Offshore Companies: A Guide to Asset Protection Strategies – Part 3

There’s typically a lot of empty moralizing that accompanies any mention of offshore companies and trusts. To the uninitiated, these legal structures are nothing more than shady money laundering tools that are more suited to mobsters and corrupt politicians than entrepreneurs.  

Let me be clear, if you’re internationalizing in an effort to hide your income and assets, then this description absolutely holds true. Underreporting business income is considered a crime in pretty much every jurisdiction, and any such attempt will be prosecuted to the full extent of the law under the category of tax evasion. In the US, that means penalties that can rise to well over $250,000 as well as a possible federal prison sentence of up to 5 years.  

However, when experts like Joel Nagel advocate for offshore companies and other mechanisms, they make sure to recommend fully legal strategies that exploit existing loopholes and exemptions in their clients’ home countries. This is known as tax avoidance and it is really the only way to effectively protect your assets from the government.

For laypersons, the difference between these two approaches may seem negligible, so let me give you a little example to illustrate the difference.

Tax Evasion

Tom is an American citizen that resides in the United States. He is the part owner of a profitable online business that sells mobile phone components to customers all over the world.  

In an effort to reduce his tax burden, Tom decides to incorporate his business and sets up an IBC (international business company) structure in Belize (zero local taxes on corporate income, capital gains and dividends) by the name of Tom LTD. He takes ownership of 70% of the company’s shares, and hands over the remaining 30% to a partner that also lives in the United States. All of Tom LTD’s earnings are collected in an offshore bank account in Belize.

  • Due to his tax residency, Tom is considered to be the operator of a US office of Tom LTD. From a tax perspective, that means his company is actively engaged in trade or business within the United States. Because Tom LTD operates solely out of this office, all income earned by the business (whether foreign or local) is subject to US corporate income tax.
  • Tom must file a US tax return for Tom LTD and disclose ownership of all his foreign accounts.
  • Any leftover profits that are available for repatriation to Belize are taxed at an additional 30% under something called the branch profits tax.  
  • Tom must also pay taxes on any dividend distributions from his company.  
  • Finally, Tom must pay taxes on any passive income earned through the company including investment income or interest on savings accounts because more than 50% of the company is owned by a US citizen. This tax is applicable whether the resulting profits are distributed to him or not.

In effect, Tom has worsened his tax situation. If Tom fails to follow any of these guidelines then on his he will be in violation of US tax law and will be considered a tax evader.

Tax Avoidance

Harry is an American citizen that resides in Hong Kong. He is the part owner of a real estate company that holds rental properties in the country.  

Harry registers an IBC in Belize to handle all income from these rental properties and sets up a bank account in the country as well. He takes ownership of 33% of the company and splits the remaining shares between two of his partners in Hong Kong. Harry accepts $99,000 a year in annual salary from his company and reports it on his annual US tax returns, he does not take any other distributions from the company (dividends, etc.)

  • Harry’s company isn’t engaged in trade or business within the US, so it is exempted from paying taxes on its income.
  • The company is now majority US-owned so its passive income is not taxable under US law.
  • The $99,000 Harry earns from his company is covered under the foreign earned income exclusion.

Based on this structure, Harry will not be legally liable for any additional taxes within the United States. This is tax avoidance at work.

Offshore Companies: A Guide to Asset Protection Strategies - Part 3Other Benefits of Offshore Companies

Tax avoidance is only part of the reason why someone would want to set up an offshore corporation; internationalization provides a number of other advantages including:

  • Protection Against Litigation – Offshore locations such as Singapore, Belize and Switzerland are known for their strict privacy laws that keep sensitive financial information, as well as details on shareholder and directors off of any published documentation. As a result, any potential claimant such as a disgruntled ex-employee or spouse will find it far more difficult to come after your assets held in these destinations.
  • Fulfill Legal Requirements – In jurisdictions where foreign citizens are barred from purchasing property, ownership of a local company will entitle you to purchase buy real estate in the country as well.
  • Stability – Political and economic unrest can threaten the safety and continued profitability of your business. By registering it in a stable offshore location you can insulate yourself against many of these risks.
  • Ease of Establishment – Countries like Belize, Hong Kong, and even the United States offer extremely conducive business environments where new companies can be set up with minimal red tape. In Belize, you can have your corporation up-and-running within a week and a half.
  • Top-Tier Banking Infrastructure – If your business currently operates out a less developed country then you may find it difficult to access many of the services and products that are taken for granted in Europe or the United States. It may also be far more difficult to move funds in and out of the country. By registering your company in a friendly jurisdiction such as Hong Kong or Bulgaria you can gain access to many of these facilities.
  • Simplified Succession – If a major shareholder in your company dies, then it will be far easier to arrange a transfer of ownership by arranging mergers that allow related parties to take control of the deceased individual’s foreign assets with ease.

Offshore Trusts

In my next blog post, I’m going to go over what many experts in this space consider to be the most secure legal structure available for asset protection – the offshore trust.  If you want a primer on some of the concepts discussed in this article, make sure to tune in to my podcast with Joel Nagel.

You can also download my infographic report 15 Global Strategies To Protect Your Wealth for some in-depth advice on how to deploy your own offshore strategies.

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ABOUT THE AUTHOR:

Mikkel Thorup is the host of The Expat Money Show podcast and the author of the #1 Best-Selling book Expat Secrets. He has spent nearly 20 years in continual travel around the world, visiting more than 100 countries including Colombia, North Korea, Zimbabwe, and Iran.

His goal now is to help Expats just like you to generate additional streams of income, eliminate your tax bill, and take advantage of offshore structures so you can travel the world freely and never have to worry about money again.