The tax benefits of an offshore corporation in 2018 will remain consistent with prior years. That is to say, there should be no changes to your offshore corporation in 2018 if President Trump’s tax plan become law.
The most common tax benefit of an offshore corporation in 2018 will be for those operating a small business and claiming the Foreign Earned Income Exclusion. The Exclusion will remain the same as previous years because Trump has indicated he will keep the FEIE in place as is.
If you’re living and working out of the United States, and qualify for the FEIE, you can exclude up to $102,100 of foreign income on your US Federal tax return for 2017. This amount should go up slightly for 2018… probably to about $102,900.
The FEIE applies to wages and salary earned by those working abroad. Wages can be a salary from any employer, even an offshore company you own. So, if you form an offshore corporation in 2018, earn business profits, and pay yourself a salary from that corporation, you can use the FEIE to reduce or eliminate US Federal taxes on that income.
Keep in mind that wages are paid from ordinary income earned by an offshore corporation in 2018. The FEIE does not apply to capital gains or passive income, even if earned by a corporation. This article is focused on active business income earned abroad.
In order to use an offshore corporation in 2018 to minimize your US taxes in this manner, you must qualify for the FEIE. To qualify for the FEIE, you must be out of the US for 330 out of 365 days or be a resident of a foreign country.
The 330 day test is easy to understand but difficult to qualify for. All you need to do is be out of the United States for 330 days during any 365 day period. So, be out for 330 days from April 1, 2018 to May 1, 2019 and you qualify for the Exclusion.
Many clients try and fail to meet the 330 day test. There always seems to be some important meeting or a family emergency that messes up their day count. The best laid plans of mice and men…
The problem is that you don’t get partial credit for your days out of the US if you use the 330 day test to qualify for the FEIE. You either qualify for the full exclusion or you don’t. If you miss your 330 by even one day, you lose the entire exclusion. Your offshore corporation will pay US tax on 100% of it’s profits in 2018.
Another issue for an offshore corporation in 2018 that attempts to use the 330 day test to qualify for the FEIE is Trump’s territorial tax system. Our President is attempting to install a territorial tax system that would dramatically change the way American’s account for our income.
If that happens, expect the 330 day test to be interpreted even more strictly or eliminated altogether. The 330 day test is not as compatible with a territorial system as is a residency test.
As a result, we’re recommending that all of our clients operating through an offshore corporation in 2018 get foreign residency as soon as possible. We don’t expect there will be big changes in 2018, but we do think you need to plan ahead for 2019.
Two reasons to secure residency as soon as possible is that 1) residency can take many months to complete, and 2) you must have it by January 1 of 2019 (the sooner the better).
The reason you should get foreign residency as soon as possible is that you must qualify for a full tax year. While the 330 day test can be used over any 12 month period, residency must be taken on a calendar year, or January 1 to December 31 of 2019.
Also, you need to break as many ties to your home country, and create as many ties to your new “home base” as possible. This takes time and something you should be working on throughout 2018.
Finally, where you get residency may impact where you setup your offshore company in 2018. So, residency should be started before you select your country of incorporation.
I suggest you get residency in a country that won’t tax your foreign sourced profits. For example, if you set up a business in Panama selling to US persons, Panama won’t tax your business income. If you sell to Panamanians, Panama will want its cut.
For a list of countries that won’t tax foreign sourced income, see: Which Countries Tax Worldwide Income?
You’ll find that there are many options when it comes to finding a tax friendly country. However, that list grows much shorter when you begin looking for an easy, low cost residency program.
I can tell you from experience that the best residency program for US citizens operating through an offshore corporation in 2018 is Panama. You can incorporate here and get residency with an investment of only $20,000.
Panama will give you residency with an investment of $20,000 in their friendly nations reforestation visa program. Other countries require you buy real estate at $250,000 to $350,000.
You can even get residency in Panama using your IRA or 401(k). Move your retirement account offshore and use that to buy the $20,000 reforestation package.
Finally, Panama doesn’t have a physical presence requirement. You can spend as much or as little time in the country as you like and keep your visa status. For more see: Best Panama Residency by Investment Program.
Of course, there are many residency options if Panama is not to your liking. So long as you’re willing to invest a few hundred thousand dollars in real estate or hire 5 or more employees, you should find a number of countries are open to you.
I hope you’ve found this article on the tax benefits of an offshore corporation in 2018 to be helpful. For more information, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.