Tax Benefits of an Offshore Corporation
11 December, 2014
If you're an American moving a business overseas, you may benefit from an offshore corporation. An offshore corporation can eliminate or reduce both your U.S. taxes and those charged by your country of residence.
First, let's get the standard questions out of the way. Yes the IRS is aggressively targeting offshore structures and FATCA has closed many offshore banks to Americans. If you want to stay out of trouble, follow the steps below to operate a business through an offshore corporation.
We start from the premise that U.S. persons are taxed on their worldwide income no matter where we live. If you reside in California or Singapore, Uncle Sam wants his cut. A U.S. person is anyone with a blue passport, anyone who holds a green card, or anyone who resides in the U.S. for more than six months of the year. It's the first two groups I am focused on here.
Next, I note there's usually no tax benefit to using an offshore corporation while you're living in the United States. Offshore tax breaks are based in the Foreign Earned Income Exclusion (FEIE) and require you to be living abroad. There are exceptions for multinationals (the Googles and Apples of the world), but very few for the average entrepreneur.
If you reside in the U.S. of A and form an offshore company or trust for asset protection, you will maximize asset protection and diversify your holdings abroad. However, you will pay taxes on capital gains as earned. You will also be required to file all manner of tax forms to keep the structure in compliance.
More on these filing requirements in future posts.
Now let's get to the point. If you move abroad, and qualify for the FEIE, you can earn up to $100,800 in salary free of Federal income tax in 2015. If you qualify for the FEIE, you can use an offshore corporation to cut out Uncle Sam.
How does one qualify for the FEIE you ask? There are two methods:
- You can move abroad, become a tax and legal resident of a foreign country, and make that nation your home, or
- You can be out of the U.S. for 330 out of 365 days.
With the first option, you may spend several months a year in the U.S. but will be required to jump through all kinds of hoops to qualify. With the 330 day test you simply need to be out of U.S. for the prescribed amount of time (330 days in any 365 day period, not necessarily a calendar year).
If you're self employed, and operate your business through an offshore corporation, it gets better. You can draw that salary from your company, take the FEIE, and avoid self employment taxes of 15%, social taxes like Obamacare, and a handful of other charges. If a husband and wife both work in the business, they can draw combined salaries of $201,600.
So, an offshore corporation allows you to live, work, and operate a business offshore while earning up to $200,000 tax free. What if your company nets far more than $200,000?
In most cases, you can hold the profits over and above the FEIE in your corporation as retained earnings. You won't pay tax on the money until you take it out of the offshore company. And you could accrue millions of tax deferred dollars in this manner, just like the big guys.
And this same structure may cut your local tax bill. Most countries don't tax foreign source income. In fact, America is just about the only one that charges tax on income earned from sources outside of its borders.
Therefore, if your customers are outside of your country of residence, and you bill them through an offshore corporation, you might not pay any local tax...or only on the income you bring in to your country. The balance can often be held offshore tax free.
To put it another way, if you open a restaurant in Panama City, Panama, that country is going to tax your business. Sales from the restaurant are locally sourced income because they come come people inside Panama. If you start an internet based business selling e-books to people outside of Panama, that is foreign source income to Panama and may not be taxable there.
- I provide tax consulting to Americans on their U.S. tax obligations at PremierOffshore.com. You will need local tax counsel to ensure compliance in your country of residence.
The key to this model is to form your offshore corporation in a tax and business friendly jurisdiction. It should be a country that will not tax your corporation and one that will not require you to file any forms or provide accounting statements. One that is happy you're paying the annual fee to keep the company in good standing and doesn't bother you for other information.
I typically recommend structures from Belize, Nevis, Panama, and the Cook Islands as the most efficient. None of these countries require accounting or annual reports.They do offer the best in class asset protection and privacy. Though, there are many other options and each person's situation is different.
I hope you have found this post helpful. Please send me an email to firstname.lastname@example.org if you have any questions or would like to discuss your international affairs. All consultations are confidential and free of charge.
While the regular guy and small business owner might not be able to make use of fancy strategies like foreign tax inversions, if you're willing to move abroad, qualify for the FEIE, and properly structure a U.S. compliant offshore corporation, you can operate tax free.
Just remember, you must keep in compliance with the U.S. laws to receive these benefits. You might not need to pay U.S. tax, but you will be required to file each and every year.
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