If you’re a US taxpayer and formed an offshore company in any of the tax havens and didn’t include IRS Compliance Form 8621, there’s a good chance you’ll end up with the same nightmarish tax problems as the American clients of UBS and Credit Suisse – who were fined up to 40% of their offshore “accounts”. Just filing the FBAR for signature over a foreign bank account can save you from criminal prosecution, and the form is not a deterrent for using offshore accounts as many imagine IMO.
It’s only a matter of time before the IRS cracks down on the big offshore international banks providing services to US taxpayers in places like Cayman and other tax havens over some simple U.S. “tax compliance” forms that are usually ignored by local attorneys, trust companies and foreign bankers (because they don’t know they exist) who have told you the “IRS jurisdiction” doesn’t extend to them and your company. Moreover, the tax liability is often less than one would expect (often zero or very low rate) when “planning” with offshore companies for business, for asset protection, for tax avoidance.
There are several IRS compliance documents you have to know about, but in this article I will talk about just one – Form 8621 (for Passive Foreign Investment Companies or PFICs or Qualified Electing Funds – QEFs).
The IRS does not require that a PFIC/QEF file a US income tax return. I’ll bet your offshore incorporator didn’t tell you that, now did they? The IRS can’t/won’t audit a “no tax return required/filed” situation. About ½ of the hedge funds organized by hedge fund managers up on Wall Street are organized in tax havens like the Caymans, but there is a plethora of tax information you need to know about, but surprisingly there are some great loopholes and tax avoidance available to you as well.
I’ve been offshore since 1990 and have formed many, many PFICs (offshore companies) for customers. I work with three British barristers in Anguilla since 2001. I formed over 350 companies in Anguilla – a no tax haven and British Overseas territory like the Cayman Islands. I am an overseas agent for the Anguilla government’s registrar. I recently formed two companies just like the ones in EXAMPLE #1 below for an industrialist from the USA .
The plan is outlined below in example #1. The IRS calls them “pedigreed qualified electing funds”, and they are PFICs just like the ones Romney uses.
Offshore Tactics Helped Increase Romneys’ Wealth http://www.nytimes.com/2012/10/02/us/politics/bains-offshore-strategies-grew-romneys-wealth.html?_r=1
Avoidance of taxes is not a criminal offense says IRS https://taxavoidancefromirs.wordpress.com/
Want an offshore fund (private company) “like” the one Romney might use for yourself? We also form companies in the tax free Bahamas where we live. Since 1990 we’ve formed over 1,030 Bahamian companies, and we can arrange banking with a Bermuda top bank or a good stock broker in THE USA, OR USE YOUR OWN BROKER!
♠ UPDATE: I have a US based broker (member FINRA/SIPC) that will take on your Anguilla, Cayman or Bahamian registered company accounts where you can trade the US stock markets free of capital gains taxes just like Goldman Sachs does in the Cayman Islands. https://www.sec.gov/Archives/edgar/data/886982/000119312512085822/d276319dex211.htm♥
“Mitt Romney’s former firm Bain Capital – $77 billion AUM http://www.baincapital.com – has at least 138 funds (called Passive Foreign Investment Companies and QEFs by the tax code) organized in the Cayman Islands, and Romney himself has personal interests in at least 12, worth as much as $30 million, hidden behind ..” http://www.vanityfair.com/politics/2012/08/investigating-mitt-romney-offshore-accounts ….
Romney filed form 8621 for 10 QEFs in 2010. A QEF stands for a Qualified Electing Fund by the IRS!
I’ll repeat myself: The IRS does not require that a PFIC/QEF file a US income tax return.
IRS can’t/won’t audit a “no tax return required/filed” situation!
Click this link to see how easy it is to fill out Form 8621. Form 8621 is mandatory beginning 2014.
If you trade the stock and bond markets using offshore companies like Mitt Romney you need to know what forms to file.
Offshore companies like Bain Capital’s 138 funds organized in the Cayman Islands do not owe US short term or long term capital gains taxes.
Just think about that next time you call your stock broker or log on online with your stock broker.
Example #1 Foreign company A (FCA) owns 100% of Foreign company B (FCB). US person X owns 4.5% of Foreign company A. FC B owns 95.5% of FCA.
Foreign company B is the business vehicle and has $270,000 in passive profits in it’s first year. For the example we’ll assume this $270,000 is CG, not ordinary income.
SIDEBAR: Profits and income of FC B or FC A could be from stock or bond market gains(and interest or dividends) in the stock market like a hedge fund would have.
Ordinary income from foreign personal holding company incomes as described here.. http://www.law.cornell.edu/uscode/text/26/1293 and
Foreign base company sales and service income of a QEF are usually considered ordinary (passive/subpart F) incomes for purposes of the QEF/PFIC/CFC legislation. But, that’s ok, because US person X is reporting the income and paying tax on of both FCA and FCB annually. Note. US Person X is only paying tax on his “pro rata share” of the two offshore company’s income. Most of the offshore profits in these two companies goes untaxed indefinitely.
If it seems confusing, it’s because the US Treasury’s tax writers wanted it to be confusing. Still, it is the (tax) law.
US person X takes the election to be taxed as a QEF for both FCA and FCB.
No US tax returns for Foreign company A or B are required under the US tax law.
For purposes of the PFIC provisions Section 1291 thru 1298, US person X would report his “pro-rata” share of Foreign company A’s profits (called the ordinary earnings + capital gains of his QEF or PFIC).
Person X should file Form 8621 in the first year and check box A in Part II for to be a (Pedigreed) QEF http://www.irs.gov/pub/irs-pdf/f8621.pdf
For purposes of the PFIC provisions, person X would ALSO report his “pro-rata” share of Foreign company B’s net capital gains + B’s ordinary income ($270,000 – we’ll say this is ALL capital gains), but the IRS allows X to pay tax as long term capital gains on FC B’s CGs… at the lower long term capital gains 15% tax rate. Remember, this is just an example. Most QEFs would not have LTCGs in the first year of operation.
If Foreign Company A has $30,000 of dividend income, US taxpayer X would put 4.5% of the $30,000 dividend ($1,350), (i.e., his pro rata share of the ordinary income of foreign company A) on his tax return. See part III of the form.. http://www.irs.gov/pub/irs-pdf/i8621.pdf
Special Note: X would not have to pay any tax on his pro rata share of the $30,000 dividends that are actually distributed to him ($1,350). That amount ($1,350) could be passed on to him AND he would not have to pay tax on it again.
COMPUTING THE TAXES: The tax for US person X for QEF A (i.e., Foreign Company A) would be on $1,350 income (his pro-rata share of the $30,000 dividend) at a tax rate of say 25% or about $337.50
The tax for US person X for QEF B (I.e., Foreign Company B) would be on B’s $270,000 income (i.e., B’s net capital gains + ordinary income) at a tax rate of 15% or $1,731.375. We’ve assumed FC B had only capital gains and no ordinary income.
The IRS allows the ordinary earnings and profits of Foreign Company B ($270,000) to be taxed at the long term capital gains tax rate of 15% on US person X’ tax return. NOTE: For 2014 the tax rate is going up to 20% for LTCGs.
See Part III, items 6 and 7 of form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf.
Note: The net capital gains cannot exceed the the earnings and profits of B according to the tax code. (i.e., I’m assuming $270,000 in net capital gains for FCB).
In our example, X would pay a tax on QEF B totaling $1,822. (multiply 4.5% indirect ownership times $270,000 GG = $12,150 / X’s pro rata share) (this figure ($12,150) gets put in part III of form 8621 and gets taxed at a 15% tax rate AND equals $1,822 in taxes). See Part III, items 6a,b and 7a,b of Form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf.
If you read the instructions for Form 8621 it tells you exactly what line on your 1040 that you put the ordinary incomes of the QEFs, and tell you to add the capital gains onto your Schedule D.
REVIEW: Here’s the tax computation of US person’s X tax return for QEF A and QEF B.
X would pay tax on his 4.5% (i.e., his indirect shareholding is 4.5% X 100% = 4.5%) of the $270,000 capital gains (or ordinary income if it’s a pedigreed QEF in it’s 1st year) of foreign company B. The Form 8621 instructions tells X to put any capital gain from a QEF on his Schedule D of his 1040.
X’s tax on FCB is $1,822.
X would pay tax on his 4.5% pro rata share of the $30,000 dividends/interests of company A or $337.50.
Multiply $30,000 by 4.5% = $1,350 which equals an actual reportable tax of $337.50.
X’s direct ownership in foreign Company A is 4.5%.
Total tax on $300,000 in offshore profits for both companies would amount to $2,159.5. US person X pays this amount.
That’s a savings of about $120,000 in taxes (annually). For example, if FCA and FCB were doing business in California as domestic corporations or mutual funds their tax bills would be greater than $120,000 (not including any state and city taxes!)
Note: THAT’S A TOTAL TAX RATE OF .77% … LESS than 1%.
Effectively, X would file two QEF forms for Company A and Company B.
See part III for where your accountant reports and files Form 8621 for YOU or person X.
Form 8621 gets attached to your 1040 tax return in March of each year.
Two forms get filed for each of the QEFs (FC A + FC B) in our example.
Note: This author has filed his TD-90.22-1 every year since 1995 (and I have copies to prove it). It’s due by June 30th of every year… . For 2014 the Treasury will be using the NEW FBAR…, and you file electronically
“Avoidance of taxes is not a criminal offense. Any attempt to reduce alleviate taxes by legitimate means is permissible.
The distinction between evasion and avoidance is fine yet definite.
One who avoids tax does not conceal or misrepresent.
He shapes events to reduce or eliminate tax liability and upon the happening of the events makes a complete disclosure.
Evasion on the other hand involves deceit subterfuge camouflage concealment some attempt to color or
Obscure events or making things seem other than what they are.”
— Internal Revenue Service https://taxavoidancefromirs.wordpress.com/2015/04/09/avoidance-of-taxes-is-not-a-criminal-offense-2/
Send questions and comments to email@example.com
For offshore Bahamian or Anguilla companies with banking at Nassau’s top bank, visit this link https://tomazz1.wordpress.com/2014/04/13/offshore-company-formations-banking-Bahamas/