Cayman is one of the most beautiful islands in the Caribbean and a top offshore banking and investment jurisdiction. The Cayman Islands are the pinnacle of the international tax and business world. Here’s how to move your business to Cayman and pay zero US tax.
Cayman has been the jurisdiction of choice for large banks, funds, and law firms for decades. However, the costs and challenges of getting a visa have kept small businesses out. Then, in 2015, the islands opened up tax free zones that included residency permits and work visas, which is what those of us with portable businesses need to operate efficiently.
Basically, you can now move a small service business to Cayman, get a work permit and residency visa in a few days, and be up and running immediately. There are no requirements to hire a certain number locals or buy a home. All of the red tape has been eliminated for qualifying businesses setting up in approved areas.
These new tax free zones provide the following benefits:
- No corporate, income, sales or capital gains tax in Cayman Islands – tax payable in the USA is a complex matter summarized below.
- 100% foreign company ownership permitted
- A 3-4 week fast-track business licensing regime
- Renewable 5-year work/residency visas granted in 5 days
- Cutting-edge IT and business infrastructure
- Offshore hosting & payment gateway
- Minimal Government regulation
- No Government reporting or filing requirements
- A tech cluster with massive cross-marketing opportunities
- ’One-stop-shop’ Administration services
- Work visas for your staff and residency permits for your spouse and children at no additional cost.
Note that you must operate your business in one of the Island’s tax free zones to get these benefits. Also, your business must in one of the pre-approved industries.
Qualified businesses include:
- Internet & Technology
- Media, Marketing or Film
- Biotechnology & Life Sciences
- Commodities & Derivatives
- Maritime Services
The above is how to move your business to Cayman and what you’ll need to live and work (for yourself) on the island.
This business will pay zero tax in Cayman. If you’re not from the United States, this probably means you won’t pay tax to any country.
If you’re a US citizen, your situation is more complex. Uncle Sam wants his cut no matter where you live. The US is one of the very few countries that taxes non-resident citizens and green card holders on their worldwide income.
Fortunately, the residency program in Cayman is designed with Americans in mind. It allows you to qualify for the Foreign Earned Income Exclusion using the residency test rather than the physical presence test. Residency in Cayman means you can spend 4 months or more in the US each year. Without residency in cayman, you’re only allowed 35 days a year in the States under the physical presence test. Having residency will make qualifying for and using the FEIE much easier.
By qualifying for the Exclusion, your first $102,100 of business income will be tax free in the United States. You’ll form a corporation in Cayman, deduct your ordinary and necessary expenses, and draw a salary of up to $102,100. This salary will be reported on IRS Form 2555 along with the FEIE.
What happens if you earn more than $102,100? You have two options:
You can take out all of your income as salary. You’ll pay ordinary income tax rates on the excess over the FEIE amount. So, your first $100,000 is tax free and the amount over this is taxed at 35% or more.
For example, you net $500,000 and take it all out as salary. The first $100,000 is tax free and the excess $400,000 is taxed at about 35%. Thus, your US tax bill is $140,000. This is a rough estimate for illustrative purposes.
Note that using a Cayman corporation for your business also eliminates Self Employment tax. If you don’t form a Cayman corporation, US SE tax will apply at 15% to your net income.
You can also hold income in excess of the FEIE in your corporation tax deferred. Hold the $400,000 in your foreign corporation and you will defer US tax on those profits indefinitely. You will only pay US tax when you take a distribution, presumably at nonqualified dividend rates.
That’s how to move your business to Cayman and operate tax free. I hope you’ve found this article helpful. For more information, please contact me at firstname.lastname@example.org. We will be happy to assist you get setup in Cayman or any other tax free offshore jurisdiction.