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Use of an offshore corporation in 2018

06/22/2018/0 Comments/in Articles, Asset Protection, offshore asset protection, Offshore Company/by Christian Reeves

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

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

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

This is all to say that an offshore corporation is:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Offshore ICO Scam and Cayman Islands Corporations

02/26/2018/0 Comments/in Articles, Banking Offshore, Cryptocurrency, Initial Coin Offering, Offshore Company/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US Expats and Retained Earnings in Foreign Corporations for 2018

02/20/2018/0 Comments/in Articles, Foreign Earned Income Exclusion, International Business, Offshore Company, Offshore Company Taxation, Offshore Tax, Taxation/by Christian Reeves

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

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

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

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

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

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

Let me start by defining a few terms.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore Corporation and Trump’s Tax Plan

10/25/2017/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

Live and Work in the United States

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

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

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

Living Abroad and Qualify for the FEIE

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

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

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

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

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

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

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

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

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

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

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

Operating a Division Offshore

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

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

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

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

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

Conclusion

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

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

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

What is Required to Form an Offshore Company

10/03/2017/0 Comments/in Articles, Offshore Bank Accounts, Offshore Company, Offshore IRA/by Christian Reeves

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

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

Offshore corporation,
Offshore trust or foundation,
Offshore Limited Liability Company (LLC), and
Offshore IRA LLC

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

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

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

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

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

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

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

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

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

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

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

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

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

The US Government is Targeting Bitcoin

09/22/2017/0 Comments/in Articles, Asset Protection, Banking Offshore, Bitcoin, Cryptocurrency, Offshore IRA/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What can you do to protect your Bitcoin?

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

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

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

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

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

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

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

How to report a foreign salary or international business income

02/16/2017/0 Comments/in Articles, Offshore Company, Offshore Company Taxation, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trump is Good for Most Offshore Businesses

01/03/2017/0 Comments/in Articles, Banking Offshore, International Business, Offshore Bank Accounts, Offshore Company, Offshore Company Taxation/by Christian Reeves

With all the talk about keeping jobs at home and taxing foreign corporations, I wanted to start the year with a post on why Trump is great for the offshore industry… at least, for those operating small businesses, investing abroad, and/or moving assets offshore for asset protection.

This article will focus on why a Trump presidency is good for small businesses operated outside of the United States. Businesses where the owner is living and working abroad or a semi-autonomous division of an online or service business is based in a zero tax foreign country.

If you’re an American expat, don’t worry, President Trump is focused on the big guys…

Unless you’re a multinational with intellectual property offshore, or a manufacturing firm with a plant in Mexico, President Trump will be a friend (or a non-issue).

Tax laws that are likely to change involve intellectual property and imports from certain countries. These don’t impact small business, they’re used by multinationals to stash cash offshore.

Trump says he’ll bring back jobs and cash to the United States. He’ll do that by offering a tax holiday for previous retained earnings. Then he’ll make it more difficult for large companies to stash cash offshore and benefit from cheap foreign labor.

To reduce the benefits of going offshore, Trump says he’ll cut the U.S. corporate tax rate, modify the intellectual property laws, and impose import duties on goods from China and Mexico if they don’t agree to renegotiate existing trade deals.

None of these changes affect U.S. expat entrepreneurs and small business owners. If you’re running an online business from a low tax country, you have nothing to worry about.

First, a lower U.S. corporate tax rate doesn’t make any difference to you or change your reasons for going offshore. You wouldn’t be paying corporate tax in the United States anyway… you’d set up as an S-Corporation or Limited Liability Company and pay only personal income tax.

In fact, more than 90% of US businesses don’t pay corporate income tax. Profits flow through to the owners, who pay personal income tax, but not corporate rates. For more on this, see Forbes.

So, a lower U.S. corporate tax rate doesn’t make any difference to a small business. Moving a small business offshore is about reducing your personal income tax rate, not your corporate tax rate. Trump is all about the corporate rate.

The key to reducing your personal income tax rate by moving offshore is to qualify for the Foreign Earned Income Exclusion. If you’re a resident of a foreign country, or you’re out of the United States for 330 out of 365 days, you can earn $102,100 in salary from your offshore corporation and pay zero taxes. If a husband and wife both work in the business and qualify for the Exclusion, you could earn over $200,000 tax free.

If you net more than the Exclusion, you can hold these profits in your offshore corporation as foreign retained earnings tax deferred. When you take them out, you’ll pay personal income taxes on the dividend.

The bottom line is, if you’re offering a service or operating online, there’s nothing to worry about. The same goes for internet marketers, bloggers, and anyone with a portable business. You have no treaty or import / export concerns, so Trump will make no difference to you.

As an expat, you should focus on the tax laws of your country of residency. Stick with nations that won’t tax your foreign sourced income, and qualify for the Exclusion, and you’ll pay zero tax on your profits.

For a list of countries that don’t tax foreign sourced income, see territorial tax jurisdictions. These countries tax local income but not profits from sales to people and companies outside of their borders.

For example, Panama has a territorial tax system. If you’re living and working in Panama, operating an online business, and selling products to clients in the U.S., all of your income is foreign sourced to Panama and not taxable there.

What if you’re business is netting well over $100,000 (single) or $200,000 (joint)? Then you might consider going “offshore” to the U.S. territory of Puerto Rico. The tax deal offered by Puerto Rico is the opposite of the Foreign Earned Income Exclusion.

Under Puerto Rico’s Act 20 and 22, you’ll pay tax on your salary at ordinary rates and zero tax on dividends from your corporation. So, if you net $500,000, and draw a salary of $100,000, you pay tax on the first $100,000 and nothing on the remaining $400,000. Net $2 million, pay tax on the first $100,000, and zero on $1.9 million.

Note that I said the amount after your salary is tax free, not tax deferred. For mid-sized corporations or very profitable online businesses, Puerto Rico is a unique opportunity. You can realize a significant savings over the FEIE.

I hope you’ve found this article on why Trump is great for offshore corporations to be helpful. For more information on how to structure your international business, or set up in Puerto Rico under Act 20, please contact me at info@premieroffshore.com or call us at (619) 483-1708 for consultation.

What is a PFIC Investment – Passive Foreign Investment Company

12/13/2016/0 Comments/in Articles, International Business, Offshore Company, Offshore Company Taxation/by Christian Reeves

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

First let me define a few terms around PFIC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are a few exceptions to the PFIC investment penalties…

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

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

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

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

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

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

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

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

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

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

How to Stop Paying Payroll Tax

11/20/2016/0 Comments/in Articles, International Business, Offshore Company Taxation, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore Asset Protection for Affiliate Marketers

11/02/2016/0 Comments/in Articles, Asset Protection, Asset Protection Trust, International Business, offshore asset protection/by Christian Reeves

Affiliate marketers face unique asset protection, privacy, and tax planning challenges. This article will review your options and point out some of the pitfalls to watch out for. We’re specialists in offshore asset protection for affiliate marketers and can help you to grow your online business in an efficient and compliant manner.

At the end of the day, www.premieroffshore.com, and our lifestyle site www.escapeartist.com, are internet based businesses. I write SEO optimized posts like this one to drive traffic and bring in leads. We’re a remote business with our publishing group based in San Diego and fulfillment in Belize and Panama City.

As the editor and chief marketing guy, I spend my days on the road, tapping away on my laptop. Our in-house attorneys are chained to their desks, but I made sure the marketing team was portable.

We’ve been providing offshore asset protection to affiliate marketers via the web since 2003 and understand the unique needs of your business model. We’re the only firm that provides offshore structures and U.S. tax compliance… at least, the only one in the middle of the market. Our price points are a bit lower than Deloitte, PwC, and E & Y.

Our offshore protection structures are positioned in the middle of the market. Less than big name CPA firms and higher than offshore incorporation mills that provide no guidance or support.

This post will focus on asset protection for affiliate marketers. As I said above, we also provide tax planning for offshore businesses, as well as for those in the U.S. territory of Puerto Rico. For more on Puerto Rico, see: Puerto Rico is the Top Offshore Jurisdiction for Americans.

To summarize Puerto Rico, if you move your business to the island, and hire 5 employees, you’ll cut your U.S. tax rate to 4%. To compare that tax deal to moving offshore, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

The remainder of this article will focus on offshore asset protection. Offshore asset protection for affiliate marketers is generally tax neutral – it should not increase nor decrease your U.S. taxes. It’s meant to keep your transactions private and your cash safe from future civil creditors.

You can combine offshore asset protection with an office or division offshore that helps to manage your worldwide tax obligations. But, your asset protection plan is independent of your international tax plan. Thus, you might start with an offshore asset protection plan for your affiliate marketing business and grow it into a business tax savings plan.

Issues in Asset Protection for Affiliate Marketers

When planning an offshore asset protection structure, affiliate marketers face a number of interesting challenges. For example, the need for privacy and the ability to diversify with subsidiaries are more urgent than with other business models.

Affiliate marketers value their privacy. For this reason, we created the Panama max privacy structure. We use a Belize LLC as the founder of a Panama foundation and a Panama corporation under the foundation to run the business. We can add corporations from other jurisdictions, as active business subsidiaries of the foundation, where necessary.

For more on our max privacy structure, see: The Bearer Share Company Hack

The Panama foundation provides estate planning and asset protection for your business units… and acts as a holding company to bring them together under one umbrella.

Panama offers great asset protection and banking facilities. The problem is that they have a public registry of ownership. That means the founder of a foundation, along with the shareholders and directors of corporations, are public record. We work around this with a Belize LLC because Belize doesn’t maintain a registry and Panama allows the founder to be a person or a foreign company.

That’s all a fancy way of saying that the Belize LLC maximizes privacy by acting as the founder of your Panama Foundation. When someone searches the Panama registry, all they find is the name of your Belize company.

I believe you’ll find that the Panama foundation is the best choice when planning an asset protection structure for your affiliate marketing business. It’s primary competitor, the offshore trust, is a great tool, but not recommended for managing an active business.

An offshore asset protection trust is the solution for someone who wants to build a nest egg offshore out of the reach of future civil creditors. You can add money managers as trustees and maximize protection with a “protector” in case you (the settlor) come under duress.

That is to say, an international trust is perfect for someone who wants to put cash away for the future. A trust is not the structure to hold an active business where you want to maintain control and maximize privacy.

Many of our clients move a portion of their after tax net profits out of the Panama structure and into an offshore trust. You can combine both for the best of both worlds while diversifying your holdings.

Offshore Merchant Accounts

Specializing in offshore asset protection for affiliate marketers means working with many banks and acquirers around the world. We’re experienced in merchant account issues as described here: How to Get an Offshore Merchant Account.

For example, many of our clients run multiple MIDs and require subsidiaries from a variety of jurisdictions to hold those accounts. This allows them to maximize privacy, diversify risk, and build systems that spread chargebacks among their portfolio.

To support this requirement from affiliate marketers, we’ve built a network of agents around the world. We can incorporate subsidiaries in a different countries quickly and at a reasonable cost.

We also understand that subsidiaries must be formed in countries which are acceptable to your processor. For this reason, we have U.K., Hong Kong, E.U., Caribbean, and Panama solutions. We also advise on U.S. accounts for companies in Puerto Rico.

A comapny incorporated in the U.S. territory of Puerto Rico can open bank accounts at just about any U.S. bank.

Another option for a business with no office or employees in the United States, is to form a subsidiary in the U.S. That subsidiary will hold only bank and merchant accounts and pass profits to the parent company.

This solution is recommended for entities with no U.S. source income. You will likely need a U.S. person to open the account… it’s become difficult for foreign persons to open U.S. accounts… and nearly impossible for non-U.S. persons without U.S. credit scores to get a low cost merchant account.

Why Hire a U.S. Provider?

Internet marketers know how to outsource. How to leverage low cost labor around the world to get things done. Why should you pay U.S. prices for your international tax or offshore asset protection plan?

Simple: only a U.S. expert can build an offshore asset protection structure that’s U.S. compliant.

When you outsource your offshore structure, you will get answers to your questions and solutions based solely on the laws of that country. For example, contact an offshore trust promoter in Cook Islands and they’ll answer inquires based on Cook Island law.

But, when you’re a U.S. citizen, your compliance risk and liability from lawsuits is in the United States. Thus, the focus should be on how the laws of your asset protection jurisdiction interact with those of your home country.

Since this is a post on asset protection for affiliate marketers, here’s a tech example…

You, the IT professional, can outsource website design because you’re an expert in website design. You know exactly what you want to accomplish and how to get there. You write the text and manage the process from start to finish.

What if you weren’t an expert in design or SEO issues? Should you hire someone to quarterback the project or should you outsource? Knowing what you know now, would you have gone it alone or hired someone to guide you in those early days?

You’d hire a quarterback because you don’t know what you don’t know. As an an expert, you understand how complex a major design or redesign can be. You know that a layperson will likely screw it up terribly, putting the entire project at risk.

This knowledge has come over years in the industry. Through trial and error, you know where the pitfalls are. You know how to drive traffic and optimize your sites. You know what works and what doesn’t.

I have a friend who’s new to the online world. He was tasked to redesign a 10 year old website with 15,000 pages and a solid Google reputation. The owners of the site didn’t want to spend any money, so he was on his own and outsourced design.

While updating the site, he thought it would be a good idea to restructure the URLs. To create a few different categories and make the permalinks more descriptive. Yeh, he decided to change the URL structure and break the thousands of inbound links for an authoritative site… the links that gave the domain much of its “reputation.”

As an internet professional, you know what a bad idea it is to change the URL structure of an authoritative website with years of history. But my friend had no idea what he didn’t know. Had he hired a quarterback, the expert would have stopped him from falling in this obvious trap.

It’s the same when planning an offshore asset protection structure. You need someone to manage the process and keep you in compliance. Outsource and the promoter will tell you what you want to hear (sure, we can restructure your URLs). Hire an expert and they will tell you “no,” when you need to hear it!

For example, when you want to use a nominee singor on your offshore bank account, you need to hear no. When you, a U.S. resident with no employees offshore, want to setup a company to hold foreign profits and only pay U.S. tax when you bring the money into the U.S., you need to hear hell no!

As with internet marketing, there are many risks in going it alone. Unlike online risks, the penalties for getting out of compliance or using an offshore structure incorrectly can cost you hundreds of thousands of dollars in penalties or even land you in jail. The U.S. government has become extremely hostile to non-compliant offshore structures and you must have an expert in your corner to keep you from becoming a target.

The world of offshore is ever changing, complex, and fraught with risks you can’t see. We can guide you the maze and quarterback your offshore structure, all with a focus on your internet based business.

I hope you’ve found this article on asset protection for affiliate marketers to be helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Move Your Internet Business to Cayman Islands Tax Free

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

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

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

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

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

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

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

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

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

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

Now on to US Taxes.

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

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

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

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

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

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

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

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

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

These tax free zones provide the following benefits:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs of Setting Up in Cayman Islands

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cayman Islands vs Puerto Rico

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

Mossack Fonseca Searchable Database Goes Online – Who Should be Afraid of the IRS and Panama Papers?

05/09/2016/0 Comments/in Articles, Offshore Company, Offshore Company Taxation, Panama, Taxation/by Christian Reeves

Do you have a company or bank account in Panama? Are you wondering if you should be worried about the IRS and Panama Papers? Do you know that the searchable database of Mossack Fonseca clients came online today? Is the thought of the IRS knocking on your door keeping you up at night?

Let me explain who should be afraid of the IRS and Panama Papers and who has nothing to worry about. Hopefully this will help most of you to rest easy, and those who have issues will take action before it’s too late.

First, a bit of background. A few months back, a hacker stole the records of one of the largest incorporators and law firms in Panama, Mossack Fonseca. The German newspaper Sueddeutsche Zeitung obtained the 11.5 million files and shared them with the Washington D.C.-based group of investigative journalists. This trove of documents became known in the press as the Panama Papers.

The Panama Papers have shone a light on many illegal uses of offshore corporations and offshore bank accounts. As Vice put bluntly in April, “The politicians who have taken and made bribes, dodged taxes, and amassed fortunes of unimaginable scale are your politicians.”

Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers.

Also exposed have been scammers and fraudsters hiding behind shell companies. For example, companies setup by Mossack Fonseca were used to dupe over 1,000 UK residents in a ponzi scheme.

I applaud the person who obtained these documents for shedding light on the dark side of the industry. Cleaning out those who use offshore structures to hide crime – or even hypocrisy – is a worthy goal that helps those of us trying to do things the right way. Those who use offshore companies within the law to minimize taxation and maximize privacy.

But, what about privacy for those who are following the law? What should reporters do with this data? Should they have the right to report on the private dealings of thousands of innocent people with legitimate uses for these companies?

Isn’t this akin to receiving stolen business records and financial data from Apple and putting in on the front page? No newspaper on the planet would do that… it would be immoral.

Does anyone have a right to know that Simon Cowell formed two offshore companies in the British Virgin Islands to buy property in the Caribbean?

What about the fact that Jackie Chan has an offshore company to manage his international projects?

What about Mossack Fonseca drafting the contracts for the sale of David Geffen’s 377-foot-long yacht? The boat was flagged in Panama, which is very common. Do we need to know this?

It appears that these were perfectly legal and compliant entities. Are they newsworthy?

Is there no right to privacy in our business and financial dealings? Do those who write on these topics owe a duty of care when using stolen data?

Job well done by the hacker… now how about some level of responsibility from the reporters?

OK, I’m off my soapbox. Back to who should be afraid of the IRS and Panama Papers.

If you or your representative used Mossack Fonseca to form your offshore structure, you need to be prepared for that information to become public. A searchable database of 200,000 offshore accounts, and thousands of companies went online today.

This online database will list:

The name of anyone listed as a director or shareholder of an offshore company formed by Mossack Fonseca.
The names and addresses of more than 200,000 offshore companies.
The identities of dozens of intermediary agencies that helped set up and run those structures with Mossack Fonseca.

NOTE: If you have a company in Panama, you should ask your incorporator who they used as the resident agent for service of process. If your lawyer or tax planning firm incorporated through Mossack Fonseca, your data is probably in the public domain. Premier Offshore has never worked with Mossack Fonseca.

Most clients list themselves as the director and shareholder of the offshore company. Those who decided to be as transparent as possible in their dealings with Mossack Fonseca will be listed in the database.

In fact, I would never setup a company with a nominee shareholder or officer. To do so would put your corporate assets at risk. Nominee directors in Panama are fine – they have no power.

It is possible to keep your identity private in Panama without using a nominee. You can incorporate a Limited Liability Company in another jurisdiction, and use that company as the shareholder. In this way, you keep control of the assets while maximizing privacy. For more on this, checkout The Bearer Share Company Hack.

If you are listed in the Mossack Fonseca database, should you be afraid of the IRS and Panama Papers?

If you’ve been filing your US tax forms and reporting your transactions accurately, you have nothing to worry about. To you, the Panama Papers is a data breach that has compromised your privacy, but nothing more.

I suggest the Panama Papers won’t even increase your risk of an audit. At most, the IRS will compare your filing to the database, find that you are in compliance, and that will be the end of it.

Considering that your offshore bank is reporting your transactions to the IRS under FACTA, the Panama Papers is only giving unto the IRS that which they already receive.

On the other hand, if you have an unreported account or company in Panama, you should be very afraid. You know that the IRS will download the Mossack Fonseca database and use it to find those who are not in compliance.

If you’ve used nominee shareholders or as singors on your bank account to avoid FATCA, you are now in extreme danger. The IRS will consider this “wilful” and come after you with a vengeance.

But you still have time to take action and save yourself. If you signup for one of the IRS Voluntary Disclosure Initiatives before you become a target, you will pay only interest and penalties.

If you are deemed willful, and the IRS comes looking for you, you are at risk of significant jail time.

The IRS is currently offering five flavors of the Offshore Voluntary Disclosure Initiative.

Offshore Voluntary Disclosure Program (“OVDP”),
Domestic Streamlined,
Foreign Streamlined,
Transitional Relief, and
Delinquent FBAR.

If the IRS might consider your actions willful or intentional, you need the Offshore Voluntary Disclosure Program. This program one is the most costly and complex, but it will save your bacon if you are nearly in the fire. The OVDP gives you cover for your prior bad acts and a get out of jail card – not for free – but out of jail.

The OVDP requires you file 8 years of amended tax returns and FBARs, plut pay taxes, interest and a 20% penalty on whatever you owe. Now for the kicker, there’s also a 27.5% penalty on your highest offshore account balance. In some cases, that penalty may be 50% depending on the bank and timing.

If the bank where your account is located is under investigation when you apply for the OVDP, the government figures they would have caught you eventually and charge a 50% penalty.

If you are living abroad, or you have paid US tax on your income, but forgot to submit a form or two, you might qualify for OVDI Lite. Penalties for these programs range from zero to 5%, and the cost of getting back in the government’s good graces will be much lower than the OVDP.

No matter the cost, I can guarantee you that the risk of doing nothing far outweighs the financial burden of coming forward now.

To repeat, if you have an undeclared an account in Panama, you MUST take action before the IRS finds you. If you or your Panama structure are out of compliance, you should be very afraid of the IRS and the Panama Papers.

I also suggest anyone with unreported accounts or offshore companies in Panama should join the OVDI. Just because you were lucky and did not use Mossack Fonseca to incorporate your corporation, don’t think you are safe. I expect the IRS to pressure Panama to report all foreign structures owned by Americans. I think that this is just the tip of the offshore corporation iceberg in Panama.

I hope you found this article informative. Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers. Please contact me at info@premieroffshore.com or call us at (619) 483-1708 for a confidential consultation on the IRS Offshore Voluntary Disclosure Initiative.

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

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

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

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

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

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

Here’s how the Foreign Earned Income Exclusion works:

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

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

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

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

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

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

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

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

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

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

If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

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

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

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

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

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

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

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

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

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

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

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

The Bearer Share Company Hack

06/09/2015/in Articles/by Christian Reeves

Bearer share companies have gone the way of the dodo. Here’s the offshore company hack to create a bearer share company like structure to maximize privacy and protection.

First, a word on bearer share companies. Back in the day, bearer share corporations allowed for anonymous ownership of assets and bank accounts. Whoever held the shares owned the offshore company. No public record of ownership was required.

Of course, the U.S. government doesn’t like anonymity… privacy in financial dealings allows U.S. citizens to cut out Uncle when it comes tax time… and the beast must be fed.

The U.S. launched an attack on offshore banking and bearer share companies in 2003 with the Patriot Act and has been hard at work stripping away financial freedom ever since. By 2015, all offshore banks have fallen in line and bearer share companies are no more.

Here’s the offshore company bearer share hack.

Let’s say you’re a law abiding citizen who wants to maximize the privacy and protection of your offshore company. How should you structure your affairs?

In my opinion, the best asset protection structure is the Panama Foundation and the best jurisdiction to incorporate an active business is also Panama. There are exceptions… such as an offshore IRA LLC is best formed in Nevis. But let’s stick with Panama for this post.

Fyi… even if your country of incorporation allows for bearer shares, no bank will open an account for your offshore company. So, bearer shares are effectively dead in every jurisdiction.

A Panama Foundation requires a founder and a foundation counsel. A Panama corporation requires three officers and three directors.

The Panama Foundation counsel is public record. Directors and Officers of a Panama corporation are also public record. Back in the day, we would work around this by appointing nominees and issuing bearer shares.

With bearer shares are out, the owner must be listed in the company or foundation documents.

The founder and counsel of a Panama Foundation may be either a person or an offshore company. That offshore company may be incorporated in any country.

Likewise, the directors and officers of a Panama corporation may be persons or corporate entities from any jurisdiction.

Now comes the hack: an LLC from Nevis may be formed with one member. The registrar in Nevis doesn’t disclose any information in the public record. Ownership of a Nevis LLC is totally private. These offshore companies make for excellent founders, council members, officers and directors.

In order to create a totally private offshore structure, much like a bearer share company of old, we form a Panama Foundation with the founder and council being Nevis LLCs. Then the Foundation incorporates a Panama corporation with Nevis LLCs as it’s officers and directors.

And you, the beneficial owner of the Nevis LLC, are in complete control of the Panama structure. You are the only signer on the bank accounts and corporate documents… none of the risk associated with turning over your assets to nominees.

And that’s the bearer share offshore company hack. For more information, please contact me at info@premeiroffshore.com for a confidential consultation. We will be happy to form your structure, open bank and brokerage accounts, and keep it in tax compliance.

Should I use an Offshore Corporation or Offshore LLC?

03/31/2014/0 Comments/in Articles, Asset Protection, Offshore Company/by Christian Reeves

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.

The tax rules around foreign real estate and other passive investments can be complex. For a detailed article, please see my U.S. Tax Breaks for Offshore Real Estate.

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.

Where to Incorporate Your Offshore Company

03/18/2014/0 Comments/in Articles, Asset Protection, Offshore Company/by Christian Reeves

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.

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

07/15/2013/0 Comments/in Articles, Offshore Company, Taxation/by Christian Reeves

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.

How to Manage Retained Earnings in an Offshore Corporation

01/20/2013/0 Comments/in Articles, Offshore Company, Taxation/by Christian Reeves

The key to maximizing the tax benefits of being offshore is to generate retained earnings in an offshore corporation. Retained earnings in an offshore corporation will allow you to accumulate (basically) unlimited amounts of tax differed dollars in your company.

If you have been reading my postings for a while, you know that anyone operating a business outside of the United States should be using an offshore corporation. You are also aware of the risks associated with these entities if not structured and reported correctly.

Operating a small business through an offshore corporation allows you to draw a salary of up to the Foreign Earned Income Exclusion (FEIE) amount, which is $97,600 for 2013. The offshore corporation also eliminates payroll or self-employment taxes, saving about 15% in most cases.

But, what if your business net profits exceed the FEIE amount? What if you earn $1 million? Must you pay tax on $902,400? The answer is yes; unless you structure your business from day one to provide for retained earnings in your offshore corporation, you will pay U.S. taxes on the income over and above the FEIE amount.

So, how do companies like Google defer tax on $10 billion with a Bermuda offshore structure? Why does Bloomberg claim there is $1.2 Trillion (yes, Trillion, with a capital T) in untaxed profits offshore? These companies spend big money on political lobbying to protect the Active Financing Exception, which can be found in Section 954(h) of the U.S. Tax Code and was recently renewed in the Fiscal Cliff deal.

The Active Financing Exception allows multinationals to create “friendly” offshore banks which actively lend and invest in the controlled group’s international divisions. The profits of this bank can be retained offshore indefinitely, or until the parent decides to repatriate these profits to the United States.

The Active Financing Exception works great for the world’s largest companies, but what about the rest of us? How can we use an offshore corporation to defer U.S. tax on our business profits? We must generate retained earnings in our offshore corporation from an active business.

How to get Retained Earnings in an Offshore Corporation

In order to get tax deferred retained earnings in an offshore corporation, you must first:

1. Be living and working abroad and qualify for the FEIE,

2. Operate through a properly structured and maintained offshore corporation,

3. Generate ordinary / active business income in excess of the FEIE,

4. Pay yourself a salary of up to the FEIE amount,

5. Retain profits in excess of the FEIE in the corporate bank account,

6. Pay tax in the U.S. on those retained earnings in your offshore corporation when you take them out in the form of dividends or other payments.

This first step, to be living and working abroad while qualifying for the FEIE, is covered in great deal on this website. Click here for additional information on the FEIE for 2013.

If you are an American who may generate retained earnings in an offshore corporation, you should begin your business with the proper structure…and that structure should be created by a U.S. international tax expert. Please contact us at (619) 483-1708 or info@premieroffshore.com for a confidential consultation to design your offshore structure.

The basics of a properly structured offshore corporation are these: you must utilize a corporation (not an LLC, Foundation, Partnership, or other pass-through entity), which is incorporated in a country that will not tax your profits. It does not matter where you live, or where you operate your business (unless you provide professional services, see below), you should incorporate in a tax free jurisdiction such as Belize, Panama, or Nevis.

You must report your activities and retained earnings of the offshore corporation on IRS Form 5471, report your foreign bank account, and keep up on all other U.S. reporting requirements. As your profits grow, so do the penalties for failing to properly report your activities. See the list of filing requirements below.

You may generate retained earnings in an offshore corporation from ordinary / active business profits. Ordinary business income is income received from the sale of a product and must be attributable to the normal and recurring operations of the company.

Next, you should pay yourself a monthly salary up to the FEIE amount. If a husband and wife are both operating the business, they can each draw $97,600 for 2013, and leave the rest of the money in the corporation.

The remainder of your net profits is to be held in the corporate bank account and become your tax deferred retained earnings. By creating retained earnings in an offshore corporation, you are deferring U.S. tax on those profits. In most cases, you must pay tax when funds are withdrawn from the corporation.

One possible exception would be paying out retained earnings as salary in future years where those salaries benefit from the FEIE. The availability of this option would depend on a number of factors and your bona-fide business must be ongoing (see below).

Four rules that allow you to hold retained earnings in an offshore corporation

Rule 1: Understand the U.S. tax regulations regarding retained earnings in your offshore corporation.

The theory behind an offshore corporation is simple: these are not U.S. entities, so the IRS has no right to tax them. Not to be deterred by such a technicality, the IRS goes after the shareholders, not the entity.

The U.S. claims authority over anyone with a U.S. passport, no matter where they live. Our government has enacted a number of laws controlling how and when U.S. citizens must pay tax on earnings from or retained in offshore corporations.

If you are going to generate retained earnings in your offshore corporation, there are two international tax code sections you should be familiar with:

Controlled Foreign Corporation (CFC): If a U.S. person holds 10% or more of the stock (or voting control) of an offshore corporation, and U.S. persons hold more than 50% of the shares or control of that company, then U.S. persons can defer tax on active income, but not passive income.

In other words, if American(s) control an international business, then that business may defer U.S. tax on retained earnings in an offshore corporation from active / ordinary activities, not from investments. If less than 50% of the business is owned by U.S. citizen(s), then the CFC rules do not apply. For Deloitte’s worldwide CFC guide, click here.

The CFC rules also limit deductions and control how retained earnings are taxed upon distribution:

Passive income from interest, dividends, investments, etc. is not active income, thus no U.S. tax deferrals are available. Passive income flows through to the shareholders of a CFC and is taxable on your personal return.
When you distribute retained earnings from a CFC, they are taxed at your marginal rate. Long term capital gains rates (currently 20% for 2013) are not available.
Losses in a CFC do not flow through to the shareholders. Losses are not deductible until the company is liquidated.
If you die holding shares in a CFC, your U.S. heirs do not get a stepped up basis. When they sell the shares, they will pay tax on their value when you acquired them, not when they inherited them.

Passive Foreign Investment Company (PFIC): If you or your offshore corporation generates high levels of passive income, or invest in non-U.S. mutual funds, a complex tax regime may be imposed on those earnings.

Basically, you can elect to pay U.S. tax on the appreciation in your investment account each year, or you can pay U.S. tax on the gain when you sell funds or shares from your account. If you elect to pay tax when you sell, a punitive interest rate is added to the tax due to eliminate any benefit from deferral.

PFIC rules are complex and I consider them in their most basic form here. My intention is to let you know of their existence and warn you that passive income in an offshore corporation is not tax exempt or deferred. If you hold a U.S. passport, America gets a piece of your investment profits. The only major tax benefit available to the offshore entrepreneur is for active business income.

Rule 2: Have a bona-fide offshore business

You must be operating a bona-fide business if you wish to hold tax deferred retained earnings in your offshore corporation. In its most basic form, this means you should be selling something on a regular and continuous basis, you should make a profit in at least 3 of the last 5 years, you should be working at the enterprise full time, and it must be a business and not a hobby.

You should be selling a product, not providing a professional service. A professional service which is performed outside of your country of incorporation and generates income from technical, managerial, engineering, architectural, scientific, skilled, industrial, or commercial activities is not bona-fide ordinary income for U.S. tax purposes.

If you are operating a consulting or professional service business, you may utilize the Foreign Earned Income Exclusion, but you are not allowed to hold retained earnings in your offshore corporation. For additional information, see Section 4.61.24 and 25 of the IRS CFC Audit Guide.

A hobby is an activity you do for entertainment and does not have a significant profit motive. Here are a few factors use to determine if you have a business or a hobby:

Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you and your advisors have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?

As you can see, the most important component in the hobby vs. business analysis is your profit motive. Your bona-fide business must generate significant profits over a number of years or risk being classified a hobby. This can be an issue for a business with one big year, followed by losses in all subsequent years.

Of course, this bona-fide business must be operated outside of the United States. The U.S. owner and operator must be living and working abroad and qualify for the Foreign Earned Income Exclusion in order to generate retained earnings in their offshore corporation.

An offshore corporation may have shareholders who live in the United States. These shareholders must be passive investors, having no control over the company’s day to day operations. The offshore corporation should not have a U.S. office or employees. Nor should it have any U.S. agents working exclusively to market or distribute its goods in the United States.

NOTE: A bona-fide business rarely includes individuals who trade their own investment accounts. This is the number one question I get at conferences and in emails – though I have had only one client in 12 years who was a professional trader. Unless you are working full time at your trading business, you are not considered a trader in securities. And, unless you are a professional trader, you may not utilize the Foreign Earned Income Exclusion, or generate retained earnings in an offshore corporation from your investment activities.

Rule 3: Keep records as if you were in the United States

Remember that you must file U.S. tax returns and therefore may be audited by the IRS. Your offshore business must maintain records of income and expense in accordance with U.S. accounting principles. If you can’t prove your expenses, they may be denied by the Service.

For additional information on accounting for business expenses, see IRS Pub 535. For a list of small business tax deductions, click here.

Rule 4: Know your reporting requirements

Offshore corporations must file a number of U.S. tax forms. Failure to file can result in some very draconian penalties.

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations (http://www.irs.gov/pub/irs-pdf/f5471.pdf).
Form 926 – Report of Transfer to Foreign Company should be filed when you fund the offshore corporation (http://www.irs.gov/pub/irs-pdf/f926.pdf).
Form TD F 90-22.1 – Report of Foreign Bank Account(s) if you have more than $10,000 offshore (http://www.irs.gov/pub/irs-pdf/f90221.pdf).

A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity (http://www.irs.gov/pub/irs-pdf/f8832.pdf).

Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (http://www.irs.gov/pub/irs-pdf/f8858.pdf).

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation (http://www.irs.gov/pub/irs-pdf/f5472.pdf).

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.
(http://www.irs.gov/uac/Form-8938,-Statement-of-Foreign-Financial-Assets).

Conclusion

The risks and rewards are great when doing business offshore and generating retained earnings in an offshore corporation. If the business is properly structured, you may be able to eliminate or defer U.S. tax on 100% of your active income. However, most of these tax rules are “all or nothing.” If you miss qualifying for the FEIE by one day, you lose 100% of the benefit. If you use the wrong type of structure, the ability to retain earnings offshore is gone. If fail to accurately and completely report your activates, you may face enormous penalties from the IRS – possibly hundreds of thousands of dollars.

The U.S. licensed tax experts and international attorneys at Premier Offshore, Inc. give you the best of both worlds – unparalleled offshore know-how combined years of experience in dealing with the IRS. Please contact us at info@premieroffshore.com or (619) 483-1708 for a confidential consultation on any aspect of offshore corporate formation and tax law.

Recent Articles (External Links)

Because of the tough economic times most American’s have experienced in recent years, much ado has been made of multinationals use of offshore tax tools to hold out on Uncle Sam. Here are a few articles on this topic, most of which are quite biased against the entrepreneur.

Older Articles (External Links)