New IRS Form 8938 created by FATCA in 2010. Can filing this form be avoided?

US$8.5 B from Microsoft ends up in Caymans.

“This is the kind of thing that companies do all the time,” said David Hasen, an associate professor and tax scholar at Santa Clara law school. “You are always trying to set up an entity so you can avoid having income in an high tax jurisdiction.”

– David Hasen, associate professor and tax scholar at Santa Clara law school

https://www.linkedin.com/pulse/dear-wealth-managerstax-attorneys-tax-havens?trk=prof-post

$1.2 trillion dollars on deposit in Cayman Banks - up 10% in 2005 says Cayman Government?

IRS Form 8938 requires American taxpayers to report their specified foreign financial assets. But, in some cases you may not have to file this form at all. For example, if your specified foreign financial assets are under $50,000 you don’t have to file Form 8938.

Let’s look at an example.

US person JR owns 1% of the shares in FC1. FC1 has 50,000 authorized shares outstanding, and JR owns 500 shares of these. FC2 (or a FT) owns the remaining 49,500 shares of FC1. FC1 is itself owned by FC2 (or optionally in this example by a foreign trust / FT with no US beneficiaries). FC1 and FC2 are both organized in the Bahamas – a no tax haven.

FC1 holds an account with a broker on Wall Street worth $1M. This is the only asset of FC1. FC1 and FC2 have no foreign bank accounts or specified foreign financial…

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New IRS Form 8938 created by FATCA in 2010. Can filing this form be avoided?

IRS Form 8938 requires American taxpayers to report their specified foreign financial assets. But, in some cases you may not have to file this form at all. For example, if your specified foreign financial assets are under $50,000 you don’t have to file Form 8938.

Let’s look at an example.

US person JR owns 1% of the shares in FC1. FC1 has 50,000 authorized shares outstanding, and JR owns 500 shares of these. FC2 (or a FT) owns the remaining 49,500 shares of FC1. FC1 is itself owned by FC2 (or optionally in this example by a foreign trust / FT with no US beneficiaries). FC1 and FC2 are both organized in the Bahamas – a no tax haven.

FC1 holds an account with a broker on Wall Street worth $1M. This is the only asset of FC1. FC1 and FC2 have no foreign bank accounts or specified foreign financial assets.

For purposes of filing IRS Form 8938, JR is considered to own 500 shares of FC1, but since there are no attribution rules for Form 8938, US shareholder JR is considered to own $10,000 of the FMV (Fair Market Value) of FC1. Since this is below the $50,000 threshold for filing Form 8938, JR does not have to file form 8938 with his tax return.

https://www.irs.gov/pub/irs-pdf/i8938.pdf

https://www.irs.gov/pub/irs-pdf/f8938.pdf

Advantages of using a FC to hold $1,000,000 within the USA:

1 – No US Income tax return (Form 1120/1120f) needs to be filed for FC1 or FC2 as long as they “do not carry on business within the US”. Trading in a securities account is not considered “doing business within the US” under the US Tax Code.

2 – No Capital Gains Tax (CGT) is owed the IRS should FC1 $1M account double to $2M. The US broker will withhold 30% of any dividends paid to the company’s account.

3 – Good asset protection from frivolous lawsuits, etc.

4 – No FBAR has to be filed by US person JR.

5 – JR can be a director of FC1 and FC2 (but see filing Form 8621 below).

6 – JR can have signature authority over FC1 WS brokerage account.

7 – The Controlled Foreign Corporation provisions of Section 951 thru 960 are not an issue for JR, and he does not need to file Form 5471.

8 – Plan as outlined has excellent Federal Estate Tax (FET) avoidance possibilities.

9 – Safety. Funds are in the US. US brokers carry plenty of insurance – especially the big ones.

Form 8621 for Passive Foreign Investment Companies is another IRS Form JR needs to consider. WHAT’s NEXT? https://www.law.cornell.edu/uscode/text/26/1297

For purposes of this example for our JR, let’s lower the number of shares JR owns in FC1 to 100 shares.

FC1 and FC1 are considered Passive Foreign Investment Companies under the US tax code, and JR is considered to own 1% of FC2 under the PFIC ownership attribution rules by way of his ownership interest in FC1 (as in the example for Form 8938 above).

For purposes of filing Form 8621, JR in this slightly different example is considered to own 100 shares of FC1 directly and 100 shares of FC2 (indirectly) for total of 200 shares in two PFICs. See the instructions for Form 8621 at the link below. The IRS tells you JR needs to file “2” Form 8621s – one for FC1 and one for FC2.

Let’s look at JR’s tax liability if he decides to file Form 8621. Could there be any advantages in actually filing this form?

FC1 opens a US$1M brokerage account with the US broker in 2016. In 2016, FC1 has a 50% CG of $500,000.

If JR files a Form 8621 in 2017 with his tax return 1040 the IRS would call his offshore company a Pedigreed Qualified Electing Fund (QEF). Here’s the approximate tax JR would have to pay in 2017.

Tax FC1 = $100 for people in the 10% tax bracket (JR’s pro rata share of FC1 = $500,000 CG)                                                                                                                                                                                Tax on FC2 = Zero (FC2 had no income)

JR would need to add $1,000 as income on his 2016 tax return and attach a form 8621 to be “straight” with the IRS on the $500,000 CGs of FC1. Actually, by filing the Form 8621 in the first year, JR might even receive long term capital gains (15% in 2016) treatment on the $1000 (ordinary income) in FC1’s (which has a $500,000 CG) broker’s account.

Sounds incredibly wrong doesn’t it? Only $100 tax on a $500,000 profit when treated as “ordinary income”.

But, Form 8621 will let JR have long term capital gains treatment (LTCG), and if JR is in the 10% to 15% tax bracket, the capital gains tax rate is 0%.

So JR might not have to pay any taxes on the $500,000 gain of FC1 or FC2 in 2017.

Still think using a “couple two three” tax haven holding company is crazy business today? Don’t you just love IRS form 8621?

https://www.irs.gov/pub/irs-pdf/i8621.pdf

https://www.irs.gov/pub/irs-pdf/f8621.pdf

Here’s a sample of a PFIC Annual Information Statment for a company incorporated in Bermuda. http://www.asaltd.com/userfiles/documents/files/162/2013-PFIC-Annual-Information-Statement.pdf and http://www.automodular.com/wp-content/uploads/2015/08/2013-PFIC-Annual-Information-Statement.pdf

 

PS. If tax planning using two offshore companies – one to own the other one – is good enough for Goldman Sachs (Cayman Islands), it should be good enough for anyone. Ya think? http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=139744266

PSS. You won’t see GS getting busted in the Caymans like this well known Cayman banker, but you never know! Note, the US clients of this Cayman bank will end up with criminal record and have about 40% of their offshore accounts sequestered. https://www.justice.gov/opa/pr/two-cayman-island-financial-institutions-plead-guilty-manhattan-federal-court-conspiring-hide

File the forms people.

Headline: Two Cayman Island Financial Institutions Plead Guilty in Manhattan Federal Court to Conspiring to Hide More Than $130 Million in Cayman Bank Accounts

Cayman Companies Admit to Helping U.S. Taxpayer-Clients Hide Assets in Offshore Accounts, and Agree to Produce Account Files of Non-Compliant U.S. Taxpayers

 

First Conviction of Non-Swiss Financial Institution For Tax Evasion Conspiracy

 

 

Note: I estimate there will be another 150 to 350 Cayman banks going down like Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT) – both Cayman Island affiliates of Cayman National Corporation.

The IRS so far has taken down 100 Swiss banks and fined them from $1M to $800M each. The IRS also received the names of thousands of US bank account holders from these bankers. All of the American account holders had one thing in common. They had not filed a FBAR disclosing the account.  In their FBAR prosecutions the IRS has so far had a conviction rate of 100%.

Switzerland has approximately 300 registered banks. Some of the Swiss banks went into liquidation because of the IRS/FBAR probe (i.e., undisclosed offshore bank accounts).

Email me. I’ll send you a list of the 98 Swiss banks that pleaded “guilty” and paid the IRS these finesand gave them “names”.

The author of this article has filed a FBAR since 1995. The FBAR needs to be filed annually.

 

 

Kind regards,

 

 

Tom Azzara

Overseas agent / Anguilla Registrar / Since 2001

SEC Registered Investment Advisor / Since 2009

Stock analyst

Nassau, Bahamas

Havens67@gmail.com

taxman@batelnet.bs

1 242 327 7359

1 242 359 0202 (cell)

https://www.linkedin.com/profile/preview?locale=en_US&trk=prof-0-sb-preview-primary-button

Gilead Sciences has FOUR companies incorporated in the Cayman Islands.

http://investors.gilead.com/phoenix.zhtml?c=69964&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTIwNTkyMTMmRFNFUT02JlNFUT0yNTImU1FERVNDPVNFQ1RJT05fUEFHRSZleHA9JnN1YnNpZD01Nw%3D%3D

“Avoidance of taxes is not a criminal offense” – says the IRS

https://taxavoidancefromirs.wordpress.com/

 

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IRS CIRCULAR 230 DISCLOSURE To the extent this document constitutes tax advice subject to Circular 230 this tax advice was not intended or written to be used and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice).

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OFFSHORE PRIVATE EQUITY COMPANIES: How to file new IRS Form 8621 for a Qualified Electing Fund or Passive Foreign Investment Company – It’s mandatory for tax years 2014 and beyond.

http://www.theguardian.com/world/2012/aug/23/gawker-mitt-romney-offshore-accountsThere are approximately 480,000 active offshore companies in the BVI and about 100,000 offshore companies registered in the Cayman Islands. I estimate that over 95% of these offshore companies meet the IRS definition of a Passive Foreign Investment Company (PFIC) and/or Qualified Electing Fund (QEF). Most all these offshore companies are currently non reporting and non-compliant (and the IRS knows this); and beginning in 2014 the IRS is making it necessary/mandatory for an American shareholder in any PFIC to file new Form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf

What’s going to happen in the BVI and in Cayman? Time will tell. Dealing with FATCA, PFICs, FBARs and form 8621 compliance is an on going issue. https://www.linkedin.com/pulse/new-irs-form-8938-created-fatca-2010-can-filing-avoided-tax-havens?trk=prof-post

Sidebar: Goldman Sachs (Cayman) Trust, Limited operates as a subsidiary of Goldman Sachs (Cayman) Holding Company providing services to PFICs of clients and their executives. https://www.youtube.com/watch?v=wBUz2RocJ8A

Offshore Tactics Helped Increase Romneys’ Wealth http://www.nytimes.com/2012/10/02/us/politics/bains-offshore-strategies-grew-romneys-wealth.html?_r=1

http://www.theguardian.com/world/2012/aug/23/gawker-mitt-romney-offshore-accounts

Was this a US$2billion tax avoidance scheme using Cayman Island PFICs/companies?  https://www.linkedin.com/pulse/dear-wealth-managerstax-attorneys-tax-havens?trk=pulse_spock-articles ♣ contact taxman@batelnet.bs for more information

Charles Schwab is “hiding out” in the Cayman Islands too… http://cym.bizdirlib.com/node/514

If a US person owns even one share in a QEF/PFIC he will need to file the form. In this article I will show you how to File Part I of Form 8621 for a US taxpayer who has transferred $1,000,000 in the Startup year to his “offshore private equity company”.

BUT DON’T GET ALARMED. EVEN If US person X is in the 35% income tax bracket, his tax liability for 2014 on the $100,000 in ordinary income earned by the offshore QEF would be about $70. http://www.law.cornell.edu/uscode/text/26/1293

Using the example #1 at this link https://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/ US person X buys 100 shares in Foreign Company A (FCA) for $1,000,000. FCA is a new, start up offshore company in its first year. Each share has a price/value of $10,000 – and there are 50,000 authorized share capital for FCA in the company’s Articles of Incorporation. Please, review the link for the corporate structure using two QEFs – one owned by the other.

Question #1 of Part I on Form 8621 asks you for … “Description of each class of shares held by the shareholder.” US taxpayer would answer 99 non-voting stock + 1 voting share (all with a value of $10,000 each).

Question #2 of Part I on Form 8621 asks “Date shares acquired during the taxable year, if applicable” US taxpayer would answer that the shares were purchased on June 1, July 1, August 30th, and December 29th in 2014.

Question #3 of Part I on Form 8621 asks US person X to supply “Number of shares held at the end of the taxable year:” US person X would answer 99 non-voting stock + 1 voting share or 100 shares in TOTAL Question #4 is a check box: Value of shares held at the end of the taxable year (check the appropriate box, if applicable): (a) $0-50,000 (b) $50,001-100,000 (c) $100,001-150,000 (d) $150,001-200,000(e) If more than $200,000, list value: US person X answers (e) and writes in the box $1,000,000.

Question 5 of part I asks: Type of PFIC and amount of any excess distribution or gain treated as an excess distribution under section 1291, inclusion under section 1293, or inclusion or deduction under section 1296: (a) Section 1291 $_________ (b) Section 1293 (Qualified Electing Fund) $100,000 (c) Section 1296 (Mark to Market) $ _______ US person answers (b) for a Qualified Electing Fund and types in $200 (assuming pro rata share 0f  $100,000) See https://www.law.cornell.edu/uscode/text/26/1293.

In Part II US person checks box A and declares his investment is in a Pedigreed Qualified Electing Fund. The word “pedigreed” is an IRS term that appears in the instructions for Form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf  http://www.irs.gov/pub/irs-pdf/i8621.pdf

When US person X checks Box A in Part II it tells him to Complete lines 6a through 7c of Part III.  6a of Part III tell US person X to enter his pro-rata share of the ordinary earnings of the QEF. Assuming there was $100,000 in ordinary income from short term capital gains, US person X enters $200 (100 shares divided by 50,000 shares outstanding = X’s pro rata share of FCA ordinary income).

6c says “Enter this amount on your tax return as ordinary income” US person X therefore adds $200 to his form 1040. If US person X is in the 35% income tax bracket, his tax liability for 2014 on the QEF A above would be about $70.

THE IRS CALLS QUALIFIED ELECTING FUNDS THAT FILE FORM 8621 IN THEIR FIRST YEAR of business- PEDIGREED QEFs. It should be obvious by the terminology that they prefer pedigreed QEFs to all other types of non-pedigreed QEFs and PFICs.

Advantages and comparison of the PFIC/QEF regime with the CFC regime

 Unlike the CFC provisions of section 951 thru 958 (Controlled Foreign Corporations), there is no “element of control” that applies to directors or shareholders of a PFIC or QEF. If a majority of the directors are US persons under the CFC rules, the offshore company would be a CFC, and US shareholders would need to pay taxes on the company’s Subpart F income even if undistributed to them .

There are no such director control provisions for QEFs or PFICs. A sole US person could be the only director of the PFICs /QEFs, or there could be several US directors for the PFIC. In either case, there are no “control” issues or adverse tax consequences in having all US directors under the QEF/PFIC regime.

NOTE: Management and employees for a QEF/PFIC should/must be in the offshore jurisdiction, and NOT within the USA. A foreign company that has its management within the US (with or without using a physical US office or permanent establishment), would/might be construed as “Doing business within the United States” and all of the offshore company profits could be subject to US taxes by the IRS.

In addition the PFIC/Foreign Company/QEF would need to file a US income tax return if it’s doing business within the United States. Distributions of earnings and profits by a CFC will usually be considered a dividend under the CFC regime and taxable. But, under the PFIC/QEF regime when a QEF makes the election to be taxed currently as described above, this is not a problem, and distributions can be made without the fear that the IRS will classify them as a TAXABLE DIVIDEND.

For example, if QEF (i.e., FCB) in example #1 (FCB) buys shares in a domestic US company with $1,000,000 of earnings and profits and that company buys a private home, this would not be considered a dividend distribution to its shareholders, BUT under the CFC regime it would be considered a taxable dividend. https://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/

Finally: 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! For offshore Bahamian or Anguilla companies with banking at a Bermuda bank, visit this link https://tomazz1.wordpress.com/2014/04/13/offshore-company-formations-banking-Bahamas/ Call or email me if you have questions taxman@batelnet.bs

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Offshore Company Formations/Banking Bahamas

We have formed offshore International Business Companies in the Bahamas and Anguilla since 1990. We formed over 1,030 Bahamian companies and over 350 Anguilla companies. We are overseas agents for Anguilla registrar since 2001.

Avoid the problems that UBS’ U.S. clients had in 2008. Learn some compliance.

If you are an American taxpayer going offshore today you had better understand the US tax law and the IRS compliance required. You can still legally avoid plenty of taxes, but you need to structure yourself and file the right disclosure to avoid complications. Review this link carefully, and contact us with questions at taxman@batelenet.bs or 1 242 327 7359 (Nassau, Bahamas).

Passive Foreign Investment Companies (called PFICs and QEFs by the tax code) do not have to file US income tax returns.

PFICs are not subject to IRS audits so study this link before you incorporate anywhere with anyone.

PFICs cannot have an office inside the United States and cannot do business within the United States. PFICs/QEFs can trade the US stock markets through their stock brokers and not owe any US short term or long term capital gains taxes.

Mitt Romney filed Form 8621 for 10 QEFs in 2010. Bain Capital ($70 Billion AUM) has over 138 PFICs in the Cayman Islands. PFICs are the vehicle of choice for the savvy trader/investor.

PFICs can be used by Americans for other activities, including receiving management/consulting fees offshore TAX FREE. Contact us.

 

Cost for Bahamian company with banking introduction, application forms, etc., at the very best bank here in the Bahamas is $2,500. Annual fee thereafter is $1,350.

Cost  for Anguilla company with banking in the Bahamas is $2,100 Annual renewal fees is $1,200.

We provide complete company formation package including;

  • Certificate of Incorporation
  • Company by-laws for company
  • Articles of incorporation for company
  • Subscriber minutes
  • Director minutes
  • Shareholder register
  • Registered agents and office (in Anguilla and Bahamas)
  • Overnight UPS/Fed Ex of documents anywhere
  • Banking application forms and introduction to bank officers at the top bank in Nassau that offers online banking, credit cards, etc.

Complete Anonymity

  • No Corporate Income Tax
  • No Personal Income Tax
  • Stockholders are Not Public Record
  • No Tax On Corporate Shares
  • Low Annual Fee
  • Directors not a matter of public record (except in Bahamas)
  • No Estate, gift or withholding taxes
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This message from New Providence Estate Planners Ltd. Is for the sole use of the intended recipient(s) and may contain confidential and privileged information. Any unauthorized review use disclosure or distribution is prohibited. If you are not the intended recipient please contact the sender by reply email and destroy all copies of the original message.
IRS CIRCULAR 230 DISCLOSURE
To the extent this document constitutes tax advice subject to Circular 230 this tax advice was not intended or written to be used and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice).
Posted in bahamas, capital gains taxes, companies, financial, formation, tax, tax avoidance, tax planning, Uncategorized | Tagged , , , , , , , , | 5 Comments

Free Consultations

Reach Tom Azzara at 1-242-327-7359 or email: taxman@batelnet.bs for information.

Free consultations.

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Taxable and Nontaxable Income

I like not taxable incomes better.

Wealth & Risk Management Blog

The IRS published another tax tip (2014-12) to assist tax filers this tax season addressing when income is taxable, and when it is not.

With individual tax returns due at the post office within 6 weeks, the IRS is stepping up efforts to help guide taxpayers with basic income tax questions and filing requirements.  Excerpted below, in its Tax Tip, the IRS states:

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of…

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There are over 500,000 active IBCs registered in the British Virgin Island and over 100,000 “exempted” companies in the Caymans. Goldman Sachs (Cayman) Trust, Limited operates as a subsidiary of Goldman Sachs (Cayman) Holding Company. Why?

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.”

http://www.jpmfinancialservices.com/images/PDFs/EstateTaxation.pdf

https://www.linkedin.com/pulse/federal-estate-tax-chart-below-shows-exemptions-us-citizens-havens?trk=prof-post

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 toohttp://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.

http://www.nytimes.com/2009/01/17/business/17tax.html?_r=0

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

http://www.theguardian.com/world/2012/aug/23/gawker-mitt-romney-offshore-accounts

Avoidance of taxes is not a criminal offense says IRS

 

https://www.youtube.com/watch?v=wBUz2RocJ8A


“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!

http://www.irs.gov/pub/irs-pdf/f8621.pdf   http://www.irs.gov/pub/irs-pdf/i8621.pdf  

                                                            
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
http://www.law.Cornell.edu/uscode/text/26/1297

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.
http://www.law.cornell.edu/uscode/text/26/1293

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
http://www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf

“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

Send questions and comments to taxman@batelnet.bs

For offshore Bahamian or Anguilla companies visit this link

https://www.linkedin.com/profile/preview?locale=en_US&trk=prof-0-sb-preview-primary-button

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