Dear Sir:
This is what I do for a living. Here is an excerpt from a little article I
have made that deals with these very same issues.
The United States as an “Offshore Tax Haven”
Everyone recognizes that the United States is a primary location for
international business. The presence of good banks, advanced
infrastructure, a consistent legal system and a stable government are all
characteristics of the United States that are taken for granted. However,
many people do not realize the enormous tax benefits given to non-resident
aliens making passive income in the United States. The United States does
not tax non-resident aliens for any interest income or dividend income
derived from the United States. Also there is zero capital gains on profits
from investments. Only active United States derived income is taxed, and
depending on the corporate structure, this income may be taxed at a very
attractive rate. However, there are some pitfalls to be avoided when taking
advantage of these special tax benefits.
The Definition of “Resident”
One of the most important issues is that of maintaining a “non-resident”
status. Unfortunately many people confuse the immigration definition of
resident with the tax definition of resident. Under the immigration laws of
the United States, a resident is only someone who has been given a permanent
residence visa. But under the tax laws a resident is someone who holds a
permanent residence visa, or someone who has maintained a “substantial
presence” in the United States. There is a specific formula as to when
someone meets the “substantial presence” test based upon the number of days
they have been present in the United States for a given year and the two
prior years. The test is confusing, but to be safe, the non-resident should
stay in the United States no more than 182 days in any given year. It is
this “substantial presence” test that causes the most trouble for non-U.S.
citizens who stay any length of time in the United States.
These problems can be disastrous for the alien investor because the tax
system becomes dramatically less favorable for the “resident” alien. First
of all, interest and dividends are now taxed as domestic income, and there
are capital gains that need to be paid on profits from investments. But
potentially the worst consequence of all is the fact that the United States
taxes residents and citizens on their “worldwide” income, not just United
States derived income. And failing to declare worldwide income is a serious
tax crime.
As you can see, residency is an important issue, and one that needs to be
addressed and monitored for the alien looking to do business in the United
States.
Taxation of non-resident Aliens
As stated above, the basic advantage for the non-resident alien doing
business in the United States is the zero tax rate for passively derived
income, and the zero capital gains tax on profits from investments. Taxes
only need to be paid on active income derived from the United States, and
even then, proper tax planning using the proper corporate entity can lower
this burden significantly.
However, there is one particular negative in this system: the withholding
tax. Although passively derived income such as interest and dividends pay
no taxes, the tax code requires that issuing institutions withhold thirty
percent (30%) of such income to be delivered to the treasury. Such funds
will be refunded upon the timely filing of a tax return, but during the
interim, the investor loses access to the money and receives no interest or
compensation. The reasons for the government withholding such money is two
fold: 1. The government in effect borrows such funds interest free, and 2.
The government forces the investor to file a tax return that he or she would
otherwise not have to file. It is the second part that is important to
note. It is not a crime to fail to file a tax return where there is no tax
liability. It may be a crime to file a tax return that contains false
information. By withholding the 30% of such income, the government forces
the non-resident aliens to file a tax return, opening himself up to charges
of non-compliance if it turns out that the information in the tax return is
in any way false or inaccurate, and it also helps the government to better
monitor the investor’s activities.
Because of this, many investors choose to invest their money in “growth”
investments that do not pay interest or dividends. The bulk of their income
comes from the sale of investment assets which results in no withholding.
Then they simply let the government keep the minimal 30% that may have been
withheld from other investments, and don’t file a tax return. Again, it is
no crime to fail to file a tax return where there is no tax liability. The
reason an investor would do this is because the primary method that the
Internal Revenue Service (I.R.S.) uses to monitor tax evasion is the review
of tax returns. Without a tax return, the I.R.S. is at a distinct
disadvantage. But even this method of investment has its disadvantages, not
the least of which is giving up the withheld income. Although the I.R.S.
primarily relies upon tax returns to monitor compliance with tax laws, there
is still the track left by institutions who must issue annual tax reports
for interest and dividend payments made by the institution, and must also
notify the I.R.S. of securities transactions. As such not filing a tax
return may remove the possibility of the I.R.S. using your own tax return
against you, there is still the problem of these other tax reports that
provide the same information.
However, there are better solutions that provide many distinct advantages.
The “Pass Through” or “Disregarded” Tax Entity
One very useful entity to use in the United States is the Limited Liability
Company (LLC). In the United States, each state has its own corporate
entity laws, and not all states allow the formation of an LLC. But most
states do allow the formation of LLCs, and even those that do not allow the
formation of such entities, recognize the validity of the those formed in
other states. LLCs are also generally recognized and accepted outside the
United States. More importantly, if properly structured, the I.R.S. views
the LLC as a “pass through” tax entity. What this means is that the I.R.S.
disregards the existence of the LLC. If there are two or more members of
the LLC, then it is a partnership and must file a partnership tax return.
If it has only one member then it is treated as a sole proprietorship, and
must be treated as such on the individuals tax return. However, for all
other purposes it is a separate entity. It must obtain its own Federal Tax
Identification Number to open a bank account, or brokerage account. It will
be this tax identification number that will be used for all transactions.
For most purposes other than that of taxes, the LLC will be treated as a
“domestic” entity. As such, institutions will not automatically withhold
the 30% from interest and dividends. But neither will the I.R.S. tax such
dividends of the domestic LLC since they “pass through” to the non-resident
alien who owns the LLC. And the owner of the LLC has no real reason to file
a tax return unless the non-resident alien earned active income derived from
business activities inside the United States, and there is an easy way
around this (to be explained briefly later).
As you can see a properly structured LLC can solve a great many problems,
and there are a number of states where state laws make LLC formation and
operation optimal. One of the most popular locations for the formation of
LLCs is Nevada. Nevada has no income tax, no franchise tax (a corporate
income tax), and therefore no tax reporting whatsoever. However, the Nevada
LLC has become identified with some negative activities, and unless you
actually operate a business in Nevada and/or have a legitimate base of
operations located in Nevada, use of a Nevada LLC brings unnecessary
attention to the owner. Rather we suggest the use of an LLC in a “low” tax
state such as Texas. Texas is one of the largest states in size, economy,
and population. It has one of the most advanced business infrastructures in
the United States. There is no individual income tax in Texas, and only a
very modest franchise tax. And there is no negative associations with the
use and ownership of a Texas LLC since it is a very common form of business
operation in Texas and will fit in just fine with other local business
operations.
How to Invest and Operate a Business Using a U.S. Based LLC
Well this is a question that is a little too big for such a presentation,
but we can try to examine some of the business issues that come up, and how
an LLC can be used along with other products to solve some problems.
1. The Investor. To date, the greatest interest in this structure has been
in using it to avoid the 30% withholding tax. As described above, most
institutions will simply see an LLC as a domestic entity and will treat it
as such. For some this is all that is really needed. However, there will
still be a stream of tax reports from the institutions themselves informing
the I.R.S. how much was paid to the LLC in interest and dividends. Although
this should not really be a serious problem, for those looking to avoid any
exposure whatsoever there are some solutions. First of all, the LLC will
start off with a non-interest bearing checking account, which is the
standard type of account issued to businesses in the United States. Banks
don’t like having to issue these tax reports either, and generally don’t set
up interest bearing checking accounts for companies in order to avoid the
paperwork. Now, instead of placing investments directly with banks,
brokerage houses and/or mutual funds, funds are used to buy whole life
insurance and/or annuities. Funds placed into the hands of an insurance
company are not tracked in the same manner as funds placed into a bank
account or a brokerage account. This is only natural as the funds are not
as liquid, and as such are unlikely vehicles for unsavory elements.
Furthermore, funds placed in an insurance vehicle are treated differently
for tax purposes as well. Interest and dividends earned in a whole life
policy and/or an annuity are not taxed until actually withdrawn, and, for
some the most important thing, there are no tax reports as to interest and
dividends earned on the funds. In essence investing funds with an insurance
company in the United States in the form of a whole life policy or an
annuity, results in similar investment opportunities, tax deferral, and no
trail of tax reports regarding interest and dividends. Also, in regards to
whole life policies, the funds can be made available in the form of loans
from the policy.
2. The Active Business Operator. Let us say that you do not qualify for
the passive investment tax benefits, at least as to some portion of income
that is considered active and derived from the United States. If this is
the case, the individual will have to file a tax return, and pay taxes based
on this active income. There is a simple way to lessen the tax burden of
this situation. First of all, we set up the same LLC as described above to
operate in the same manner as described above. Then any activity that will
generate active United States derived income will be handled by a U.S. based
corporation that will be owned entirely by the LLC. As a general rule, tax
treatment of corporations is more favorable than that for individuals. The
corporation will be able to take tax deductions on expenses that an
individual would not be allowed, such as cars, and other expenses.
Furthermore, a corporation can give its employees various tax free benefits
which can be very valuable depending on the size and nature of the
enterprise.
3. The Potential Immigrant. Finally, there is the person who wants to live
in the United States, but doesn’t want to suffer all the negative tax
consequences. Depending on which country this person is from there may be
immigration treaties that give such nationals access to Treaty Trader and
Treaty Investor Visas. These visas require minimal investments, and provide
unlimited access to the United States for the recipient and his or her
family. Also, as long as the visa recipient does not stay in the United
States longer than the “substantial presence” test provides, these
individuals will not necessarily be taxed like a resident. For such an
individual, the above structures provide the ideal way of managing their
investments and/or business activities to maximum advantage.
The “Ultimate” Solution
We have discussed how the United States can be the ideal jurisdiction for
the passive investor, and we have described how the proper use of entities
can optimize the tax benefits to be gained. However, we have not discussed
the use of “offshore” entities in conjunction with the above described
“domestic” entities.
The same benefits that can be derived from the use of these structures by
an individual can also benefit a non-resident alien entity, like a
corporation, LLC, International Business Company (IBC), etc. There are
separate rules to determine whether a business entity is a resident for tax
purposes, and there are some pitfalls here if U.S. citizens or residents try
to use “offshore” entities that have been poorly structured (Note: it is
possible for a U.S. citizen or resident to use the strategies designed
above, but they involve some complex structures and advanced legal
planning). However, ultimately the same benefits are available to the
entity as to the individual. In addition there are the additional benefits
that can be gained by using the “offshore” entity such as greater privacy,
increased access to international investments, asset protection and tax
minimization. Although no taxes will be due in the United States from the
above activities, there may be legitimate reasons for the owner to want to
avoid disclosure of confidential information concerning his investments and
business activities. The United States, for all its stability and
investment opportunities, is not an easy place to maintain ones privacy and
confidential information. Databases are everywhere, and there are companies
collecting information for every imaginable purpose. The result is that
there is little privacy. It is also not a country where one wants to be
sued. It is not uncommon for foreign plaintiffs to sue other foreigners in
the United States seeking the more generous laws and juries available there.
To avoid advertising to everyone who you are and what you are doing with
your money, and in so doing making yourself a target for everyone who may
have ever considered suing you, you should consider placing a layer of
insulation between you and the LLC. That insulation will most likely be
some kind of “offshore” structure that will vary according to where you come
from.
It would be impractical here to go into the many advantages of using
offshore entities in regards to asset protection, tax minimization, privacy
protection, and investment opportunities. However, combining the benefits
of an intelligent offshore structure with the benefits of an intelligent
onshore structure as described in this paper can produce an unbeatable
combination.
Please contact me for price list.
Glencannon Group Ltd.
http://www.glencannongroup.com/
[EMAIL PROTECTED]
[EMAIL PROTECTED] (for a more secure email)
fax: 419-710-4339
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