| Tax Favored Offshore Business Opportunities |
Smaller and smaller businesses are setting up offshore companies or are establishing joint ventures with foreign companies. These companies may not be prepared for the complexity and ambiguity of the tax rules that apply to doing business offshore.
Although some high income U.S. taxpayers have established a foreign corporation for the purpose of saving taxes, the great majority of foreign corporations owned by U.S. persons were formed because of a perceived opportunity to do business in one or more foreign countries.
In addition, the explosive growth of the Internet and World Wide Web have encouraged many small entrepreneurs to pursue business opportunties outside the U.S. and its territories.
It is legal and possible to set up a corporation in a foreign country and to avoid the payment of U.S. taxes on the profits generated by the foreign business -- but there are many complicated and devious obstacles in the U.S. tax law that must be avoided in order to accomplish this goal.
With many caveats, I can summarize the requirements for being able to have a foreign based corporation that will not subject the U.S. owners to tax on the current profits of the corporations.
- First, the business needs to generate more than 25% of its gross profits from the sale of products or services.
- Second, the business must utilize more than 50% of it's assets to produce income from a trade or business rather than from investments.
- Third, the businss profits should not be generated from favorable buying or selling arrangements with affiliated U.S. persons or businesses.
- Fourth, the major business functions of production, marketing, warehousing and administration should be outside the U.S. and the U.S. owners should not be active managers of the business unless they work outside the U.S.
- Fifth, if the foreign business derives significant revenue from the sale or use of an intangible asset, the U.S. owner of that asset should receive a fair royalty from that intangible asset.
- The corporation should pay taxes to its host country and
should be a resident corporation of that country. This precludes the
use
of an International Business Company in a tax haven country.
Their are other technical obstacles that apply to specialized industries like software producers, insurance, banking, mining and shipping.
In many cases involving small businesses, it would be more profitable for the owner to operate the business as a foreign LLC that elects to be taxed as a foreign partnership (with U.S. partners) or as a disregarded entity. An individual can receive up to $80,000 a year free of U.S. taxes by living and working outside the U.S. for at least 330 days out of 12 consecutive months.
Other planning alternatives may be available based on the specific facts and circumstances of a particular business.
Vernon Jacobs
(C) Copyright, 2004 All rights reserved.
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