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.
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
- El Salvador
- Marshall Islands
- Northern Mariana Islands
- Puerto Rico
- United States Virgin Islands
- United States Minor Outlying Islands
It is a currency of major circulation in 15 additional countries and four territories:
- British Indian Ocean Territory
- Cayman Islands
- Turks and Caicos Islands
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 – 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.
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.
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:
- New Jersey
- North Dakota
- South Dakota
Furthermore, the ULLCA has been introduced but not yet enacted in:
- 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.
While practically every state has LLC, there are some which are more popular than others. The main ones are:
- New Mexico
- South Dakota
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 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 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 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 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.
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 is more known for its ironclad trusts (more on those later), but sees some usage for incorporations.
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 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.
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.
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.
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.
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.
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.