Need a tax haven?
JPMorgan/Chase writes on U.S. Estate taxation: “Because stock of a foreign corporation (in a no tax haven) is not subject to U.S. estate tax, holding U.S. situs assets through a foreign corporation constitutes a planning opportunity.”
What JPM is trying to say is a non-resident individual that holds US stocks and bonds or US real estate in his name is subject to a 40% US federal Estate Tax (FET) should he die.
Foreign Companies (FC) are not subject to US Estate taxes (i.e., zero % rate) on any of their US holdings – and with just a little tax planning this would include his/her US real estate holdings too. JPM would likely use a FC to own a US company that owns the US real estate IMO, because otherwise there is a 30% withholding tax on any rental income sent offshore directly from US situs property (ies), with the 30% tax on the “gross up rental income” – without allowing you any deductions.
A foreign individual / NRA would be subject to a 40% FET minus only a $60,000 exemption. The FET does not apply to NRA US bank accounts, but most everything else gets taxed. If you have over $60,000 invested in the US, you should use a FC domiciled in a tax haven that has no income, estate, gift or inheritance taxes – like the Caymans, Anguilla Bahamas or Bermuda.
SIDEBAR: How one US company avoided US$2 billion dollars in federal and (California) state income tax with just two little ol’ Cayman companies. https://www.linkedin.com/pulse/dear-wealth-managerstax-attorneys-tax-havens?trk=prof-post
The US tax code has lots of legal loopholes like the one above. You don’t have to end up like UBS and Credit Suisse – and fined US$ billions. The US Treasury is not finished with Switzerland and it’s banks. Here’s a list of 70 Swiss banks that admitted to assisting tax evasion and are in big trouble. https://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators Note: Some of these Swiss banks listed were forced out of business and are in liquidation.
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 50% of their offshore “accounts”. All have “criminal records”, but few received jail time. Just filing the FBAR for signature over a foreign bank account can save you from criminal prosecution, but there’s more to know to “do it right”. UBS and Credit Suisse each supplied at least 4000 account holder names to the IRS. However, there are 100,000 US account holder names the IRS did not get from these big institutions, so they’ll be back for more IMO.
There are several IRS compliance documents you have to know about, but here I will talk about just one – Form 8621 (for Passive Foreign Investment Companies or PFICs or Qualified Electing Funds – QEFs). http://www.irs.gov/pub/irs-pdf/f8621.pdf http://www.irs.gov/pub/irs-pdf/i8621.pdf
Click this link to see how easy it is to fill out Form 8621. Form 8621 is mandatory beginning 2014.
The IRS does not require that a PFIC/QEF (even if based in a no tax haven like the Cayman Islands) file a US income tax return. I’ll bet your offshore incorporator/service provider 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.
Charles Schwab is “hiding out” in the Cayman Islands too… http://cym.bizdirlib.com/node/514
Note, both these players (and Goldman Sachs Cayman as well) have a 2nd holding company in Cayman that own the shares in the other company. They would both meet the IRS standard for PFIC/QEF.
Gilead Sciences (GILD) has FOUR companies incorporated in the Cayman Islands.
I’ve been offshore since 1990 and have seen formed many, many PFICs (offshore companies). I was audited by the IRS in 1997 (after forming over 700 offshore companies). I work with three British barristers in Anguilla since 2001. I/they 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. It’s my opinion that you need two offshore companies to make a “scheme” work as outlined in EXAMPLE #1 below. And, why would you need to spend upwards of $5,000 per company, or even more, in the Caymans to a management company or foreign lawyer that knows nothing (and cares little) about IRS compliance (specifically Form 8621 for QEF’s and PFICs)? An Anguilla company can be registered for $2,500 with us, and we will/I talk and recommend proper compliance to obtain the proper tax breaks in the event you don’t know what they are.
PFICs/QEFs can receive management company fees free of US income tax so long as they don’t open an office within the USA. There are “lots” of other transactions that can go tax free as well offshore, and Anguilla has no personal or corporate income taxes, estate taxes, death taxes, CGTs, withholding taxes. It’s classified as a “no tax haven” just like Cayman and Bermuda.
Filling out form 8621 (click this page link).
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
“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 17 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 its 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 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
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