore UBIT Blocker are free from corporate level tax. If that entity were a U.S. corporation, its profits would be taxed at 35%. Because it is an offshore corporation, formed in a country with no corporate tax (such as Belize or Nevis), no tax is due.

The UBIT Blocker now passes up these profits to the LLC as dividends. Because dividends are not unrelated income, but rather investment returns, they are not taxable…and UBIT has been effectively blocked.

To be clear, I am referring to an IRA making an investment in to a business that is outside of the United States, has no US source income, and is generating active business returns with an office and staff based in Panama. I am not taking about an offshore structure investing in a business or partnership located in the United States, or a business based in America that is utilizing a foreign holding company.

I hope you have found this article interesting. If you have questions on forming U.S. or offshore IRA LLCs and/or UBIT Blocker structures, please contact me at info@premieroffshore.com. I will be happy to work with you to design a structure that maximizes privacy and protection while still in compliance with IRS retirement account regulations.


Puerto Rico Tax deal

Puerto Rico Tax Deals for Corporations

Thinking about moving your business offshore? If you are a US citizen, and your profits exceed $400,000, I guarantee Puerto Rico has a better deal for you.

As I reported last month, a US citizen can move to Puerto Rico and pay zero capital gains tax on his or her passive income and investments. That’s right, no US Federal or State tax on capital gains tax from real estate, stocks, and/or other investments acquired after you move to and become a resident of Puerto Rico.

This time around, I am here to tell you that Puerto Rico has a deal for business owners and entrepreneurs…a deal you can’t find anywhere else in the world unless you turn in your US passport.

Puerto Rico is offering business owners a tax contract similar to the one Switzerland and Russia negotiates with high net worth Europeans. Yes, Snowden’s Russia is a tax haven. For example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

A tax contract with Puerto Rico will allow you to cut your total (worldwide) tax rate down to 10% or lower without the need for any complex planning or structuring. Once you enter in to a contract, it can’t be modified or revoked by the government until 2036. Of course, you can leave Puerto Rico, thereby opting out of the tax deal, at any time. You can also spend a few months a year in the United States.

To receive these benefits, you are required to move yourself and your business to Puerto Rico, spend at least 183 days a year on the island, become a legal resident of this territory, and enter in to a tax contract with the government. Once you have relocated, you have opted out of the US Federal and State tax systems and in to the Puerto Rico tax code…which trumps the Federal code.

  • As a US territory, Puerto Rico’s tax code takes precedent over the US Federal tax code. While US Expats are bound by Federal tax law, American’s in Puerto Rico need only follow local tax rules.

Such a contract is the inverse of the Foreign Earned Income Exclusion (FEIE) and allows you to pay all of your taxes now at a reduced rate without the need to lock earnings in to an offshore corporation, captive insurance company, or some other complex tax deferral mechanism.

Let me explain: If you qualify for the FEIE you can earn up to $97,600 in salary free of Federal income tax in 2013. If a husband and wife are both working in the business, they might take out $195,200 combined. That is a major tax break which allows a properly structured offshore business earning $195,200 to be completely free of US tax.

Well, what if your business earns significantly more than the FEIE amount? You can usually retain excess profits in to your corporation and thereby defer US tax until you distribute these profits as a dividend. Capital gains, interest income and other returns derived from these retained earnings are taxable (may not be deferred) and dividends are taxed as ordinary income.

While the FEIE works great for those with business profits near the exclusion amount, it is not so wonderful for those earning significantly more. If you net $1 million a year and want to take that money as income now, then you are stuck paying US tax on the amount over the FEIE at 39.6% in 2013. This comes to about $318,000 in Federal income tax assuming a husband and wife both qualified for the FEIE and no State tax is due (($1m – $195,000) x .396) = $318,000. If only one person qualifies for the FEIE, your tax bill will be about $357,350 (($1m – $97,600) x .396) = $357,350.

In Puerto Rico, you pay income tax on the first $250,000 (using a graduated rate of up to 33%) and 4% on income over $250,000. There is no need to retain earnings in an offshore corporation and no issues related to tax deferral. You are paying tax each year as the money is earned…at a lower rate compared to those of us in the States, but no deferral or retainer earnings to worry about.

For example, on $1 million of business profits, your tax bill in Puerto Rico will be about $105,000, significantly less than the same US owned business operating offshore using the FEIE. This equates to an effective tax rate of about 10% ((.30 x 250,000) + (.04 x 750,000)) = $105,000 or 10%.

As your net profits increase, the benefit of Puerto Rico’s tax system increase and your effective tax rate drops. For example, on net profits of $3 million, your tax is approximately $185,000, for an effective tax rate of 6.2% ((.30 x 250,000) + (.04 x 2,750,000)) = $185,000 or 6.2%.

As stated above, if your net profit is anywhere near the FEIE amount, then living and working abroad and operating through a foreign corporation will give you the best tax deal. If your profits are between $100,000 and $500,000, then you might need to run the numbers to determine whether Puerto Rico or the FEIE provides the better option. Such an analysis would take in to account how much you are willing to retain in to an offshore corporation, how long you can lock those profits away, and the deductions you have available on your US personal income tax return (itemized deductions such as mortgage interest, property tax, charitable contributions, etc.). I have not considered these issues in the examples provided.

What about those of us earning less than $1 million from our business? In Puerto Rico, you will be required to take salary of 1/3 of your net profits, up to a maximum salary of $250,000, and pay 4% on the remaining 2/3. So, if you earn $300,000 in total profits, your tax would be about $38,000 or 12.6% ((.3 x $100,000) + (.04 x $200,000)) = $38,000 or 12.6%.

If that same $300,000 was earned as salary by a US citizen using the FEIE and an offshore corporation, the first $97,600 would be tax free and the remaining $202,400 would be taxed at around 31% in 2013. This means your US Federal income tax will be about $62,644 (($300,000 – $97,600) x .31) = $62,644 for an effective rate of about 20%.

If a husband and wife are both working in that business with a net of $300,000, the FEIE amount becomes $195,200, and the balance is taxed at approximately 29%, for a total tax of $30,392. Therefore, at this income level it will be more efficient for a single person to operate in Puerto Rico and a married couple to be based offshore (($300,000 – $195,200) x .29) = $30,392 or about 10%.

When you combine these business tax incentives with the personal tax benefits of zero capital gains, you have a very strong contender in Puerto Rico. It is a deal that no country in the world can offer a US citizen.

So, why is Puerto Rico doing this? This island territory is in its 8th year of recession and is desperate to attract some wealth and prosperity. 4% tax on business profits is better than no business and no tax revenues.

How bad is the economy? Puerto Rican bonds are sold in the US with yield above 10%, which is extremely high. So high that Puerto Rico was forced to cut its offering this week the island’s Government Development Bank announced it would cut bond sales to between $500 million and $1.2 billion for the rest of the year. This yield compares to California municipal bonds at a current high of 3.13%, up from 2.17% at the end of 2012.

As the territory struggles with $70 billion in public debt and a 13.9% unemployment rate, higher than any U.S. state, it is searching for new ways to bring in capital, employment and investment. The government hopes to cut its $820 million budget deficit in half by 2015.

But, there is hope for Puerto Rico. While the US is completely out of control, Puerto Rico’s deficit has been reduced from $2.4 billion over the last couple of years. The island’s five-year economic plan calls for creating more than 90,000 jobs that would add as much as $7 billion to the economy by 2016, and another 130,000 jobs and as much as $12 billion of growth by 2018.

While these tough economic times might prevent a firm from building a large factory, or committing millions to the Island, they should not deter a high net-worth investor and business owner from picking up and moving. These tax incentives are guaranteed by the government until 2036 and can’t be withdrawn or amended. Even a law change would have no affect because your earnings are not locked in to the corporation, as they are with retained earnings in excess of the FEIE.

For more information, here are some links to other sites.

Links to Outside Resources

If you are considering moving your business  to Puerto Rico or abroad, please contact me for a confidential consultation. You can reach me directly at info@premieroffshore.com or (619) 483-1708.

Puerto Rico Pic

Move to Puerto Rico and Pay Zero Capital Gains Tax

Are you tired of paying in to the Obamanation? Is most of your income from capital gains taxed at 24% plus whatever your State grabs? You can eliminate tax on interest, dividends and capital gains by moving to Puerto Rico…immediately and legally.

Those of you who have been following me on  Live and Invest Overseas and PremierOffshore.com for a while know I am focused on showing business owners how they can move their operations offshore to eliminate or defer US tax using the Foreign Earned Income Exclusion. While this model works great for the entrepreneur or small business owner, it provides little benefit for retirees or those who make a living trading stocks and investing.

While the US is taxing and redistributing wealth as quick as it can, Puerto Rico has seized upon this opportunity (an Obamatunity if you will) to entice high net worth individuals to move to their happy islands. Puerto Rico has completely eliminated tax on capital gains, interest and dividends. Yes, that’s right, once you become a resident of PR, you can legally pay zero capital gains tax. No more Federal tax, no complex planning, and no fear of the US government finding your offshore account.

I am not talking about only cutting out your State tax…I am saying you can jettison ALL United States tax on interest, dividends, and capital gains. This is possible because Puerto Rico, while a commonwealth of the United States, is treated as separate for tax purposes. By moving to PR, you can opt out of the Federal tax system and in to the PR tax program. This is because, under the Internal Revenue Code (IRC), capital gains are sourced to your place of residence and the IRC has one section detailing Federal law and another specifying laws of the territories.

Retired? Puerto Rico does not tax social security or unemployment income.

I would like to note here that moving to a foreign country with a low capital gains tax rate does not reduce your effective tax rate on passive investments. This can only be accomplished by relocating to a tax friendly US territory. As a US citizen, you are taxed by the US IRC on your worldwide income no matter where you live. When you move abroad, you remain under the jurisdiction of the Federal Government. So, if your country of residence taxes your gains at 5%, and the US at 20%, then you pay 5% to your country and 15% to Uncle Sam for the right to carry his passport. But, when you move to Puerto Rico, you fall under a unique section of the US tax code for the Commonwealth which trumps Federal law. You are opting out of the IRC Federal system and opting in to the IRC commonwealth system.

In other words, once a U.S. citizen becomes a resident of Puerto Rico, any income derived by that person from sources within Puerto Rico is excluded from U.S. Federal income tax, and taxed under the Puerto Rican income tax code. However, any income derived from outside of PR remains taxed under the Federal law.

So, capital assets (such as land, stocks, bonds, etc.) acquired after moving to PR are tax free. As for property acquired prior to becoming a resident, special provisions can result in a 10% long term rate from the day you qualify and a 5% tax rate applies to property acquired prior to becoming a resident and held for at least 10 years thereafter. See details below.

Why is Puerto Rico Doing This?

While I could pontificate on how PR sees the error of our ways and is a bastion of freedom and capitalism, the truth is probably less grandiose. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. Puerto Rico has been battered by several years of recession and its unemployment rate is over 13 percent, well above the national rate, and its economy remains in a funk. Moody’s Investors Services rates the island’s debt one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

I also note that these tax breaks apply only to new residents and not those currently living in Puerto Rico. More specifically, they are available to individuals who have not been residents of Puerto Rico within in the last 15 years and who become residents of Puerto Rico on or before December 31, 2035. As such, PR is obviously attempting to bring in new money to revitalize their fledgling economy.


To qualify, you must become a tax resident of Puerto Rico, reside in PR for at least 183 days a year, and file an application for the exemption with the local tax authority. Once approved, the decree establishes the terms of the exemption and has the effect and force of a contract during the entire benefit period. Considering the weakness of the PR economy, and how frequently tax laws change, this contract status is a major benefit.


The tax incentives available to individuals are as follows:

  • 100% tax exemption on interest and dividend income earned after the nonresident individual becomes a resident of Puerto Rico; also applies with respect to alternative minimum tax (AMT) up to tax year 2036
  • 100% tax exemption on interest, financial charges, dividends or distributive share on partnership income from international banking entities in Puerto Rico including AMT
  • 100% tax exemption on long-term capital gains realized and recognized after becoming a resident of Puerto Rico but before January 1, 2036
  • If not realized and recognized within the incentive timeframe, regular individual long-term capital gain applies (currently at 10%)
  • Applies to appreciation of property after becoming a resident of Puerto Rico
  • 5% tax on long-term capital gains realized before becoming a resident of Puerto Rico, but recognized after 10 years of becoming a resident of Puerto Rico, as long as recognized before January 1, 2036
  • This 5% long-term capital gain tax only applies to the portion of gain that relates to the appreciation of the property while the individual lived outside Puerto Rico
  • If the long-term capital gain is not recognized within these time periods, applicable individual long-term capital gain rate would apply on any Puerto Rico-source long-term capital gain

Puerto Rico also has great incentives for business owners, based around the tax breaks on dividend payments, which I will detail in a future article. If you are considering living and working abroad, give Puerto Rico a chance. Because of its status as a US territory, these islands can offer tax incentives to US citizens that are not available anywhere else in the world.

Offshore IRA Fees

Tax Benefits of Going Offshore

The United States tax code is a hopelessly complex mess with as many loopholes for the wealthy as there are stars in the sky. There are many tax benefits of going offshore, and some of them can great for the “regular guy.”

Multinational corporations and billionaires spend big money on political campaigns and on lobbyists to ensure their interests are protected, and they expect a strong return on these “investments.” For example, a 2009 study found that each dollar put toward lobbying translated into $6 to $20 of tax benefits. Searching through these negotiated tax breaks leads you to a list of tax benefits of going offshore.

Just how ridiculous has the US tax code gotten? According to the IRS, taxpayers spent more than six billion hours in 2011 complying with the tax code – that’s enough to create an annual workforce of 3.4 million people. If that workforce was a city, it would be the third largest city in the United States. If that workforce was a company, it would employ more individuals than Walmart, IBM, and McDonalds, combined.

Even the mighty IRS seems overwhelmed by the complexity of the current tax laws. According to the National Taxpayer Advocate – part of the Internal Revenue Service – the Service cannot meet the needs of taxpayers.

Of the 115 million phone calls the IRS received in fiscal year 2012, it was only able to answer (actually pick-up) 68 percent of the calls. The IRS also failed to respond to almost half of all taxpayer letters within the agency’s own established time frame. And in 2011, the U.S.  Treasury Inspector General’s reported to Congress that most taxpayers who contact the IRS do not receive helpful responses.

Such complexity means that the well informed and well represented have a major advantage over the average citizen. While billionaires can afford hundreds of thousands of dollars a year in legal fees to structure their affairs to minimize tax, diversify their investments, and protect their assets, the average citizen is at a major disadvantage.

With this in mind, I spend my time researching and writing on the various ways the average person might utilize the tools designed for the Googles and Mitt Romneys of the world for their benefit. It is my hope that my website and articles will level the playing field just a bit.

Tax Benefits of Going Offshore

In the world of international tax planning, there are many regulations that can be utilized by anyone living, working, or investing abroad, to reduce your US tax bill. Some will eliminate tax on your salary, or allow you to opt out of the Social Security and Medicare taxes, while others, such as those that apply to IRA LLCs, can allow you to invest in just about anything offshore, with leverage, tax free.

The information provided below on the tax benefits of going offshore is a brief summary of a variety of complex tax rules. It is not meant as a complete analysis of these laws, nor is it tax or legal advice specific to your situation. Please contact me at info@premieroffshore.com or at (619) 483-1708 to discuss your situation in detail.

Foreign Earned Income Exclusion

The key to many of the offshore tax benefits of going offshore is the Foreign Earned Income Exclusion. This section of the tax code allows you to earn up to $97,600 from work, either as a self-employed person or as an employee. To qualify, you must be out of the US for 330 out of 365 days or a qualified resident of another country.

Anyone living and working abroad can qualify for this exclusion, so long as you meet the requirements of the 330 day test or the residency test, you are golden. The exclusion applies to Federal Income Tax, and not Self Employment tax, so additional planning may be required if you are running your own show.

I note that only those living in low tax countries will get much play from this exclusion. If you are based in a place with a tax rate that is about the same, or even higher, than the United States, then the Foreign Tax Credit will step in and prevent double taxation, without the need for the FEIE.

In other words, if your US Federal tax rate is 35%, and your rate in France is 40%, you have no need of the FEIE because you are already paying more in tax than you would in the United States. You can deduct your French tax on your US tax return without concerning yourself with qualifying for the FEIE.

Conversely, if you are living tax fee in Panama, drawing a salary of $100,000, and fail to qualify for the FEIE, then 100% of your income is taxable in the United States. Without the FEIE, there is no benefit to working abroad in a low tax country!

Take Your Retirement Account Offshore

By moving your IRA or other retirement account in to an offshore LLC, you can take control over your savings, invest in foreign real estate or projects, and hold cash outside of the United States in any currency you like. Even better, you can do all of this while maintaining the tax free or tax deferred status these accounts enjoy.

For the sophisticated investor, the tax benefits of going offshore can be enormous! I will list the in order of importance.

First, if your IRA invests in certain hedge funds (typically, the most profitable ones), the income generated is probably taxable to your IRA at the prevailing corporate tax rate, which is currently 15% to 39%. Most investors will pay about 34% on taxable income earned in their retirement account. In addition, you must file IRS Form 990-T to report that income and pay the tax.

–        Note that only very specific types of income, known as Unrelated Business Income (UBI), is taxable in a retirement account. This tax is called UBIT.

By moving your IRA in to an offshore LLC, and investing through a UBIT Blocker Corporation, you can completely eliminate UBIT. Your IRA can invest in a hedge fund, or any other UBI generating venture, and pay zero US tax.

This tax loophole was created for large pension funds, but is available to any tax exempt organization or charity, including offshore IRA LLCs. Hedge funds that wish to attract pension funds, retirement accounts, or non-US investors, must set up an offshore module of their fund (known as a Master/Feeder structure), whereby the tax exempt groups (your IRA) and foreign persons invest in the offshore division, while US persons invest in the US division. Then, these groups are combined in the master fund, from which investments are made and returns generated.

Offshore IRA LLCs have been used by the uber rich for years, and became big news during the previous presidential election. Many news outlets reported that Mr. Romney was able to grow his IRA LLC to over $100 million through the use of this type of international tax planning. To read more about his use of these structures, click here for the NY Times and here for a very partisan article on the Huffington Post.

Likewise, IRA LLCs that wish to invest in an active business will benefit from being offshore. Your IRA LLC can own up to 50% of any active business. The profits generated, especially if that business is structured as a partnership, are often Unrelated Business Income and taxable to the IRA.

If the company is offshore, then it may be operating free of US income tax. If you buy in through a specially designed offshore IRA LLC, profits paid out to you may also be tax free because your offshore structure effectively blocks the US from taxing those profits. For additional information, see the UBIT Blocker section of my website.

Those are the basics of taking your IRA offshore…child’s play, if you will. Here is the monster tax benefit of going offshore: You can eliminate UBIT on leverage by going offshore. Let me explain.

When you borrow money, or leverage up your IRA, the profits generated from that leverage are taxable (under the UBIT rules). So, if you buy a rental property for $100,000 with your IRA, paying $50,000 from your retirement account and get a non-recourse loan of $50,000 for the balance, when you receive rental payments, or sell the home, 50% of the net income will be taxable as UBI.

The same is true with brokerage and forex accounts. Your provider may be willing to give you 10 to 1, 30 to 1 or even 100 to 1 leverage on your deposit. But, if this is an onshore retirement account, the profits generated with that leverage are taxable.

By taking these transactions offshore, through a specialized offshore IRA LLC with UBIT Blocker Corporation, you can eliminate UBIT on borrowing and leverage. Tax free leverage is the key to generating big tax free profits in your retirement account.

For the “asset protection” benefits of moving your retirement account offshore, see my article: Can the Government Seize my IRA? If you are concerned with privacy or protecting your IRA from creditors and government appropriation, moving your IRA offshore, and in to a bank that does not have a branch in the US, is your best and only defense.

Stop Paying Social Taxes

Are you tired of supporting the Obamanation through social and medical taxes? Or, forgetting the political hyperbole, do you want to cut your US taxes? You can opt out of employment and social taxes by moving offshore. If you qualify for the Foreign Earned Income Exclusion, and are an employee of a company based outside of the US, then you need not pay Social Security, Medicare, or any other social taxes on your salary.

However, if you are an independent contractor, or are otherwise self-employed, then you must still pay Self Employment tax, at a rate of around 15%. So, assuming you qualify for the FEIE, on a salary of $97,000 you pay no Federal Income Tax but around $14,000 in SE tax. For a husband and wife, each drawing a salary, the SE tax will doubled to about $28,000.

The same is true if you are an employee of a US corporation while living abroad. You get the benefit of the FEIE, but must pay your share of social taxes (about 7.5%), as must your employer. All Social Security, Medicare, Obamacare, and related taxes still apply to the Expat and his employer, so long as you are employed by a US company.

Like the employee of a foreign company, you can eliminate SE tax by incorporating your business offshore and become an employee of that company. You can incorporate in any tax free country (such as Belize), and it does not matter where you are living or working, it does not matter if you are the owner and sole employee, nor does it matter if all of your clients are in the United States. So long you are living and working abroad, qualify for the FEIE, and are running an active business, you can eliminate SE tax by incorporating offshore. Your corporation should bill your clients and you can draw a salary from the net profits that entity of up to the FEIE amount (currently $97,600).

–        You might combine the offshore company with a US LLC if you wish to open accounts in the US and get paid by check, PayPal, or credit card.

Defer Tax with Offshore Mutual Funds

For the uninitiated, investing in an offshore mutual is a bad idea. Punitive rules (the opposite of loopholes) have been written in to the tax code by the US mutual fund industry which are quite hostile to investing in these types of products offshore.

In most cases, an offshore mutual fund investment is governed by the Passive Foreign Investment Company (PFIC) section of the code. Like a US mutual fund, you only pay tax when you cash out. But, unlike a US fund, the tax man is going to crush your profits. First, when tax is paid, all income and gains are taxed at the highest ordinary income rate (presently 39.6%).  There is no long-term capital gains treatment.  Second, losses are disallowed.  Third, you have to assume that all of the gains are earned ratably over the time the investment was held — even if the fund lost money the first few years and only made its gains in the last year when you cashed out.   Why is that bad?  Because of the final part of the quadruple whammy – interest charges, compounded annually.  Annually compounded interest at the underpayment interest rate (which is set by the Treasury Department each quarter and has been anywhere from 5% to 10% over the last several years) is charged on deferred tax.

And here is the loophole for the offshore professional: If the PFIC meets certain accounting and reporting requirements, a PFIC shareholder can elect to treat the PFIC as a qualified electing fund.  The effect is that the PFIC shares are taxed like U.S. shares.  The owner of a foreign mutual fund treated as a QEF may: 1) elect to pay tax on income as it is accrued in your account, or 2) choose to defer tax until money is received. If both the QEF and deferral elections are made, you pay tax on the profits plus 3% interest per year when you receive a distribution.

If your offshore mutual fund is returning profits greater than your interest rate of 3%, or the fund has profits some years and losses in others, the QEF with deferral elections are major tax benefits. This is especially important for a fund with losses, as these losses do not flow through to your tax return, so deferral can eliminate some quite harsh tax consequences of going offshore.

These elections allow the well-educated investor to access some of the high flying offshore mutual funds without the punitive taxes meant to keep the uninformed in the United States.

Eliminate Tax in Your Country of Residence

While the United States taxes you on your worldwide income, no matter where you live, and no matter where your clients are located, most countries do not charge you for foreign source income…which is to say, you pay no tax on income earned outside of their borders or, the majority of nations tax you only on income earned within their territory.

With this in mind, planning may eliminate tax from your country of residence. For example, if you are living in Panama, selling products or services to customers in the United States, and operating a through corporation in Belize, Panama may not tax you on the net profits of that Belize entity. Conversely, if you are living and working in Panama, operating through a Panama corporation and/or selling to people living in Panama, then Panama wants its cut.

By incorporating your business in a country other than where you reside, you may be able to legally avoid paying any tax to that country. When you combine a tax free country of incorporation (Belize), with a country with a territorial tax system (Panama), and the Foreign Earned Income Exclusion, it is possible to earn a significant amount of money from your business and pay zero income tax to any nation.

In the case of a business with employees and local expenses, you may form a corporation in Panama and bill your Belize corporation from that Panamanian entity. You should only bring in enough money to Panama to pay your bills, but draw your salary from the Belize company. In this way, the Panama company will break-even and no tax will be due.

I am often asked why countries like Panama allow this setup. It is because 1) you will pay employment and other taxes on your employees, and 2) you will spend money and indirectly contribute to the economy by living and basing your business in that country. A business that employees local workers is a major benefit to any efficiently run economy.

Retain Earnings Offshore

For the entrepreneur, qualifying for the FEIE and taking that salary through an offshore corporation is the first line of defense against the IRS. It allows you to take out $97,600 in salary free of Federal Income Tax. If a husband and wife are both involved in the day to day operation of the business, each may qualify for the exclusion, resulting in up to $195,200 in tax free salary.

So, what if your net profit is more than FEIE? If you take more than the Exclusion out of the corporation, you will pay tax on it as earned. If you leave it in the corporation, it will be classified as retained earnings and not taxable in the United States until it is distributed as a dividend or other payment.

–        This assumes you are incorporated in a country, such as Belize, that will not tax your corporate profits or retained earnings.

Two important caveats: 1) interest or capital gains derived from these retained earnings is taxable as earned, and 2) you may not borrow retained earnings from your corporation or use them for your personal benefit. They must remain in the corporation or be used for business expenses and expansion.

You might be wondering why large companies based in the US get offshore exclusions while you must make the drastic step of moving abroad to receive these benefits? In fact, multinationals must follow similar rules to qualify by having an active division with employees outside of the US in order to retain some earnings offshore.

To put it another way, a small business, that is owned and controlled by a US person, must move all of its operations outside of the US to gain these benefits. A large corporation can achieve the same by moving an autonomous division abroad.

For additional information on this topic, see my article: How to Manage Retained Earnings in an Offshore Corporation.


As you can see, there are a number of tax benefits for those offshore. If you are living, working, and/or investing abroad, you should consult with a professional to ensure you are taking advantage of these benefits. For the business owner who has a non-US partner, additional incentives may be available but are outside of the scope of this article.

I will end by pointing out that big tax breaks come with big tax reporting requirements. US tax compliance should be a primary component for anyone considering going abroad and is the foundation of an international tax or business strategy. Be sure to contact a licensed US representative, and do not rely on a foreign provider, whenever incorporating offshore.

Panama Foundation Scam

Is Panama the Next Singapore?

Panama vs. Singapore by By Christian Reeves and Lief Simon (www.offshorelivingletter.com)

“Panama is the next Singapore,” declared a friend over lunch the other day. He wasn’t the first I’ve heard make the prediction.

Since finding its legs after the U.S. military handed over the canal, Panama’s economy has been on an uninterrupted upward trend. Even throughout the global recession of the past several years, Panama has racked up positive, albeit slower, growth.

Like Singapore, Panama is a shipping, banking, and corporate headquarter hub. Both countries are also tax havens. Where they diverge is gross domestic product (GDP) per capita and cost of real estate. Singapore’s GDP is about four times that of Panama, depending on the statistics you look at. The population of Singapore is about 50% greater than that of Panama, making this GDP figure even more stunning.

The average price per square meter for apartments in Singapore is eight times the current average cost in Panama City. (And we’ve been complaining about property values in Panama City!)

The point is that both of these statistics are being used as predictors for Panama’s potential. The consensus is that Panama is looking at at least another decade of continued tremendous growth rates.

I agree.

Panama has 100 times more land area than Singapore. As a result, there are different markets at work in this country. While real estate prices will continue to increase in Panama City as the country continues to mature and will, sooner or later, I believe, reach levels to qualify as “expensive” in a global context, prices in the interior of this country and in most of the beach areas will remain more affordable than those in comparable options in the United States. That will allow Panama to continue to attract retirees from North America and Europe.

Banking, shipping, business, tax benefits, and retirees: That is a dynamic combination for the Panamanian economy, which has grown at a rate of at least 7.2% per year every year since 2004, with the exception of 2009 (the “slow year”), when it grew at a rate of 3.9%. Unemployment is low, at 4.2%. In fact, the country is growing so quickly that it can’t educate and train its own citizens fast enough to keep up with the ever-expanding job market. The new “Specific Countries” residency visa, which comes with the possibility of a work permit for citizens of 47 countries, is one attempt to ease the strain the country is experiencing trying to find qualified workers for all the international companies relocating here, not to mention the local businesses and banks.

Global Banking Haven?

Historically, Panama has been generally acknowledged as a “banking haven.” No question, this is an international banking center; there are currently 78 banks licensed in this country. However, there is no longer any pretext of banking privacy or secrecy; not since November 2011 when Panama signed an exchange-of-information agreement with the United States.

Still, there are a lot of banks here and a lot of banking options. Like most offshore banking destinations, Panama offers two kinds of banking—local and international. Of the 78 banks licensed in Panama, 2 are state owned, 28 are international banks, and 48 are general licensed banks. International banks can only take clients from outside Panama, while general licensed banks can have both local clients and clients outside the country. The main difference from a practical point of view is that international banks don’t offer day-to-day banking services such as checking accounts or mortgage lending. These are places to keep investment, not operating, accounts.

You can see the full list of banks in Panama here. LINK TO http://www.superbancos.gob.pa/en/igee-general-information

The problem with most of the 48 general licensed banks in Panama is that, while they can take foreign (that is, non-resident) clients, in the current climate, they tend to not want to. That said, a colleague walked into Balboa Bank and was able to open an account as a non-resident foreigner with remarkably little hassle. He had his bank reference letter and his passport, which is all you need in theory. However, when it comes to banking overseas, the theory can be one thing, while the reality is something else.

While I’ve given up on identifying a local bank in Panama that will consistently open accounts for foreigners, ones to try in addition to Balboa Bank (which recently merged with Banco Trasatlantico and seems to be interested in growing its client base)include Banco General (one of the biggest banks in Panama in terms of number of branches), and Global Bank (where some I know have recently reported having good luck opening accounts).

All banks in Panama offer some level of internet banking, but check the details of this before investing the time in getting an account open to make sure you can initiate wire transfers online if that’s something you’ll need to do. Balboa Bank offers that service online, as well as an English-language version of their interface. This is notable, as many banks in this country don’t have English versions of their websites.

Many of the general licensed banks offer consumer as well as private or investment banking. If you’re a private banking client (meaning you’ve deposited US$250,000 or more), then you’ll generally have an easier time opening an operating or consumer account with one of those banks.

Again, the international banks operating in Panama deal only with foreign clients. Further, the minimum account balance required to open an account with one of these banks is US$1 million or more.

One exception is Banca Privada d’Andorra (BPA), which has a branch with an international license in Panama. BPA will open an account for you with a minimum account balance of US$100,000 (although they prefer US$250,000). Their online banking interface is in Spanish, French, Catalan, and English. You can contact Yariela Montenegro at y.montenegro@bpa.ad for more information about BPA’s services.

With the growing cost of the compliance required of any bank with American clients, many of the world’s international licensed banks are simply opting out of dealing with U.S. citizens, even those with the funds to open an account with US$1 million. Meantime, with everything going on in the global banking industry, banks are changing their policies and rules regularly. One bank that will open an account for a foreigner today may not next week and vice versa. We’ve watched this in Panama. Last year, for example, the executive committee of Unibank, a bank we’ve been recommending to readers since it opened in December 2010, decided that they would no longer take non-resident foreigners as clients except in their private banking division (US$250,000 minimum deposit). In December, they reversed that decision, but implemented a US$300 application fee for any foreigner wishing to open an account. Probably the back and forth and the new application fee are a reaction to the escalating cost of compliance when dealing with foreign clients.

Panama banks are generally solid, as the country’s Superintendent of Banking strictly monitors all bank activity. Currently, one bank is in “forced liquidation.” I’m not sure what that means, but banks don’t fail in Panama. When a problem does arise, the Superintendent takes action.

One specific occurrence a few years ago had to do with Stanford Bank in Antigua (the island, not the town in Guatemala). Stanford went bust because of malfeasance of the founder, and all related banks in different countries were affected. The Panama subsidiary of Stanford was closed, its assets frozen. The U.S. entities handling the case against Allen Stanford tried to seize the Panama assets, but the Panama Banking Superintendent wouldn’t allow that. After about 18 months, Stanford in Panama was sold to a group that reopened as Balboa Bank (still in operation today). All the Stanford Panama clients received the return of their funds.

It’s difficult to try to make a direct comparison of banking in Panama with that in Singapore. There are more banks and financial institutions in Singapore, which also offers more types of licenses. The number of banks in Panama has been relatively stable over the last 10 years, with new banks opening as other banks merge. Meantime, the volume of banking in Panama has increased, and I expect the number of banks to continue to increase as more international banks decide to open branches in this country.

Business And Taxation

One of the biggest advantages to Panama as a jurisdiction right now is that it is the best place in the world to run a business. Not a local business. I’d say that running a local business here in Panama would come with all the same challenges of running a local retail business anywhere in the world. In addition, though, the important thing to note about local trade in Panama is that much of it is restricted to foreigners. Most professions – doctors, lawyers, accountants, etc. – are restricted to Panamanian citizens, as are retail businesses. Most foreigners who want to be in business in the country focus on tourism-related opportunities or other service-related businesses…or restaurants.

If you’re looking for a place to launch or relocate an international business, however, you won’t find a better locale…

Except, perhaps, Singapore. I’d say these two countries are the top choices worldwide for where to base an Internet, consulting, or other laptop-based business. And, given the choice between Panama and Singapore, I’d choose Panama (as I did five years ago when my wife and I decided to relocate from Paris to Panama City to launch the Live and Invest Overseas business). Singapore is a far more expensive place to live and to do business. It’s also halfway around the world and many time zones away from your customer base if your customer base is based in North America.

One important reason Panama is as appealing as a doing-business choice as it is, is because it is a jurisdictional-based tax regime. That means any person or entity is taxed in Panama only if his, her, or its income is earned in Panama. Further, Panama doesn’t impose tax on interest income from deposits in Panamanian banks. Therefore, it’s possible, if you organize your life appropriately, for an individual to live in Panama free of any Panama income tax liability. Don’t earn any money in Panama, and you owe no tax in Panama. It’s as simple as that.

The easiest strategy for setting yourself up to be in Panama and in business without earning any income in Panama is to start a consulting or internet business based outside Panama. Create a non-Panamanian entity to house your non-Panamanian business, earn your income outside Panama (by consulting for a client in Costa Rica, for example), and have your clients pay your non-Panamanian company.

What you can’t do is set up a physical business in Panama with a non-Panamanian business providing the goods, and then have the non-Panamanian entity charge enough to the Panama company to keep it from showing any profit in Panama.

Panama has two rules that void that practice. One is simply an implied income tax on the gross revenue of a company if the company continually shows no profit. It’s essentially a minimum income tax charged at 1.168% of gross income for companies with gross revenue of US$1.5 million or more if the calculated tax on net income is less.

The other rule has to do with transfer pricing between affiliated companies. Panama passed a law last year specifically addressing this. A company with a Panama operation and a foreign subsidiary that provides products or services for local sales cannot charge above market prices for those products and services to the Panama entity in order to reduce the taxable income in Panama.

If you want to start a business in Panama for local trade, the tax rate is a flat 25% tax on net income. However, again, Panama places many restrictions on foreigners doing business locally.

To avoid this 25% tax on local business profits, you could consider basing your local business in either the free-trade zone in Colon or the Panama Pacifico “city” being developed at the former Howard Air Base outside Panama City. The free-trade zone in Colon is essentially a place to warehouse and modify goods to be shipped out of Panama. You can import and export goods to and from this zone with no tax implications, including no income tax. Any goods brought into Panama from this zone, however, are subject to import duties.

Panama Pacifico has been designated a tax-free zone for companies that qualify. The 13 categories of businesses that can operate here tax-exempt are:

 Distribution centers of multinational companies
 Back office operations
 Call centers
 Multimodal and logistics services
 High-tech product and process manufacturing
 Maintenance, repair, and overhauling of aircraft
 Sale of goods and services to the aviation industry
 Offshore services
 Film industry
 Data transmission, radio, TV, audio, and video
 Stock transfer between on-site companies
 Sale of goods and services to ships and their passengers
 Corporate headquarters

Another benefit of basing your business in Panama Pacifico is the opportunity that creates for you, as the business-owner/employer to be able to obtain work permits for foreign employees beyond the usual 90/10 rule. The 90/10 rule, which applies to all businesses operating in Panama outside Panama Pacifico, means that the business must employ nine Panamanians for every one non-Panamanian.

In recent history, again, the exception to this requirement that 90% of the employees for any business be Panamanian, has been to base yourself in Panama Pacifico. However, the new “Specific Country” residency permit means that this Panama Pacifico benefit isn’t as big a deal as it used to be. Now, any foreigner from any of the 47 countries included on the Specific Country visa list can obtain residency and a work permit, creating a chance for businesses to hire non-Panamanian labor without restriction. I believe this window of opportunity will continue only until President Martinelli is out of office. Martinelli created the new visa program through special Executive Order. The guy who follows him in office likely will repeal the order.

Unless the guy who follows Martinelli in office isn’t a guy at all but Mrs. Martinelli, as is lately being discussed.


Another important benefit of Panama as a jurisdiction includes the offshore services available here. In this way, too, Panama is very similar to Singapore. While Singapore has taken the offshore structures game to a next level, as it has been at this for much longer, Panama is working hard to catch up.

Panama offers corporations, trusts, and foundations. Again, Panama corporations pay no income tax in Panama if they don’t earn any money in Panama, making a Panama corporation a very appealing option for structuring business operations in other locations.

You can also use a Panama corporation to hold real estate in Panama or outside the country. Historically, this strategy provided important benefits to do with property and capital gains taxes. However, the rules for these things have changed recently, making this less of a no-brainer option. It can still make sense to hold Panama real estate in a Panama corporation, but not always.

Here’s how this used to work:

Once the Panama property was put into a Panama corporation, the “value” was locked into the public property registry. When the owner decided to sell, he sold not the property but the corporation holding the property. Ownership of the property didn’t change, and, therefore, the public registry value of the property didn’t change. As a result, the amount of property tax charged for the property didn’t change either. In other words, property values could increase, but property taxes (which are figured on property values) could be held constant this way.

Additionally, it used to be that, while Panama did charge capital gains tax on the transfer of property, it did not charge capital gains tax on the transfer of company shares, saving the seller 10% of the appreciation.

This changed in 2006. Now, sellers pay capital gains tax on both the transfer of property and the transfer of company shares.

Finally, Panama charges a 2% transfer fee on real estate. Selling the corporation rather than the property avoided that tax, as well.

Bottom line, today, with capital gains tax charged on the sale of shares and property values being reevaluated for the purposes of property tax, as I said, holding Panama real estate in a Panama corporation isn’t the no-brainer decision it was years ago. The cost of setting up a corporation runs from about US$1,000 to US$1,500, depending on the attorney. Maintaining the corporation runs US$530 a year without nominee directors, which should cost around another US$250.

On the other hand, using a Panama corporation to hold non-Panama real estate can be an excellent strategy, with estate planning and asset protection benefits. American readers should note, though, that a Panama corporation cannot be treated as a disregarded entity for tax purposes; they are treated like corporations. An American considering options for holding real estate in different countries should consider an LLC, a trust, or a foundation, which can be better choices depending on your circumstances overall.

Few people think of Panama as a trust jurisdiction; most look to the Cook Islands or perhaps Belize for this kind of structure. However, Panama does offer trusts (an odd thing for a civil law country).

Panama also offers foundations which is the civil law equivalent.

Foundations work very much like trusts and can be a good alternative to a trust depending on your needs. On the U.S. side, for tax purposes, a foundation can be treated like either a corporation or a trust. You want to make sure you set everything up so your foundation is treated like a trust. If you’re an American, have your Panama attorney work with a U.S. attorney who knows something about Panamanian foundations to be sure that the wording of the foundation documents is such that the entity will be treated as a trust by the IRS. Otherwise, you risk negative U.S. tax implications.

One other thing to keep in mind with a Panamanian foundation is that, while the name may suggest that it is a charitable organization, it is not. A Panamanian foundation is a tax-paying entity and can be liable for tax, both in Panama (if the foundation has any Panama based income) and in the United States (if the foundation has any income at all).

Pushing For First World Status

Panama’s President Martinelli has set an ambitious agenda. He has declared that he’s pushing Panama toward First World status. To that end, he’s taking all the revenues being thrown off by the Panama Canal (and then some) and investing them in infrastructure improvement projects across the country. You can’t drive more than a few blocks in any direction in Panama City without encountering some kind of construction—road expansion or repaving, digging for the new city metro, new building construction or old building renovation, electric and phone cables being moved underground, tunnels, bypasses, etc. Every main thoroughfare in the city is being improved in some way. The latest extension of the Cinta Costera, the new highway and pedestrian area that runs along the Bay of Panama, will take motorists around Casco Viejo and to the Bridge of the Americas, allowing drivers to avoid the current log jam trying to exit the city.

Around the country, roads are likewise being improved, expanded, and dug anew. Plus, new airports, new hospitals (including a big one in Santiago), new schools, and new shopping malls. The landscape of this country is being remade before our eyes.

The investment opportunities that all of this translates into are tremendous. Someday, people could be saying that Singapore is like Panama City.


Currency Transaction Report

How to Get an Offshore Merchant Account

You read a lot of stories about how difficult it is for Americans to get an offshore bank account. Well, opening a low cost, efficient, offshore merchant account 10 times more difficult. Many of us are used to the extraordinarily low rates of the U.S., and have no idea what to expect when we venture offshore. I have more than a decade of experience in this arena, and can tell you an offshore merchant account is a whole different animal that you have experienced in the good ole U. S. of A.

If you are setting up an internet business offshore, you will need a corporation, a bank account, and a way to process credit card transactions in to that bank account…this is the offshore merchant account. Before I talk about rates and what to expect, I want to take some time to explain how the industry is different from the U.S., and how credit card processors view you, the potential client.

  • Definitions: This article will use quite a few industry terms, such as reserve, discount rate, high risk, etc. If you are new to the game, one of the better glossaries on the web can be found here.

How Offshore Merchant Account Processors Think

When a credit card processor opens a new account, they view it as extending some level of credit to their new customer. This is because the processor is liable for any refunds demanded by your customers, called chargebacks, if you, the merchant, is unable or unwilling to pay.

Let me explain: If the bank processes $10,000 a month for a merchant, and 5 months in finds out that their customer (you) has been selling a fraudulent product; the processor is on the hook for $50,000. The same is true if a new merchant account is opened and a batch of stolen credit cards is run through…the processor is responsible for 100% of the loss if the merchant has disappeared with the cash.

In the United States, the processor has a relatively easy time assessing risk and protecting against fraud.  They can check the credit score of the applicant (again, you) and review your banking history. If both of these indicators are clean, it is unlikely that any illegal activity will go through your account. And, if the processor is duped, American police departments are more than willing to step in and hall you off to jail.

But, what happens when you have a processor in Belize, the merchant’s corporation and bank account is in Panama, and the owner of the Panama entity is a citizen and/or resident of Costa Rica? There may be no easy way to validate the creditworthiness of the owner or perform proper due diligence on the account. Also, once the processor sends money to Panama, there is no effective way to get it back and it is unlikely that legal action will be successful…except in the gravest of cases. Basically, the international processor has no recourse in the case of fraud.

Of course, scammers get all the headlines, but fraud and theft are rare. More common is the case where a few customers have a problem with a merchant and chargeback their purchase(s). In the U.S. and Europe, the processor can debit the merchant’s account, withhold future processing to cover these expenses, ruin the owner’s credit, and sue for damages in extreme cases.

Offshore, the processor is limited to withholding future transactions and closing the account. If the merchant is a high volume low dollar account they will obviously pay the chargeback. If they are a low volume high dollar account they may be unwilling to pay…and simply open a new account elsewhere. Most sophisticated merchants will run two or more merchant accounts for this reason.

To protect against this risk, offshore account processors typically require a “rolling reserve” of 10% to 20% from new accounts. A rolling reserve is when the processor holds a percentage of each and every transaction, usually for 60 to 120 days, until the risk of chargebacks has past.

If you are considering moving offshore, you must be prepared for the rolling reserve. If your profit margin is such that the reserve is an issue, you will need sufficient operating capital, credit, or payment terms with your vendors, to support this cash flow “cost” of doing business abroad.

I note that strict rolling reserve rules will apply to new accounts. Once you have processed 6 to 12 months, and your chargeback rate is less than 1%, most processors will reduce or eliminate the reserve.

High Risk Offshore Merchant Accounts

Certain industries and business models have high chargeback rates and are thus termed “high risk” by credit card processors. Anyone in these trades is certain to pay a higher rate to process credit cards and to have a significant rolling reserve. The following are typically considered high risk:

Adult: Pornographic websites have high chargeback rates, especially on their recurring billing practices. Add to this the fact that most large processors don’t want to be associated with porn, and it is easy to see why adult sites get the shaft when it comes to fees.

Gambling: Because deposits in to gambling accounts are typically higher dollar and lower volume than adult, and because of the number of legal issues this industry has faced, internet gambling accounts are considered the highest of risk.

MOTO (Mail Order & Telephone Order) and Telemarketing: If your business accepts phone orders, or you market through outbound phone calls, you must code your transactions as MOTO and will be classified as a high risk account. You will also need a virtual terminal rather than an e-commerce shopping cart.

Pharmacy: If you are an internet pharmacy selling outside of your country of origin, you are considered high risk by the offshore merchant account providers. In most cases, an offshore merchant account will be your only option

Replicas and knock-offs: Most merchant account providers will not process transactions for sellers of replicas. Such products usually violate trademark and other laws.

Travel: A travel agent selling airline tickets or vacation packages over the internet is one of the highest risk accounts out there. The reason is simple: these transactions are for large dollar amounts, often sold months in advance, allegations of fraud are common (we all define a 5 star hotel differently), rights to refund are rare, and buyers love to chargeback…even after the trip has been completed.

Tobacco: If your business is related to cigars, cigarettes, or any type of tobacco, you are a high risk e-commerce client. If you are shipping worldwide, you will need an offshore merchant account.

Your Business Must Be Legal

We at Premier, and all reputable credit card processors, accept only clients operating legal businesses. It is the merchants responsibility to research, understand, and comply with all applicable laws and regulations related to the sale and use of their products and services.

If you are concerned that your product or services may be prohibited, here are some basic rules that apply:

–          Products or Services that violate any law, statue, ordinance or regulation

–          Donations or any configuration in which the value of the transaction is greater than the value of the product or service.

–          Products or services that are illegal, infringe upon the intellectual property rights of others, or can be used illegally.

–          Any product or service enabling consumers to circumvent locks, programming codes or to gain access to any service for which they have not expressly paid.

Higher Number of Rejections

When you process through a non-U.S. merchant account, you need to be prepared for a higher number of failed transactions. This is when the card / sale is declined by the customer’s bank (the issuer), for one reason or another.

When you are using a U.S. processor, just about the only time the issuing bank declines a transaction is when the customer has maxed out his credit. When you are using an international processor, a number of your transactions will be declined simply because you are offshore.

Basically, the bank who issued your customer’s card is concerned that a large transaction originating from, for example, Belize, is fraudulent, and has stopped it before any money has changed hands. When this happens, you can ask the customer to provide a different card, or ask him to phone his issuer and authorize the transaction. The bank will approve the transaction at the customer’s request and you can run the transaction a second time.

When building a website, you should have a system to easily communicate these issues to your customers…typically through a live chat pop-up, or a full service call center. Remember, being offshore means that you must take a proactive approach to each transaction.

Offshore Merchant Account Pricing and Reserves

A typical offshore merchant will pay 4% to 6% to process transactions and will have a rolling reserve of 20% for 60 days. High risk merchant accounts should expect to pay 5% to 10% and may be subject to a higher reserve.

If you are a brand new offshore merchant account, there will be little room to negotiate these fees and reserves. However, if you can bring in significant transactional volume, and have been operating a clean account for 6 to 12 months, providers will often cut deals to get you to move. If you are low risk and paying more than 5.25%, it is probably time to negotiate.

When selecting an offshore merchant account, there are a number of fees to keep in mind. In addition to the discount rate above, you have a per transaction fee (often $0.50 for offshore), a fee on each chargeback of $30 to $100, a dispute fee each time a buyer lodges a complaint, and a gateway fee, just to name a few. For high volume low dollar merchants the offshore transaction fees can be a killer.

Why a U.S. Social Security Number Helps

A U.S. Social Security Number is now a requirement for all merchant accounts in the U.S. The Patriot Act and similar laws of the land have scared processors in to demanding SSNs for all applicants (not ITINs).

While the Patriot Act does not specifically mandate that financial institutions must ask for a customer’s SSN in order to set up a merchant account, the regulations, which took effect in 2003 and were implemented in accordance with Section 326 of the Act, require that all financial institutions establish a Customer Identification Program (CIP), to verify the identity of any individual who wishes to conduct financial transactions through their businesses.

These regulations govern banks and trust companies, credit unions, mutual funds, savings associations, futures brokers, and other similar financial institutions, including institutions that offer merchant accounts to companies for the purpose of accepting credit cards. An institution’s CIP requires that it gather identifying information about any individual seeking to open an account in order to engage in financial transactions, and that it further (1) verify the identity of the individual creating the account such that the institution has reasonable certainty that it knows who the account holder is, (2) establish and keep records of the information used to verify the identity of the account holder, and (3) compare the identity of the account holder to lists provided by the government of known or suspected terrorists.

The “purpose” of these regulations is to allow the US government to work with financial institutions to prevent identity theft, money laundering, the financing of terrorist organizations and activities, and other types of fraud. A financial institution’s CIP is incorporated into its Bank Secrecy Act compliance program, which every US financial institution must have as a means of cooperating with the government to combat money laundering. Financial institutions are required to have procedures in place to ensure that they can verify a customer’s identity and establish that the customer does not appear on any government list of terrorists within a “reasonable time,” and to dictate under what circumstances the institution should refuse to open an account, close an account previously opened, or file a Suspicious Activity Report, based on its ability to successfully establish the identity of the customer.

Each financial institution develops its own CIP, which is then approved by its board of directors. As such, while the Patriot Act does not specifically require that a customer’s SSN must be provided in order to obtain a merchant account, most financial institutions consider a SSN to be a simple and reliable means of verifying identity, and may choose to deny service to a customer who does not wish to provide it. Using a SSN as a requirement for creating a merchant account has been demonstrated to be an effective means of discouraging criminal use of these accounts, and remains one of the easiest ways for financial institutions to comply with U.S. government regulations regarding the verification of customer identity and fraud prevention.

Onshore / Offshore Merchant Account Solutions

If you are a U.S. citizen living and operating a business abroad, or just looking to move some profits offshore for asset protection purposes, you may benefit from an onshore / offshore business structure. This solution may cut your processing costs in half and eliminate or reduce the rolling reserve.

We can setup a U.S. Limited Liability Company in Delaware, owned by an offshore corporation (typically Belize), and open a U.S. merchant account under the Delaware entity. In order to utilize this structure, you must be a U.S. citizen or resident with a valid Social Security Number, have good credit and provide the following:

  1. A U.S. mailing address,
  2. A U.S. utility bill reflecting that address and your name, and
  3. Be willing to travel to the U.S. to open a bank account (if necessary).

In order for this structure to have any tax benefit, you must be living and working outside of the United States, you may not have an office or employees in the US, you must qualify to retain earnings in your offshore corporation (click here for a detailed article), and the owners of the offshore company must qualify for the Foreign Earned Income Exclusion (click here for a detailed article on international taxation).

For additional information on offshore merchant accounts or to form an offshore corporation, please contact me directly at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

Offshore Corporation Taxation

Eliminate U.S. Tax in 5 Steps with an Offshore Corporation

Yes, you, the offshore entrepreneur, can eliminate your US tax bill by forming an offshore corporation and following the five steps below.

As you are painfully aware, the United States taxes its citizens on their worldwide income. No matter where you live, or how much you make, America want’s its cut. Using an offshore corporation will level the playing field just a bit.

If you are a salaried employee in a high tax country, such as France or England, then the US tax system can’t get much, if anything, from you. You have already paid more in taxes to your host country than you would have to the US, so the Foreign Tax Credit steps in and prevents double taxation.

In other words, if the US tax rate is 30%, and you, as an American living in London, pay 35% to The Queen, there is nothing left for the US to take.

But, what if you want to structure your affairs to reduce or eliminate your worldwide tax bill? If form an offshore corporation, and you can follow these five steps, you will eradicate host country income tax, eliminate or defer US tax on your business profits and finally get Uncle Sam out of your pocket – legally and without risk.

Step 1 – Form an offshore corporation in a country that is business friendly

There are a number of tax efficient countries where you can structure your offshore company to pay zero local income tax. Most of these business friendly nations will tax only local source income, or sales to locals, and an internet based or international business will not pay tax on its profits.

To facilitate this, you may need to incorporate in an offshore jurisdiction, as well as in your country of residence, and bill your clients through your offshore entity. The offshore corporation is your “sales” unit and the corporation in your country of residence is your “operating” entity.

Cash flows to your sales entity and net profits are held there. Operating overhead, such as office and employees, are run through the operating entity, which bills the sales unit for these expenses. The operating entity should break-even at year end to avoid local taxation.

If you are marketing to the United States, the most business savvy country from which to operate your offshore company is Panama. It offers a well-qualified English speaking workforce at ¼ the cost of the US and is in the same time zone as America, a big benefit. Panama also has an excellent banking and professional sector, as well as decades of experience in shipping, technology, and production.

Where you incorporate your offshore sales unit doesn’t make much difference. So long as 1) it is different from your operating country, 2) does not tax your business, and 3) does not require you to provide annual reports or audited financial statements. In most cases I recommend a sales unit in Belize or Nevis to match up with a Panama operating company.

You might wonder why countries like Panama and Belize offer these types of structures and tax benefits…don’t they need tax revenue? First, these countries are relatively small and have nowhere near the military, spying, social programs, and other expenses related to running a superpower. Second, offering these incentives brings in investment, income from employment taxes, as well as employment, sales taxes, and other benefits. A small and efficient economy based on entrepreneurship can bring in sufficient proceeds to offer most of the benefits and few of the costs of America.

Step 2 – Live and Work Outside of the US

To realize tax benefits from your offshore corporation, you must live and work outside of the United States as well as qualify for the Foreign Earned Income Exclusion. If you do not qualify for the exclusion, all of the income in your offshore corporation will be taxable in the United States.

There are two ways to qualify for the Foreign Earned Income Exclusion:

The first is a simple math – be out of the US for 330 out of 365 days. If you can meet this requirement, known as the Physical Presence Test, you are guaranteed to qualify for the exclusion and should have no problems in an audit.

I also note that you can be out of the US for 330 out of any 365 day period. It does not need to be in a calendar year. For example, if you are out of the US from March 1, 2013 to March 30, 2014, and only visited the US for 20 days during that time, then you qualify for the Foreign Earned Income Exclusion.

If you have questions on the Foreign Earned Income Exclusion and how these days are calculated, please see my article: Changes to the FEIE Physical Presence Test Travel Days

The second is based on your intention to become a resident of another country for the foreseeable future and is more challenging to prove if you are audited. As a test based on your intentions, rather than travel days, it requires you to show you are a resident of a country, that you are a part of the community there, and that you have no intentions of returning to the United States in the foreseeable future.

To qualify as a resident, you must get a residency permit and file taxes in your new nation (hopefully, you will pay very little, if anything, but you must file). Also, you should think about applying for citizenship or securing some other long term work permit or enhanced residency status. Finally, you should break as many ties to the US as possible, including selling real estate, moving with your family or spouse, transferring some of your investments or retirement accounts, and have as few contacts with the US as possible. 

If you can qualify under the Residency Test, rather than the Physical Presence Test, you can spend much more time in the United States. While I don’t recommend spending more than 4 months, it is possible to spend just under 6 months. If you spend 6 months or more in the United States, you are by definition a resident.  Exactly how much time you can spend in your homeland will depend on the specific facts and circumstances of your situation.

I also note that the Residency Test must cover a calendar year. While the Physical Presence test can be used for any 12 month period, the Residency Test is much more rigid and is usually not an option in the first year you move abroad…unless you happen to move on January 1st.

If you are a perpetual traveler, or on a work assignment abroad, you will need to use the Physical Presence Test. This is because the perpetual traveler never puts down roots in a particular city, and so she is not a “resident” of anywhere, at least as defined by the US tax code. Likewise, the person assigned to work for 3 years in Medellin, Colombia by his employer intends to return to the United States at the end of that job assignment (at least, until he learns how much fun the city can be), so he is not a resident of Colombia for US tax purposes.

Once you qualify for the Foreign Earned Income Exclusion, you can earn up to $97,600 in 2013 in salary from your offshore corporation and pay nothing in US Federal Income Tax. If a husband and wife both qualify, then you can earn $195,200 jointly.

If you are operating a business, and your net profits exceed $200,000, read-on, additional planning is required.

Step 3 – If you are self-employed or have a business, form an offshore corporation

If you are operating a business, you must form an offshore corporation. Failure to incorporate will have dire consequences on your US tax situation. Here are a few examples:

If you do not incorporate, you will pay Self Employment tax on your income, which is approximately 15% and is not reduced by the Foreign Earned Income Exclusion. On joint income of $200,000, SE tax is a little less than $30,000 per year – money you could have saved by planning ahead.

If you do not incorporate, your Foreign Earned Income Exclusion will be reduced by your business expenses. This is a complex matter, but I can summarize it as follows: if your business expenses are 50% of your gross, then your FEIE will be reduced by 50%, from $97,600 to $48,800. So, only $48,800 of your salary is tax free under the FEIE.

If you do not incorporate, 100% of your net profit must be reported as salary. If you incorporate and earn more than the Foreign Earned Income Exclusion, you may be able to retain earnings over and above the FEIE and thereby eliminate or defer US tax. 

It is not tax efficient to draw a salary of more than $100,000 single, or more than $200,000 jointly, from a foreign corporation. If your net profits are above these levels, leave the excess in the corporation and defer US tax until the money is distributed.

There are a number of rules to consider when dealing with retained earnings. For additional information on retained earnings in your offshore corporation, read my previous article here.

Step 4 – Gain residency in your new home country

During your first year offshore, I highly recommend you use the Physical Presence Test to qualify for the Foreign Earned Income Exclusion and spend as little time in the United States as possible. Keep in mind that the Residency Test requires a full calendar year and that qualifying as a resident is a challenging and complex matter.

Once year two rolls around, have all of your documents filed, your ties to the US cut, and your roots firmly in to the community. No matter your long term plans, being able to come and go in the US will be a benefit, and being recognized as a resident of your country of operation will  open a number of doors, both in America and abroad.

For example, a resident will have a much easier time opening bank accounts, getting favorable apartment and office leases, and generally conducting business.  As the luster of the American passport diminishes around the world, a residency card becomes more of a necessity.

Step 5 – File your US Tax Returns, Offshore Corporation Returns, and Report your Foreign Assets and Bank Accounts

As an American citizen, you are required to report your income and foreign assets to the US government or face the wrath of the IRS. This includes an interest in an offshore corporation. The penalties for not reporting these resources are intended to be so draconian that failure to comply is simply not worth the risk.

For the international business owner, the Foreign Earned Income Exclusion and a properly structured entity should remove most of the tax cost of compliance, so reporting and running a “clean” operation should be a welcome relief.

Below is a basic review of the expat Entrepreneur’s US filing obligations:

International Bank and Brokerage Accounts

The most critical filing requirements is the Report of Foreign Bank and Financial Accounts. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with more than $10,000 must disclose these accounts to the U.S. Treasury.

The law imposes a civil penalty for not disclosing an offshore bank account or offshore credit card up to $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. Note that these penalties can be imposed for each year.

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

Offshore Corporation and Trust Filing Requirements

There are a number of filing requirements for offshore corporations, IBCs and International Trusts. Failure to file the required returns may result in civil and criminal penalties and may extend the statute of limitations for assessment and collection of the related taxes.

            Form 5471 – Information Return of U.S. Persons With Respect to Certain Offshore Corporations must be filed by U.S. persons (which includes individuals, partnerships, corporations, estates and trusts) who owns a certain proportion of the stock of a foreign corporation or are officers, directors or shareholders in Controlled Foreign Corporation (CFC). If you prefer not to be treated as a foreign corporation for U.S. tax reporting, you may be eligible to use Forms 8832 and 8858 below.

            A offshore corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether or not to make an election to be treated as a corporation, partnership, or disregarded entity. Making an election is optional and must be done on or before March 15 (i.e. 75 days after the end of the first taxable year).

            Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities was introduced in 2004 and is to be filed with your personal income tax return if making the election on Form 8832. A $10,000 penalty is imposed for each year this form is not filed.

            Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation is required to be filed by a “reporting corporation” that has “reportable transactions” with foreign or domestic related parties. A reporting corporation is either a U.S. corporation that is a 25% foreign-owned or a foreign corporation engaged in a trade or business within the United States. A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.

            Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation is required to be filed by each U.S. person who transfers property to a foreign corporation if, immediately after the transfer, the U.S. person holds directly or indirectly 10% of the voting power or value of the foreign corporation. Generally, this form is required for transfers of property in exchange for stock in the foreign corporation, but there is an assortment of tax code sections that may require the filing of this form. The penalty for failing to file is 10% of the fair market value of the property at the time to transfer.

            Form 8938 – Statement of Foreign Financial Assets was new for tax year 2011 and must be filed by anyone with significant assets outside of the United States. Who must file is complex, but, if you live in the U.S. and have an interest in assets worth more than $50,000, or you live abroad and have assets in excess of $400,000, you probably need to file. If you are a U.S. citizen or resident with assets abroad, you must consult the instructions to Form 8938 for more information. Determining who must file is a complex matter. See http://www.irs.gov/uac/Form-8938,-Statement-of-Foreign-Financial-Assets for additional information.

With proper planning, selecting the best country of operation and formation of your offshore corporation, keeping in compliance, gaining residency, and, most importantly, utilizing the Foreign Earned Income Exclusion, you can operate your business free of both US and local taxes and make the most of your time abroad.

Please contact me directly at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

Payroll Tax Increase

Payroll Tax Increase Hits Millions of Americans at Home and Abroad

Millions of Americans found their wallets a bit lighter today. While politicians promised tax increases for the wealthy, almost all Americans will face higher rates because of the payroll tax increase. If you are a U.S. citizen living and working abroad, and paying self-employment or payroll taxes, you have options.

In 2012, Congress passed the Middle Class Tax Relief and Job Creation Act to reduce the payroll taxes of working Americans from 6.2% to 4.9%. This reduction targeted the Old Age, Survivors and Disability Insurance taxes, which are capped at $110,100 per employee. Self-employed individuals received a comparable benefit.

Because this Act was allowed to expire, the average worker will pay around $1,000 more in taxes for 2013, with a maximum increase of $2,202 (2% on up to $110,100 in salary). This means a household with two highly paid wage earners will be about $4,400 lighter. It also means that the new definition of “wealthy” is any American with a job.

In addition to this payroll tax increase, Obamacare will raise your Medicare tax by 0.9% if your salary exceeds $200,000 for a single person, and $250,000 for married filing joint. This tax increase, which came in to effect on January 1, 2013, is to be withheld by your employer on form W-2.

The payroll and Medicare tax increases affects all Americans working for U.S. employers through U.S. corporations, and any self-employed American. It does not matter where you are living, or if you qualify for the Foreign Earned Income Exclusion. If your employer is a U.S. company, or you are self-employed and not using an offshore corporation, your payroll and Medicare taxes (or self-employment taxes) have increased.

Remember that the Foreign Earned Income Exclusion reduces your Federal Income tax. It does not affect other taxes, such as FICA, Medicare, Social Security or self-employment tax. Also, the FEIE does not reduce investment or passive income, only ordinary / active wage or salary income.

If an American business has employees outside of the country, the company and its workers may both benefit from a simple international tax plan. All it takes to save big on employment taxes is to form one entity in a tax free offshore jurisdiction (such as Belize, Panama or Nevis). No employees or work need be done in your country of incorporation, and no complex accounting tricks are required.

Those workers who are U.S. citizens and qualify for the Foreign Earned Income Exclusion are employed by the offshore corporation, rather than the parent company. They receive a W-2 from the subsidiary, and can keep all of the same benefits of the parent, such as medical, retirement accounts, etc.

By running payroll for international employees through an offshore corporation, both the employer and the employees eliminate all employment related taxes. This results in a combined savings of about 15% on $110,100 of wages.

The same solution is available to any self-employed American who qualifies for the Foreign Earned Income Exclusion. If you operate your business through an offshore corporation, rather than a U.S. LLC, or no structure at all, you will eliminate self-employment tax of about 15%. Remember that a self-employed person pays both halves of payroll tax, so your net savings is approximately 15%.

To qualify, you need to do the following:

  1. Incorporate your business in any tax free country,
  2. pay yourself a salary every two weeks or once a month,
    1. If your income varies month to month, you can fluctuate your payroll amounts accordingly.
  3. obtain a U.S. tax ID for your international corporation, and
  4. issue a W-2 to yourself at the end of the year.

It doesn’t matter where you incorporate, nor does it matter where you live. So long as you qualify for the Foreign Earned Income Exclusion, and structure your business in a country that will not tax your profits (again, such as Belize, Panama or Nevis), you will maximize the tax benefits of your offshore structure.

Finally, if your corporate profits exceed the Foreign Earned Income Exclusion, you may be able to retain earnings in the company, thereby deferring or eliminating U.S. business tax. For additional information and corporate tax options, please see my website at premieroffshore.com or call me at (619) 483-1708 for a consultation.