Offshore Corporations in 2018 After Trump's Tax Plan
06 March, 2018
In this article I'll consider the use and benefits of an offshore corporation in 2018 after Trump's tax plan. The Republican tax plan rewrote much of the code as it pertained to offshore corporations in 2018, making 95% of what I and others have published obsolete. So, here's what you need to know about using an offshore company in 2018.
If you're operating a business through an offshore corporation in 2018, and netting more than $200,000 a year, you probably want to sit down for this article. Depending on your income level, Trump's tax plan either changes nothing or changes everything.
Note that this article is focused on US expats living in low or no tax countries... those who have optimized their worldwide tax rates. If you're already paying tax at a rate higher than or equal to the US rate, Trump's tax changes won't make much of a difference to you. If you're paying little or no tax, things are about to change for the worse.
There are two groups of US persons that use offshore corporations. The first are Americans who hold their investments abroad. Those who use offshore companies for asset protection and investment purposes, These structures provide no tax benefit and nothing has changed. Capital gains and passive income inside of an offshore structure are still taxable in the United States as earned.
- US Person: Any US citizen, green card holder, or US resident. A US resident is a foreign national living in the US that spends 183 days or more in a year in the country. These are usually visa holders waiting on their green card applications.
The second group is American citizens and green card holders living and abroad. Generally referred to as expats, these are US persons who qualify for the Foreign Earned Income Exclusion in 2018.
To qualify for the FEIE, you must be a resident of a foreign country or out of the United States for 330 out of 365 days. If you're a resident of a foreign country, you can spend more time in the US, but never more than 183 days a year. The most popular residency program these days is the Panama Friendly Nations Reforestation Visa.
A US person living abroad that qualifies for the Foreign Earned Income Exclusion can exclude the first $104,100 of salary or business income from their US tax return. That is to say, your first $104,100 in wages, be it from an employer or your own offshore corporation, is free of Federal income tax. If a husband and wife are both working in the business, they can take out up to $208,200 combined.
US persons living abroad that qualify for the FEIE must still pay US tax on all capital gains and passive income. Likewise, they must pay US tax on any salary in excess of the FEIE (subject to the Foreign Tax Credit, a topic for another day).
Here's where the rubber meets the road with offshore corporations in 2018 and Trump's Tax plan.
Prior to Trump's tax plan, expats that earned more than the FEIE could hold those profits in their offshore corporations. Profits could remain in the company and would only be taxed when taken out dividends, hopefully many years later.
That is to say, under the old law, expats were allowed to retain earnings in their offshore corporations tax deferred. Someone making $1 million a year would take out a salary if $100,000 (or $200,000 joint) and retain $900,000 or $800,000 in their corporations tax deferred.
With a small change to Subpart F of the US tax code, Trump eliminated retained earnings with a stroke of his pen. No longer can expats who qualify for the Foreign Earned Income Exclusion hold profits in their offshore corporations tax deferred. For more, see: US Expats and Retained Earnings in Foreign Corporations for 2018.
Above I said that Trump's tax plan could change nothing or everything for your offshore corporation. Here's why.
If your net profits are less than the Foreign Earned Income exclusion, the new rules make no difference. You continue to take out your salary tax free using the FEIE.
If you're earning significantly more than the FEIE, you're screwed. A US person netting $1 million now gets the joy of paying US tax on the $800,000 or $900,000.
If your profits exceed the FEIE, you have a few options.
- You can now live anywhere in the world and pay the same tax rate. If you've been living tax free in Belize, but have grown tired of that lifestyle, might as well move. Remember that you get a dollar for dollar credit for any taxes paid to a foreign government. So, why live in a country you don't like only to maximize your payment to Uncle Sam? You can now move you and your business to any country with a tax rate lower than or equal to that of the United States.
- There's now only one place on earth where you can escape Trump's tax plan. It's an island in the Caribbean of about 5,600 square miles, with a population of 3.2 million, and a falling economy. It's the only place on the planet that's permitted by the US government to make its own tax laws that counteract Trump's tax plan.
If you're willing to move to the US territory of Puerto Rico, you can cut your tax rate to 4%. If you're living in Puerto Rico (spend at least 183 days a year on the island), you're Act 20 business will pay only 4% in tax.
Three important caveats:
- You must be living in Puerto Rico to qualify for Act 20 in 2018. Just like offshore corporations, Act 20 corporations can no longer retain earnings for US resident shareholders. For more on this, see: Big Changes Coming for Puerto Rico's Act 20 Tax Incentive Program.
- ONLY residents of Puerto Rico are exempted from US tax on their earnings. Only residents of Puerto Rico can escape Trump's tax plan under Section 933 of the US tax code. US residents living in foreign countries are taxed on their worldwide income.
- Act 20 is the inverse of the FEIE and should be used by those earning $500,000 or more from their portable service business. For more, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.
- If you move to Puerto Rico and file for Act 22, you can pay zero tax on capital gains earned from assets purchased after you become a resident of the territory.
As you read through my website, please note again that Act 20 now only applies to US persons willing to move to Puerto Rico. My older posts discuss retained earnings, which is no longer available in the territory.
If you don't want to pay unto Caesar and don't want to move to Puerto Rico, the only way out is to give up your US citizenship. So long as you hold a US passport, you must pay US taxes on your profits in excess of the FEIE and on all of your capital gains.
Of course, the first step in giving up your US citizenship is to buy a second passport. The most popular passport for purchase program for 2018 is St. Lucia. The best passport available at any price is Portugal (based on visa free travel options).
If you want to earn your passport over time, you might consider Panama's Friendly Nations Reforestation Visa Program. This visa requires an investment of only $20,000, the lowest cost by far. You can apply for citizenship after 5 years of residency.
I hope this article on offshore corporations in 2018 after Trump's tax plan has been helpful. For more information on restructuring your business offshore to maximize the FEIE, or for more information on Puerto Rico or a second passport, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.
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