Welcome to Offshore, USA!
Population: trillions of dollars.
After a pre-FATCA scare, the gates of the offshore financial world are opening up to Americans again, albeit with tighter controls and regulations.
For people who are neither resident nor citizens of the US, it is arguably one of the most attractive tax havens around.
Incorporation costs are often lower than UK, and the laws far more flexible and business friendly.
This will be a wade through the shallow and easily-understood parts of the murky waters that make up the role of the US in the international financial services sector.
USD
To understand how the US fits in this context, it’s important to recognize just how important it and its currency are.
The US dollar is the world’s most traded and transacted currency, and the world’s largest reserve currency. Estimates by the ECB and IMF indicate USD accounts for over 60% of all foreign currency reserves. The second is EUR at just over 20%. Third place is held either by JPY or GBP, both at just under 4%.
While the USD has decreased since the early 2000s and some countries are seeking to reduce their reliance on USD, it remains the de facto international currency.
In addition to the US, it is the or an official currency in the following countries and territories:
- American Samoa
- British Virgin Islands
- Caribbean Netherlands (Bonaire, Sint Eustatius, Saba)
- East Timor
- Ecuador
- El Salvador
- Guam
- Marshall Islands
- Micronesia
- Northern Mariana Islands
- Palau
- Panama
- Puerto Rico
- United States Virgin Islands
- United States Minor Outlying Islands
- Zimbabwe
It is a currency of major circulation in 15 additional countries and four territories:
- Afghanistan
- Bahamas
- Barbados
- Bermuda
- British Indian Ocean Territory
- Cambodia
- Cayman Islands
- Guatemala
- Haiti
- Iraq
- Jamaica
- Lebanon
- Liberia
- Maldives
- Nicaragua
- Peru
- Turks and Caicos Islands
- Uruguay
- Vietnam
Furthermore, several currencies are pegged to the USD:
- Aruba florin (AWG)
- Bahamas dollar (BSD)
- Barbados dollar (BBD)
- Bahrain dollar (BHD)
- Belize dollar (BZD)
- Bermuda dollar (BMD)
- Cayman Islands dollar (KYD)
- Cuban convertible pesos (CUC)
- Djibouti franc (DJF)
- East Caribbean dollar (XCD)
- Eritrea nakfa (ERN)
- Hong Kong dollar (HKD)
- Jordan dinar (JOD)
- Lebanon pound (LBP)
- Netherlands Antillean guilder (ANG)
- Oman rial (OMR)
- Panama balboa (PAB)
- Qatar riyal (QAR)
- Saudi Arabia riyal (SAR)
- United Arab Emirates dirham (AED)
- Venezuela bolivar (VEB)
FATCA
FATCA – the Foreign Account Tax Compliance Act – is a law which at its most basic constituents requires the following:
- That US persons report their offshore financial accounts (bank account, broker account, treasury account) worth more than 50,000 USD;
- That Foreign Financial Institutions (FFIs) report the assets and identities of US persons that have accounts or an interest in accounts.
FFI reporting is done either by individual FFIs signing up for FATCA or with a so-called IGA (Inter-Governmental Agreement).
US persons who fail to comply risk repercussions set out under regular tax crimes. Senate has discussed refusing renewal or issuance of passports for persons with a certain tax debt but this has yet to pass.
FFIs which fail to comply with the reporting requirements risk a 30% withholding tax (effectively a haircut or garnishment) on all USD denominated transactions. Given the importance of the USD currency, this would be a devastating blow to any bank, whether it’s a small, local bank that still relies on USD for international clearing or a large international bank.
The US Department of Treasury maintains a list of FATCA agreements here: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
Specified US Person
What constitutes a specified US person is not entirely clear cut but FFIs are supposed to look for US person indicia, which include:
- US citizenship or permanent residence (green card);
- Born in the US;
- US residence or correspondence/mailing address;
- US phone number;
- Standing instructions to transfer funds to a US bank;
- Power of attorney with a US address;
- Care-of, hold-mail, or mail-forwarding address in the US;
- Persons of substantial presence in the US;
- Partnerships or corporations created in the US;
- Non-foreign trust or foundation.
Not all factors are enough on their own to be considered a US person and it is very much up to the FFI to assess the situation of each individual customer. It therefore requires a lot of extra work for FFIs to on-board a US entity or US person than other nationalities.
Offshore For Americans
Yes, US persons can open offshore bank accounts.
Yes, US persons can form offshore companies.
While the former has changed in recent years, the latter not so much. Owning a company does not in and of itself constitute a source of income or wealth and therefore does not really interest US authorities. It’s the bank accounts they are interested in.
Americans who formed offshore companies and leveraged long-standing personal relations with US banks have been able to open US bank accounts for offshore companies. This doesn’t work for everyone, though. As I said, long-standing personal relations are usually required – often implying ample capital.
Opening an offshore bank account as a US citizen or US resident today is more difficult than it was five or ten years ago, before FATCA and before a number of tax busts which have involved notorious information leakage from especially Switzerland, but also Cayman Islands and other tax havens.
Things have, mostly, calmed down since then. Americans are welcome again at most banks around the world, but because banks now need to be much more careful and diligent (including filing a lot more reports and paperwork) for US citizens, the minimum deposit is usually higher than before. The amount of extra work that goes into taking on and maintaining a US person will simply cost more than what the bank would earn from a typical lower-value client.
It’s still very difficult to find banks that take on Americans for less than 250,000 – 1 million USD. This may go down in the coming years as banks further optimize the workflow surrounding US persons, as there are still plenty of potentially profitable clients in the 50,000 – 250,000 USD range.
However, Americans can have no reasonable expectation of financial privacy anywhere. While it’s possible that there are jurisdictions which have not caught up yet and haven’t amended their laws, banking secrecy generally does not apply to Americans. Even the ultra-secretive Lebanon has enacted an exception to its coveted banking secrecy law for US persons.
Limited Liability Company (LLC)
Before proceeding, make sure you have read my article Comparison LLC vs. IBC (vs. others) as I in this article will assume you know the basics already.
Originally from the cowboy state of Wyoming , LLC has almost all the bells and whistles of a corporation with all the ease of a sole proprietorship or partnership.
Forming an LLC with a registered agent, including first year registered office, typically costs around $200 to $400. And since the main target audience is Americans, payment can normally be made by debit or credit card – sometimes PayPal and other alternative payment methods.
Many states provide very tight secrecy. Names of members and managers usually only appear on public record in annual filings. Not all states require filings and in those that do, other entities (such as another US LLC or an offshore entity) can appear as members and managers at the time.
Once you have your LLC, you probably want to get an EIN (Employer Identification Number). This is your LLC’s very own tax number and is what you will use when filing for tax in the US or opening a bank account (more on both later). If you have a social security number or the EIN of another company, simply head over to the IRS website and get an EIN instantly. Otherwise, pay your registered agent a few dollars for them to obtain it for you.
Series LLC
A handful of states (notably Delaware, Nevada, Oklahoma, and Texas) permit for so-called Series LLCs. These are LLCs which can be thought of as something akin to protected cell companies, where a single legal entity has multiple subsets of limited liabilities.
A Series LLC needs to keep separate records for each liability.
Close LLC
Crafted in Wyoming in 2000, a Close LLC is another variation of LLC where the ownership is more strictly controlled.
A member must sell his membership share to the remaining members before the share can be sold to someone else. This can be used to ensure that a member does not sell his part to an unknown party.
Close LLCs can also be used as pieces in strong asset protection structures.
(Revised) Uniform Limited Liability Company Act
With each state empowered to write its own LLC laws, an organization called Uniform Law Commission was established in 1892 to promote uniform laws across the USA.
The Uniform Limited Liability Company Act (ULLCA), is an attempt to have the same LLC legislation across as many jurisdictions as possible. As of writing, the ULLCA has been enacted in the following jurisdictions:
- Alabama
- California
- DC
- Florida
- Idaho
- Iowa
- Minnesota
- Nebraska
- New Jersey
- North Dakota
- South Dakota
- Utah
- Vermont
- Washington
- Wyoming
Furthermore, the ULLCA has been introduced but not yet enacted in:
- Illinois
- New Mexico
- South Carolina
Some notable features of the ULLCA include:
- Flexible management structure (LLCs can be run as corporations, partnerships, or anything else members agree on).
- No limitation on activities (as long as they are lawful).
- Empower members to ask a court to dissolve the LLC if managers are oppressive or acting in a harmful way.
S Corp and C Corp
S Corp and C Corp are different classifications of corporations. Both have limitation of liability and have directors and shareholders. Articles of incorporations must be submitted to the state in which they are formed. Annual filings and annual meetings (shareholders’ and directors’) are required.
The main difference is in taxation. C corporations are taxed on corporate income, whereas S corporations are pass-through entities (similar to LLCs). While this may sound like it would be attractive to non-residents, S corporations are limited to US citizens or US residents. There is also a maximum of 100 shareholders permitted for an S corporation, none of whom can be another S corporation or even a C corporation or LLC for that matter.
C corporations can have different types of stock, whereas S corporations can only have one.
These types of entities are far less common with foreigners but are popular vehicles in tax planning structures for US companies or large international conglomerates with a US presence.
US Jurisdictions
While practically every state has LLC, there are some which are more popular than others. The main ones are:
- Delaware
- Florida
- Nevada
- New Mexico
- Oklahoma
- Oregon
- South Dakota
- Texas
- Wyoming
Delaware
Delaware is the most popular nowadays. Start digging through the Delaware state records and you will find that virtually every large corporation (and many smaller ones) have at least one entity there. The ones you can’t find probably just use a different name.
Aside from tax and privacy benefits, another reason for its tremendous popularity is for the Court of Chancery. It is a court of equity rather than justice. The Delaware Court of Chancery exists largely as a living fossil, from old colonial times. It has however matured very well with time and is a highly reputable institution for settling corporate matters.
According to the 2014 tax census, 31.57% of Delaware’s tax revenue comes from company license fees.
Florida
Florida has gained some popularity due to its low state taxes, which it is required to maintain effectively because of its large number of retired residents.
Asset protection laws are problematic in Florida but the weaknesses likely do not apply to non-residents with no financial interests in Florida.
Nevada
Nevada is a bit of a wild child. It has fought a lot with the IRS and many politicians have argued over the legality of collecting federal tax. It and Texas are the only states which do not have an information sharing agreement with the IRS.
Nevada corporations are nigh-on impenetrable. While US government can drop a message to essentially any foreign jurisdiction to get information about members of secretive IBCs, it cannot and does not get anything from Nevada.
Sounds great, right? Yes and no. As long as the company only trades in Nevada or outside of the US, privacy is assured. It does have some reputational disadvantages, though, should you trade within the US outside of Nevada. And just to be clear, the lack of information sharing does not preclude you from having to file for taxes.
Nevada came very close to enacting a corporate tax law not too long ago but instead ended up enacting a commerce tax. This has worried some who fear that a corporate tax may come sooner rather than later.
New Mexico
New Mexico does not require annual filings, which almost makes a New Mexico LLC about as secretive as an IBC from any of the sketchiest IBC jurisdictions, but without all the reputation baggage. Low costs.
Oklahoma
Oklahoma is in the same boat as New Mexico but costs are bit higher. Record keeping requirements are very lax and failure to keep records is very lightly, if at all, punished.
Oregon
There isn’t a lot to say about Oregon. It’s a rather easy-going, business-friendly state. As with many other states, the limitation of liability is not set aside if an LLC fails to perform certain duties often associated with a corporation, such as detailed record keeping and board (managers) meeting.
South Dakota
South Dakota is more known for its ironclad trusts (more on those later), but sees some usage for incorporations.
Texas
Texas, like Nevada, does not share information with the IRS. However, it levies a franchise tax on LLCs (as well as corporations) of 0.25% of taxable capital.
Wyoming
Wyoming is the birthplace of LLC. However, that doesn’t in and of itself give Wyoming an advantage. The advantages Wyoming offers is its very low cost, low tax, and the quite possibly strongest asset protection laws of all LLC jurisdictions.
The annual license fee for a Wyoming LLC is $50, although a higher premium can apply to LLCs with high capitals. This is mostly beneficial for LLCs run with no US basis, as other states’ license fees and taxes may otherwise apply. Similarly, the absence of tax in Wyoming does not mean the LLC can be operated entirely free of tax.
The asset protection aspects comes from creditors only having one remedy available: a charging order, which is a court order from a Wyoming court. A court order is required for funds to pass from the LLC to a creditor instead of the LLC owner. While many other states have similar statutes, Wyoming extends this protection even to single-member LLCs. Whether this holds up in a local court (whether in another US state or on non-US territory) is unknown. As noted above, Wyoming also has Close LLCs.
Picking LLC or Corp Jurisdiction
As a US resident, the choice needs to be carefully considered with local laws in mind. While a Wyoming, Nevada, or Delaware corporation or LLC may seem attractive, it needs to be considered whether any of the benefits are set aside by state and other local laws.
For a non-resident, the choice usually comes down to Wyoming, Nevada, Delaware, and New Mexico.
It’s impossible to say which one is best without carefully considering the full scope of each individual’s unique situation. Delaware is the most popular, but the reason for that seems to be reputation and marketing more than anything. Nevada and Wyoming are close seconds, with New Mexico lagging behind.
All that said, it is very difficult to beat the cost and ease of forming and running a Wyoming LLC. Those seeking even higher privacy may want to look into New Mexico or even Oklahoma but it can be difficult to find a registered agent willing to take on non-residents there. Wyoming registered agents are usually perfectly happy with non-resident foreigners.
Banking in the US
Compared to for example Europe, the US banking system is an absolute mess. Sending money from one personal bank account to another personal bank account has not changed much since colonial times. (For B2B, B2C, and C2B there is ACH, which works quite well.) Checks are far more common here than most other countries. Direct debits can be initiated without account holder’s consent. 3D Secure (Verified by Visa, MasterCard SecureCode) for online shopping is virtually unheard of for a US-issued card and the US has still not rolled out EMV on credit cards (supposed to be mandated from October 2015).
It would be almost impossible to list all banks in the US. There are thousands upon thousands of banks and bank-like financial institutions such as credit unions and credit card companies.
With such a gigantic banking sector, quality will obviously vary from bank to bank. Keeping with the big names, banking services are fairly competent if a bit lacking when it comes to foreign currencies and international wire transfers.
Service fees may appear high upfront but aside from wire transfers to other banks and international wires, it is usually quite cheap to bank in the US once you have a balance of a few thousand dollars to waive all the monthly fees.
Foreign-currency accounts are bothersome to set up, though.
Is it possible to a US bank account for a non-resident-owned LLC or corporation?
No, probably not. At least not without having former ties to the US (citizen or resident alien with a SSN) or being a well-established business setting up an entity in the US.
It is almost unheard of for a US bank to take on a newly formed non-resident company, irrespective of whether it’s incorporated in the US or elsewhere.
There are very few ways for a non-resident foreigner to bank in the US. Placing a large deposit (500,000 USD and up) or showing proof of high turnover (at least 1 million USD) can get your foot through the door.
I have seen a couple of cases where international banks such as HSBC and Citibank have agreed to open accounts for non-US residents who are resident in territories where these banks have a significant presence.
Banking Secrecy
None, although it is debatable how cooperative US authorities really are when it comes to disclosing banking information for non-resident foreigners.
A nation that can bully and pressure practically any other nation to disclose information about US persons (and others), the US is a lot less willing to reciprocate. I have several times heard exchange of information agreements with the US described as one-way streets.
If you can find a bank willing to take you on, you could in theory end up with an almost impenetrably secretive structure by forming a non-resident LLC and bank account in the US – and still enjoy all the reputational advantages.
Non-US Banking for US Company
So you formed a US LLC but now you can’t find a bank in the US to take you on. This happens time and time again. It’s one of the biggest problems people face after they get caught up in the US LLC hype.
Will a non-US bank accept a US company?
Maybe, if you can show significant enough capital. As I mentioned above when talking about FATCA, because of the extra compliance work involved in handling a US client, the minimum deposit tends to be much higher.
It can be very difficult to find a bank willing to take on a US entity. If you for example are resident in Europe and try to approach European banks, the bank will be suspicious as to why you aren’t just operating under a European company.
Small Caribbean banks are terrified of getting something FATCA-related wrong and may say they don’t accept any form of US entities, fearing that a simple slip-up would cost them 30% of their USD transaction, on which they are almost wholly dependent.
Taxation
US citizens and US residents
While tax evasion is a bigger pastime than baseball in the US, the IRS remains the world’s most powerful tax authority. The US tax code is extremely convoluted and while attempts have been made to simplify it, companies like Intuit, which makes tax calculation software TurboTax, and others such as tax advisers lobby for status quo or further complication.
Americans can enjoy tax planning to reduce their tax burden. However, for as long as they remain citizens, Americans are taxed on their worldwide income no matter where they live. The US is joined by Eritrea in being the only two countries to do this.
Non-resident US citizens can use tax treaties to lower or completely void their tax burden in the US.
Non-US citizens and non-US residents
Persons who are neither citizens nor resident of the US may still be subject to US tax on income earned in the US, notably withholding tax. This tax can be mitigated by a tax treaty.
Pass-through companies such as LLCs are however treated a bit differently. Instead, a sort of faux territorial taxation applies where locally-sourced income is taxable in the US on a federal level – and state taxes may or may not apply. Any tax advantage of a trading US LLC is effectively limited to business activities outside of the US, much like Panama and Hong Kong.
What counts as locally-sourced income is not clearly defined. It is generally believed to be income earned by selling to US residents, meaning that if your Delaware LLC earn 1 million USD in a year and half came from sales to US residents, you would have to pay federal tax on the 500,000 USD. However, some make a much bolder assessment of what constitutes taxable income in the US and only count activities that take place in the US, such as selling a physical product from physical premises.
Accidental tax evasion is probably very common with foreign-controlled, foreign-owned, foreign-operated US entities but for smaller amounts, the IRS is unlikely to ever hear about it let alone bother going after someone. But the risk is still there.
Trust
Trusts are regulated under various laws. 32 states in the US have enacted some form of trust law, based on the Uniform Trust Code (UTC).
However, the probably most infamous trust jurisdiction is not one of these 32: South Dakota.
South Dakota
Dynasty trusts in South Dakota enable families to skirt estate taxes indefinitely. The secrecy and asset protection surrounding these trusts match those of offshore jurisdictions.
Others
Nevada, Delaware, Alaska, and Wyoming are also popular trusts states, the latter however not allowing self-settling trusts.
The IRS estimates a loss of tax revenue of at least 150 million USD from wealthy Americans moving funds into trusts in states such as these.
Conclusion
For non-resident non-citizens, the US can be a very attractive tax haven. An LLC can be formed by simply filling in a form on a website and paying the $300 or so by credit card. Then wait a few days and your entity will be up and running.
There are usually no KYC or ID controls in place for incorporation, making it a simple process to form a US entity under completely bogus details. This of course is illegal and can have severe repercussions, but it’s a gaping weakness and one which no one seems particularly interested in fixing.
It is also the (possibly) most secretive of all onshore jurisdictions. KYC checks are entirely optional for registered agents, with most of them not asking for a single document to prove that you are who you said you are when filling out the order form.
Banking in the US is generally good but it’s difficult to get in as a non-resident.
Taxation requires care and diligence, but used correctly, a US LLC can be a very attractive solution for businesses with no activities or sales in the US.
There may be circumstances under which even a non-resident non-citizen could benefit from a US trust but there is generally no advantage over trusts in more established jurisdictions such as Cook Islands or Bermuda.
Hi Streber
When are you coming back to write new articles?
You are missed.
If a Non-US person with residency in an AEOI-country opens an individual bank or online brokerage account in US
– Does one get reported to his country of residence?
If not, taking into consideration setup and annual fees, on-going paperwork & bureaucracy
– what are the benefits of going the trust and/or llc-route, generally speaking, for wealth management purposes for a family?
Answered here: https://www.streber.org/forums/topic/aeoi/#post-2751
Hypothetical situation.
John is a US Citizen.
He lives overseas 330+ days a year.
He does not have permanent residence—a perpetual traveler.
He plans to sell physical products on Amazon USA.
Should he:
A) Sell through a US LLC with US Bank, claim FEIE, while paying 15.3% SECA.
B) Sell through Anguilla IBC with Singapore Bank. Pay maximum FEIE salary + 0% SECA & retain IBC earnings.
C) Sell through a US LLC with a Singaporean Bank. (Don’t know if Singapore accept US personal/business customers)
The Antigua IBC structure provides the most tax savings. Potentially zero tax if it pays FEIE salary & retain earnings.
But it’ll pay 30% withholding to Amazon selling as a third-party retailer.
Yet…if the IBC wholesales to distributors around the world, it’ll forego tax withholdings in any country.
What would you say are the pros and cons of each structure?
Hypothetical John needs to go speak to a Hypothetical Tax Adviser.
Option A sounds nice and simple.
Option B sounds very close to the illegal activity of tax evasion.
Option C just sounds like an unnecessarily convoluted version of Option A.
Can’t really go into more detail than that. What you need is really a tax adviser to look at everything in your structure. Selling physical products as a US citizen or US soil, you’re going to have a hard time setting up a tax-reducing structure that’ll hold if questioned by the IRS (or courts), unless your operation is large enough that you can establish a substantial and primary foreign presence.
Option A it is.
Thank you for being a voice of reason.
Thank you for offering all this precious information.
I’m a resident of Belgium and want to form an offshore company + corporate bank account.
I’m hesitating between the following combinations:
1. USA Delaware company + USA corporate bank account
2. Panama company + Panama corporate bank account
3. Bahamas company + Hong Kong company bank account
Any suggestions? The USA package is the cheapest although it only offers US$ accounts, no multi-currency
Thanks a lot
Hi fellow Belgian here! Good idea to post your question on the forum. You will get more input from more people.
Thank you Balboni. If you have any offshore experiences to share as a Belgian citizen, I´m very interested to hear them
As long as you live in Belgium, you are going to end up paying Belgian tax unless you invest so heavily in your business that you can establish actual control and management of the company in Delaware, Panama, or Bahamas. Nominees won’t be enough. You need actual staff and executive directors.
Option 1 has the advantage of looking the most proper and reputable. It’s strange that the bank won’t open foreign currency accounts. That’s usually not a problem with US banks (it’s a hassle but they’ll do it in the end). Are you sure it’s the case and not just something your service provider has said? Transfers between US and Europe can get expensive, if you plan to move the funds.
Option 2 is good in that you are keeping company and banking in the same jurisdiction. This gives your structure a sense of integrity in some people’s eyes. An often forgot cost when looking at Panamanian incorporation is that you need three directors, and that Panama has public records.
Option 3 is unclear what sort of benefits it has.
Of course, it depends on what you are doing, how you do it, who you are, how much money is involved, and so on. I can’t go into that level of detail here but I would guess based on the vast differences between the three options (ranging from high to low secrecy, high to low reputability, and being all over the world) that you probably need to determine what you actually want to achieve with your structure and, based on that, approach an international financial adviser.
Hello Streber and thank you for your reply.
I forgot to mention that my purpose is asset protection. The Company will not be doing any business at all.
For Delaware Company – US Banking you are right. The Service Provider told me multi-currency accounts are not available. But it´s good to know I could ask foreign currency accounts once the bank account is established. Because my only purpose is asset protection, currency diversification is a priority for me.
Also, besides being the cheapest, the USA package also requires less documentation than Panama or Hong Kong. The documents Panama/HK ask for Banking are sometimes difficult to obtain.
When you say “ranging from high to low secrecy”, do you mean Option 1 being high secrecy and Option 3 low secrecy? Or vice versa?
Now that you told me the US bank will be able to offer multi-currency accounts, I think Option 1 will be my choice. Less expensive than the other ones and not too difficult for documentation and KYC requirements.
Now, let’s be clear. I can in no way guarantee that you will be able to open a foreign currency account. I’m just saying that in my experience, it’s usually possible even if the bank might be resistant at first.
Asset protection is extremely complex. I trust you have sought or will seek advise on the matter because the three options you have mentioned aren’t in and of themselves asset protection structures. Your assets might be safer in a corporate entity than in your own name – but there is a lot more to consider than just that.
Option 1 could be the most secretive in that US rarely gives out information. Otherwise, option 2 or 3 are probably more secretive, at least on paper. Depends on what EOI treaties are in place and are applicable.
Thank you for your insightful comments Streber.
Yes, I will form a corporate structure, this account will not be in my own name.
As for EOI treaties, seems this will redundant with the forthcoming OECD common reporting standard. I’m still not sure about which jurisdiction to choose. Hong Kong is the most attractive because of a diverse selection of currencies with the bank account.
If by mishap, the USA bank would not offer me foreign currency accounts, I’m stuck with the US dollar, even if it weakens in the future.
Because of this, my choice seems to go to Hong Kong again. It’s not an easy choice.
Any suggestions?
I don’t want to come off as dismissive but what you are asking is something that requires hours if not days of careful analysis to answer correctly. Analysis of your situation, your expectation, the financial situation, risks and how you view these risks, tax implication, and so on and so forth.
The best suggestion I can really give is that you take a few days to go through what you really want and expect – and can reasonably predict for the future. With these requirements, go out in the world and identify which jurisdiction, bank, and set up works best for you. A lot of people take the help of a financial adviser to work this out, especially if it’s something as complicated as international taxation or asset protection.
Your list contains Panama. But why not Costa Rica or The Bahamas?
You have Delaware. But why not Wyoming or Nevada? Oklahoma? New Mexico?
You also keep returning to Hong Kong. Why Hong Kong over Switzerland, UAE, Singapore?
Why is any of this better than forming a local Belgian company with a Belgian bank account? You are still answerable Belgian courts at the end of the day.
I get the impression there is a lot of things you probably should determine before it comes down to picking jurisdiction and bank.
Thanks for all your work and informative articles.
I have done a lot of research online and just can’t get a specific answer. Maybe you don’t know? As an American and if I open up a bank account in Belize, I was told by one bank rep at Atlantic Bank, that they do not report to FATCA if it is less than 250K for corporate account and 50K for individual accounts. So is this the policy of most banks who have FATCA agreement? You see, I am not really sure if I believe them, I don’t want to make stupid mistake because of misinformation. I don’t think I will have anymore than 50K in account so should I be more or less confident that my info will not get shared with IRS? Or should I be skeptical. Thanks.
There are exemptions available for lower-value accounts. The initial focus of FATCA is accounts valued one million USD and up but FFIs are also required to look for accounts down to 250,000 for entity accounts and 50,000 for personal accounts. However, a lot of banks are playing it safe and being over-compliant by just reporting all US accounts. The banks have nothing to lose from doing that (other than the time it takes to generate and send the reports).
+1 for Malta. See here and check whether it makes economical sense to you:
http://www.legal-malta.com/articles/malta-global-residence-programme
What bugs me about this article is:
Care-of, hold-mail, or mail-forwarding address in the US;
Literally hundreds of millions of people use mail/freight forwarding services in the USA for shopping purposes without any ties to the US whatsoever. Do you think IRS is desperate enough to go after them in an attempt to save the sinking ship?
First of all, let me say thank you for your detailed answer!
Do you have any idea about how would it be possible to successfully hide my income?
Malta and other territorial taxation countries wouldn’t work for me because my income is considered as trading income rather than capital gains therefore it’s not foreign sourced.
The US is not a big deal since I’m not a citizen or a green card holder. I was just curious.
So, if I live in London and I have a residency in Dubai (with the same passport because currently I do not have a second passport) for this purpose and I have a Dubai phone number, I rent an apartment there, I have a local bank account and utility bills plus I use a VPN service to login to my bank and brokerage accounts then what would be the case? The brokers and the banks would see that I’ve logged in from Dubai, they could reach me on my Dubai number, the time zone is almost the same (negligible difference). Obviously I would never use that money, would not spend anything from those funds, I wouldn’t use a foreign card at all. I would use this structure with my Dubai address to accumulate tax-free investment returns and one day if I choose to retire then I would move to Dubai or The Bahamas and I would cash it out.
After reading your comment now I know the bank might report my bank account despite all the evidences I gave to them so it’s a huge risk and I don’t see any solution to this.
Alternatively I’m thinking about relocating to Monaco but it’s really pricey. The problem is that I prefer to invest/trade through a company because of the limited liability and as we both know my company would have to pay a 33.33% tax in Monaco.
I was thinking about how to avoid this and to have limited liability at the same time. My “solution” is to setup a PTC (private trust company). I would be the settlor and the beneficiary as well and in order to gain the limited liability I would use an Ltd as the trustee. Obviously this Ltd would be owned and managed by me but this would give me the limited liability because otherwise the trustee (me) would face unlimited liabilities.
What do you think about this Monaco solution? Could this work? Would this really be tax-free? Would they accept this sort of structure and wouldn’t they say that I have to pay the 33.33% tax because I’m using this for tax-avoidance?
Thank you in advance for your valuable answer! Your knowledge always makes me feel like a student.
In your London/Dubai example – you could potentially and very likely get around AEOI. One risk to factor in is the repercussion from banks/financial institutions (and even tax authorities, depending on how far you take this charade) if you get caught. The funds would probably be frozen until you obtain a court order saying otherwise. I see these type of structures quite a bit and sometimes they work, and sometimes it goes very badly. And, yes, there is a risk still that the bank will report you to the UK – especially since UAE does not tax income or wealthy anyway.
The Monaco idea could work, although it might not be fully compliant. It’s not like the Monegasque authorities spend a lot of time digging around in their residents’ tax affairs. Using a trust or foundation or other to separate yourself from the company might help, but since operations and control of the company take place in Monaco, it is probably a Monegasque company for tax purposes and therefore should pay the 33.33% tax.
Thank you for your answer!
I think I wasn’t clear with my description regarding Monaco so let me explain this in-detail.
For instance in Guernsey anyone can setup a Private Trust Company if this PTC does not offer services to anyone else except the person who has setup the PTC.
So I create a regular LTD in Guernsey which will be Trust company providing trust services only to me. The shareholder of this LTD is a purpose trust. The settlor of this purpose trust is me and it has no beneficiaries since the purpose of this trust is just to hold the shares in the PTC. The PTC’s director would be a BVI Ltd which would act as a trustee. The owner and the director of this BVI Ltd. would be me. It would have no bank accounts and I would create it with nominees. I would use nominees to hide myself from the public and not because of tax purposes.
Then I would create a “regular” trust with this PTC where I’m the settlor, the trustee (with the BVI Ltd) and the beneficiary as well. This Trust would have a brokerage account in the US with TD Ameritrade. So the investments would be held by the trust and as the trustee I would pay some income to the beneficiary (to myself).
You can check this here: http://www.mourantozannes.com/media/451290/guernsey_private_trust_companies__ptcs_.pdf
The difference between my structure and this is that I would not use a holding or trading company instead I would hold the bank and brokerage accounts on the name of the trust.
As far as I know trusts are flow-through entities therefore only the beneficiaries (me) are liable to taxes therefore I could potentially avoid to corporate taxes.
The only questionable thing is what is the case if Monaco says that they classify me as a sole-trader because of this structure and I would be subject to the corporate taxes anyway.
What’s your opinion?
Regarding to the London/Dubai structure: I would not use any Dubai based company or banks. I would get the residency and I would not use my Dubai FTZ company. Instead I would setup an offshore company with my Dubai address and I would open a brokerage account for this company with TD Ameritrade in the US or with InteractiveBrokers in Singapore just to mix the jurisdictions. However now I understand that it’s risky because they can report my income if they feel like I’m not telling the truth regarding my tax residence.
Suppose you were doing this in a tax aggressive jurisdiction – Germany, Sweden, Norway, Australia, et cetera – then this structure wouldn’t fly. You would be reliant on non-action or secrecy. The company is being operated and controlled from where you live and that makes it resident there (in nearly all cases). Convoluted structures are disregarded and a tax authority (or court) would look at beneficial ownership, ultimate beneficial ownership, or effective beneficial ownership. In your structure, it would probably come down to effective beneficial structure since you are the effective beneficiary of what the company does.
Trusts are not flow-through entities. In fact, trusts aren’t entities at all. They are agreements. A PTC is an entity but unless the PTC is set up as a pass-through entity (i.e. an LLC, LLP, or other partnership) is not a pass-through entity either. Taxation of trusts gets complicated. Does it count as capital gains? Income? Profits? Dividends? Neither, other? Depends on the exact nature and structure of the trust.
However, because you are (or would be) doing it Monaco, it’s unlikely that the tax authority would care. If they were to look into your finances, which in an of itself is quite unlikely, they would see income coming from abroad and provided there is nothing obvious tying your residence in Monaco to the company, chances are they won’t care and just look the other way.
Thank you for the response!
I think I’m still not clear with my description so let me explain my situation in-detail. I trade stocks, bonds and currencies. The applicable tax rate in the UK is really high. Since I make more than I need I was thinking about this:
I could form an FTZ company in Dubai to get the residency permit. Then with my Dubai address I would form a company in a zero tax jurisdiction and I would open a bank and brokerage account for this company for instance in Singapore.
I still don’t know how could they find this out? Again, I would NEVER use the money I make in this structure. Seriously, never! I would never transfer money to my personal bank accounts from this structure and I would not have a credit card to this money
I simply doesn’t need because I have my brokerage account on my own name with my UK address. So it’s sort of like a mirror trading. I trade the same stocks with both accounts. The only difference is one is visible to the HMRC but the other one with my Dubai address is not. Again, I would NEVER ever use the money I’ve accumulated in my offshore company with my Dubai address. Maybe when I turn 60 then I will physically relocate to Dubai (for real) and I will live off my accumulated funds.
Regarding Monaco, the type of income would be the same. Trading income. NOT capital gains, but trading income from stocks, bonds and currencies.
My type of income is definitely not capital gain because I trade a lot, with leverage and my trades doesn’t last for more than a few hours or days.
If we are talking about the illegal activity of tax evasion then sure, your structure might hold. The bank would have to spend an unusual amount of time researching you in order to see that your UAE residency is not actually where you live but rather in the UK.
What you are doing would in all likelihood be considered unlawful, should it ever reach a British court.
The bank may find your UAE residency suspicious but as long as you aren’t American, there isn’t a lot of effort spent on questioning clients’ residences.
First of all, let me say thank you for your detailed answer!
Do you have any idea about how would it be possible to successfully hide my income?
Malta and other territorial taxation countries wouldn’t work for me because my income is considered as trading income rather than capital gains therefore it’s not foreign sourced.
The US is not a big deal since I’m not a citizen or a green card holder. I was just curious.
So, if I live in London and I have a residency in Dubai (with the same passport because currently I do not have a second passport) for this purpose and I have a Dubai phone number, I rent an apartment there, I have a local bank account and utility bills plus I use a VPN service to login to my bank and brokerage accounts then what would be the case? The brokers and the banks would see that I’ve logged in from Dubai, they could reach me on my Dubai number, the time zone is almost the same (negligible difference). Obviously I would never use that money, would not spend anything from those funds, I wouldn’t use a foreign card at all. I would use this structure with my Dubai address to accumulate tax-free investment returns and one day if I choose to retire then I would move to Dubai or The Bahamas and I would cash it out.
After reading your comment now I know the bank might report my bank account despite all the evidences I gave to them so it’s a huge risk and I don’t see any solution to this.
Alternatively I’m thinking about relocating to Monaco but it’s really pricey. The problem is that I prefer to invest/trade through a company because of the limited liability and as we both know my company would have to pay a 33.33% tax in Monaco. This could be minimized by paying myself a high salary but Monaco doesn’t really like this above a certain level.
I was thinking about how to avoid this and to have limited liability at the same time. My “solution” is to setup a PTC (private trust company). I would be the settlor and the beneficiary as well and in order to gain the limited liability I would use an Ltd as the trustee. Obviously this Ltd would be owned and managed by me but this would give me the limited liability because otherwise the trustee (me) would face unlimited liabilities.
What do you think about this Monaco solution? Could this work? Would this really be tax-free? Would they accept this sort of structure and wouldn’t they say that I have to pay the 33.33% tax because I’m using this for tax-avoidance?
Thank you in advance for your valuable answer! Your knowledge always makes me feel like a student.
I’m curious to see your opinion about the following “solution”.
So, as we both know the banking secrecy ends in 2017 in most of the reputable banking jurisdictions for all citizens, trusts, foundations and for all type of business entities because of the OECD Common Reporting Standard. There are countries which adopts it one year later in 2018 though but it’s a negligible difference.
Well, here is my case for instance. I live in the UK as a European citizen (not British). I have a personal bank account in Singapore which used to be good for many years but from 2017 they will share my account details with the UK automatically. I’ve studied the OECD’s “book” to find loopholes but I couldn’t find any that I would classify as reasonably safe to use.
After that I’ve started thinking the opposite way. How do they share your information and how do they determine your residence? Obviously based on your permanent home address. Consequently the solution seems to be straightforward for those who can afford an expensive and robust structure.
In my opinion all I have to do is to find a country which is willing to issue residence permits for foreigners with the lowest requirements and where you do not have to spend more than a few days a year to maintain your resident status. The Bahamas looks good for this purpose. You have to rent a dirty cheap apartment, put the utility bills onto your name, get a local phone number and pay for a mail forwarding service to the UK.
Once it’s done create a private foundation in Panama with nominees, without bank account to mitigate the risk, form a company in a highly secretive jurisdiction that will be owned by the foundation and open a bank and/or brokerage accounts for this company outside of Europe with your Bahamas address and phone number.
It’s not cheap for sure and might costs as much as $25,000 a year but in my opinion this is the least risky solution since the bank will be convinced about that you live in The Bahamas and they will share the bank account details with The Bahamas only. If you want to be extremely careful then you can purchase a cheap Caribbean passport and do this with that document for additional security.
What is your opinion about this? Of course there are other countries which fits to these parameters not just The Bahamas but the key point is that whether it’s possible to make tax-free investments with this solution or not!? What do you think what are the potential pitfalls?
[ Is it riskier if I would live in the US and I would do this with a second passport? ]
Thank you in advance and have a great weekend!
If the bank however suspects that you do not live where you claim to live, they can still report back to your country of citizenship. Although you might have the utility bills to prove it, if a bank for some reason becomes highly suspicious, they will start looking at things like IP address you log in from and time of day in Bahamas that you log in or message the bank. They might also look you up on social media and if your LinkedIn profile states that you work in Amsterdam, they might start asking a lot of uncomfortable questions.
It is riskier if you live in the US since the IRS is extremely aggressive. Banks will (or at least should, and risk penalties for failing to) monitor continuously for signs that account holders are US persons. If discovered, they will notify US authorities and should things not line up with your US tax returns, you have just created quite a mess for yourself.
However, even if you consider the risk of being caught low, the repercussions should you get caught can be far worse as a US resident than as a resident in some more relaxed jurisdiction (i.e. Malta, Cyprus, where you can legally live as an EU citizen).
In fact, you might want to consider setting up a residency in Malta (but, optionally, not domicile yourself there). The bank will report your bank account to the Maltese IRD which will see that you are a resident who has a foreign-sourced income and unless you remit it into Malta, it should fall outside of Maltese taxation so they won’t care. As an EU citizen, this is a lot easier than bothering with some faraway residency.
A second citizenship may be beneficial in that citizenship is used as a last-resort tie-breaker in case of residency uncertainty. If a bank doesn’t fully believe that you live in The Bahamas, they will probably play it safe and report to your country of citizenship instead of The Bahamas (or both).