Tips for Offshore Investors

U.S. persons are not prohibited from buying investments from foreign securities dealers or investments issued by foreign companies. However, the U.S. Securities & Exchange Commission does not permit foreign security dealers or issuers to sell securities to U.S. persons inside the U.S. In addition, if a foreign issuer or dealer wants to sell securities in the U.S., they must also satisfy the state securities department in each state where they may offer their securities.  If the foreign security is a variable annuity or life insurance policy, each of the 50 states requires registration and conformance with their respective rules.

Thus, a U.S. investor must go offshore to secure access to foreign investments that are not registered with the S.E.C. and the applicable state security departments or insurance departmerns for distribution within the U.S.

Foreign dealers or issuers who do not want to become embroiled in a dispute with the U.S. SEC or various state securities departments will refuse to sell their securities to any U.S. person or entity with a U.S. address.  Thus, the U.S. investor who wants access to foreign securities must physically go offshore and place an order offshore. For many foreign dealers, even that is not enough. They will not sell securities to a U.S. person at all. The U.S. investor must therefore establish an offshore trust or an offshore corporation in order to purchase foreign securities. The problem is that this leads to some unpleasant tax consequences for the U.S. investor.

The IRS does not really care if U.S. taxpayers buy stocks, bonds or other securities from foreign issuers -- or at least there is nothing in the U.S. tax code to specifically discourage such purchases. But, when a U.S. investor creates a foreign trust or foreign corporation in order to purchase foreign securities, the investor is suddenly subject to a host of very dismal and confusing tax rules.

If the U.S. investor decides to buy foreign securities through a foreign trust, the taxpayer must be prepared to comply with some very onerous and complicated tax reporting requirements. The grantor who puts money into a foreign trust will be treated as the owner of the assets of the trust and will be subject to tax on the income of the trust, the same as with a domestic revocable trust. If the trust grantor dies and the assets are left to a US beneficiary, there can be some unpleasant tax consequences if the trust income is not distributed each year.

When a U.S. investor utilizes a foreign corporation or international business company (IBC) to purchase and hold foreign investments, different sections of the U.S. tax law apply and often have the effect of converting any capital gains into ordinary income. This can be avoided by making an election to treat a single owner foreign corporation or IBC as a "disregarded entity". The election is made with Form 8832 and must be made within 75 days of the beginning of the entities tax year.

Further details about this subject are available at http://www.offshorepress.com/offshoretax/

Vern Jacobs
The Jacobs Report

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