Tired of toiling away in a cubicle? Of being stepped on and abused by your boss? Here’s how to escape the rat race and start a business offshore. Here’s how to start a business offshore in 5 steps and become an offshore internet mogul.
We can’t tell you what business is right for you… just that it should be one that’s location independent. Most of our clients are internet marketers, Amazon publishers, or operate some other form of a portable business. If all you need is a laptop and some passion to get started, then you’re going in the right direction.
Once you have your business idea, here’s how to execute it in the most tax efficient manner possible.
- Form an offshore corporation is a business and tax friendly jurisdiction
Your first step is to form an offshore company in a country that offers you maximum privacy, protection, and that won’t tax your profits. You should also select a country that won’t require you to file taxes or go through an annual audit.
My top business jurisdiction is Panama. If you need advanced business banking, and might decide to live and work abroad someday, start off right with Panama.
If you plan to keep things simple, then you might go with one of the lower cost options. For example, Nevis, Belize, Cook Islands and Seychelles are all sold corporate structures.
One country missing from my list is Hong Kong. This is because Hong Kong now requires annual audits and tax reporting of all registered companies. You will also need a local secretary and to go through all kinds of hassles to keep the taxman out of your pocket.
Unless you must use a Hong Kong company (for example, because you’re doing business in China), keep it simple and go with Panama or one of the other options with zero reporting.
Note that an offshore company gets you privacy and asset protection. Unless you move abroad, or hire employees and operate an autonomous foreign division, you get no tax savings from your structure. That is to say, an offshore company is tax neutral (doesn’t increase or decrease your U.S. taxes) unless the work which generates the income within the company is done outside the United States.
- Open business bank accounts
Your offshore company might need 3 or 4 different accounts. Most start with a basic business account at a bank that doesn’t require a personal visit. There are several in the Caribbean and in the South Pacific (Cook Islands) that will open an account for your company via courier.
However, these banks charge high fees and have limited services compared to their larger counterparts in Panama. If you outgrow your “starter bank,” you will need to travel to Panama to open an international account.
Your third offshore bank account might be to manage retained earnings. As foreign sourced profits grow tax deferred in the corporation, you’ll want them to be working for you. We can set up managed accounts in Switzerland, Germany, Andorra and elsewhere.
Your fourth offshore account might be an ecommerce merchant account. While offshore credit card accounts are difficult to get, and the fees are higher than in the U.S., many prefer to operate outside of America. For more, see How to Get an Offshore Merchant Account.
- Become a resident of a foreign country
The next flag to plant is residency. Become a resident of a foreign country to increase your global footprint, create a “landing spot” for you and your family, and minimize your taxes when you’re ready to qualify for the Foreign Earned Income Exclusion.
When searching for a foreign residency, look for a country with a territorial tax system. These nations tax residents on their local income, but not foreign profits. If you’re selling online to persons and businesses outside of your country of residency, you’ll pay zero in local taxes.
My top territorial tax countries are Belize, Costa Rica, Hong Kong, Malaysia, Panama and Singapore. For a complete list, click here.
Of these, Belize and Panama have the easiest residency processes. For example, if you’re from a top 50 country, you can get residency in Panama with an investment of $20,000. For more on this, see Best Panama Residency by Investment Program.
- Qualify for the Foreign Earned Income Exclusion
If you’re an American, you need a plan to deal with the IRS. So long as you hold a blue passport, the U.S. government wants their cut of your income. No matter where you live, Uncle Sam must be fed.
If you qualify for the Foreign Earned Income Exclusion, your first $102,100 in salary in 2017 is tax free. That salary can be from your offshore corporation or from work you do for someone else.
If a husband and wife are both working in a business, they might each take out $100,000 tax free, for a total of $200,000 per year. If you net more than this, you can hold the excess in the corporation as retained earnings.
To qualify for the FEIE, you must be out of the U.S. for 330 days or be a resident of a foreign country. If you’re a tax resident of a foreign country, you can spend 3 or 4 months in the U.S. per year.
The 330 day test is over any 12 month period. Residency is for a full calendar year.
This is why I put foreign residency as step 3 above and the FEIE as step 4. Even if you’re not ready to commit to being out of the U.S., you should get residency now.
- Keep your company in compliance with the U.S. IRS
If you’re going to set up offshore, do it right from day one. Know your U.S. tax reporting obligations and have an expert on speed dial when questions come up.
For example, you’ll need to file a Foreign Bank Account Report if you have more than $10,000 in your foreign bank account(s). That’s $10,000 combined in all foreign accounts.
Next, your offshore corporation will need to report to the IRS on Form 5471. This is a full blown corporate tax return much like Form 1120. You’ll need to keep business records and account for expenses just as if you were operating from the U.S.
The key to a long and prosperous offshore business is tax compliance. The penalties for getting it wrong are severe and you don’t want to be looking over your shoulder when your business takes off.
- Bonus Round: Don’t forget about your IRA
If you’re going to commit to the expat life, don’t forget about your IRA. You can move your U.S. retirement account into an offshore IRA LLC, appoint yourself as the manager of that company, and be in total control of your investments.
You must follow all the U.S. rules, such as no self dealing, just as if the account were at a U.S. brokerage. But, if you play the game, you can keep the tax benefits of your retirement account and hold it offshore with checkbook control of your investments.
I hope you’ve found this article on how to escape the cubicle with an online business to be helpful. For more information on setting up an offshore business, please send me an email to firstname.lastname@example.org or call us at (619) 550-2743.