Trump’s tax plan could be an amazing deal for offshore companies and expats. If you’re already structured offshore, or are a legal resident of a foreign country, Trump’s tax plan could be a goldmine for you and your business.
These new laws change decades of US tax policy towards international businesses and US citizens living and working abroad. Here’s what you need to do to get ready and to maximize the savings from Trump’s tax plan.
The section of the tax law change that get’s the most press is that on intellectual property. US companies move new IP to a low tax country like Ireland and charge their US and EU divisions for the use of that technology. This moves a good amount of their corporate profits out of the US and our 35% tax rate to Ireland and it’s 12.5% rate
The Apple’s and Google’s of the world have amassed $3.1 trillion offshore and President Trump wants to incentivize them to bring it home… and close this loophole.
To do this, the Senate’s version of the tax law would lower the US rate on certain IP gains to 12.5% and lower the corporate rate from 35% to 20%. A 12% tax on previous year’s retained earnings (cash holdings) and 5% on non cash holdings would be taxed at only 5% when repatriated.
Companies will have up to 8 years to pay these taxes and repatriate their offshore earnings. It’s expected most would repatriate their cash over 2 or 3 years, with billions of dollars rolling into the treasury over the remainder of President Trump’s term.
In order to prevent the future transfer of US revenue offshore, the Treasury would charge a 20% tax on dividend payments to foreign entities. This would put a stop to the largest of the offshore tax loopholes.
Finally, the new Trump tax plan would freeze inversions. Any company that does an inversion within 10 years of the new tax law will be taxed at the current 35% rate. That is to say, their corporate tax rate in the US will go up from 20% to 35% as punishment for moving their headquarters to a foreign country.
Future corporate profits generated in the United States would be taxed at 20% and profits earned abroad would not be taxed in the US… and this is the potential goldmine for you, me, and the multinationals.
The United States currently taxes it’s businesses and citizens on our worldwide income. No matter where you live, you must pay US tax on your capital gains, business profits, and salary. This is all set to change as the US moves to a territorial tax system.
The US is the only developed nation on earth with a global tax system. Every other country is on a territorial tax program with income earned within their borders is taxed and profits generated abroad are not. For more, see: Which Countries Tax Worldwide Income?
If you’re a US citizen living and working abroad, and you qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 in salary from your US tax return in 2018. If you earn over the exclusion amount, you pay tax on the difference in the US.
There are two ways to qualify for the FEIE. You can be out of the US for 330 out of 365 days or you can be a legal resident of a foreign country with that country being your “home base.”
The 330 day test is easy to understand… just be out of the US for the prescribed number of days. Many try and fail to meet this test because they spend more time in the US than allowed. Missing your 330 by even one day means you pay US tax on 100% of your worldwide income (the FEIE is not prorated).
The residency test takes effort, and usually some investment, to become a legal resident. But, once you have that residency visa, you can spend more time in the US and you have little risk of losing the exclusion.
Trump’s tax plan would do away with the FEIE in 2019 and eliminate the 330 day test. Those who qualify as residents of a foreign country could exclude 100% of their non-US income from their US taxes. That is to say, most expats with residency visas will pay zero to Uncle Sam, even on capital gains and income over and above the FEIE amount.
The same goes for profits generated by Americans abroad earned in offshore corporations. As a foreign resident, you’d pay zero tax on business income and dividends earned in a foreign corporation. Your business would only pay US tax on US source income.
But, here’s the catch. You must be a resident of a foreign country for a full tax year. Also, it takes time and effort to get that residency visa from any quality country.
While it doesn’t matter which country you select from a US tax perspective, most of our clients are focused on low and zero tax jurisdictions. The most popular is Panama, where you can get residency relatively quickly with an investment of $20,000 in their reforestation visa program.
This compares to $500,000 to $1.2 million in EU programs. Panama is the lowest cost and most efficient second residency program for US citizens.
I hope you’ve found this article on why Trump’s tax plan could be a goldmine for offshore businesses and expats to be helpful. For more information on structuring your life and your business abroad, and negotiating a second residency in 2018, please contact me at firstname.lastname@example.org or call us at (619) 550-2743 for a free and confidential consultation.