The following is a guest post by Attorney Joel Nagel on offshore business taxation.
Question: What are the tax considerations for having a U.S. owned offshore business?
When thinking about active offshore business taxation and how to plan an international operation, there are three tracks to consider:
- U.S. owned businesses with no employees abroad (shell companies),
- U.S. owned businesses with employees abroad (offshore businesses), and
- Foreign joint venture where U.S. person(s) own 50% or less.
This article is on the taxation of active offshore businesses. It does not cover intellectual property or passive income.
A “U.S. owned business” is one where U.S. citizens, residents, or green card holders own or control more than 50% of the company.
Ownership means U.S. persons directly or indirectly (through family or structures) hold the stock of the company.
Control of the business means voting rights or other measures of control, such as directing transactions, controlling distributions, etc.
“Control” is meant to target offshore businesses set up with nominee shareholders, officers and directors. This is where the true beneficial owner doesn’t appear in the corporate documents but is pulling the strings behind the scenes.
Let’s Get to the Heart of Active Offshore Business Taxation
When U.S. persons own an offshore corporation, and it has no employees and no operations abroad, we call this an international shell company.
Shells are offshore corporations used for
- risk mitigation,
- international banking,
- and asset protection.
All of that is to say that an offshore corporation without foreign employees can be used for business and asset protection purposes only. This offshore business does not provide its U.S. owners any U.S. tax benefit.
An offshore company that doesn’t have employees and operations outside of the U.S. is tax neutral. Profits earned are being generated by work done by people in the United States and are thus U.S. source income taxable in the U.S. as earned.
U.S. source income may not be held in the offshore corporation tax deferred. Income generated by work done in the U.S. is taxable in the U.S. as earned, no matter the structure you put up abroad.
Offshore Businesses Owned by the U.S. but Operated Abroad
The next category is an offshore business owned by U.S. persons but operated abroad. It is an international business with employees and management outside the U.S. that runs independently (without significant control by persons living in the US).
An offshore company, where the “mind and management” of the business and the work to create the income, are both outside of the United States, generates foreign source income.
Foreign source income is not taxable in the US until it’s transferred from the offshore company to the U.S. owners or otherwise “repatriated.”
That is to say, foreign source income from an active business can be held in an offshore corporation tax deferred. When it’s paid out to the U.S. owners (usually as a dividend), it will be taxed in the United States.
Special rules may apply to income earned from services. This article does not consider Subpart F and Foreign Base Company Sales or Service income issues.
Foreign Joint Ventures
The last category is a foreign joint venture where U.S. person(s) own or control 50% or less of the business. When you have a true joint venture with foreign partners, and not simply nominees, you have a lot of tax planning options.
In most cases, a foreign joint venture is only taxed in the U.S. on U.S. source income and when dividends are paid to U.S. shareholders. As foreign joint ventures don’t typically do business in the United States and don’t have U.S. source income, they should operate tax deferred.
I also note that foreign joint ventures avoid Subpart F issues and have reduced U.S. filing obligations.
I hope you’ve found this article on offshore business taxation of active businesses to be helpful. For more information visit NagelLaw.com.
About Joel Nagel
Joel Nagel is a U.S. licensed attorney who specializes in international business tax planning and offshore asset protection. Mr. Nagel has been practicing for over 20 years and is considered one of the top experts in planning, structuring, and operating an offshore business in a tax efficient manner. He is also the former Ambassador for Belize to Austria.
Joel Nagel sits on the boards of a wide variety of global companies including banks, real estate developers and online publishers. He brings a unique skill set and real world experience to each engagement.
Joel is a hands-on, in the trenches lawyer working on behalf of his clients. No matter the size or scope of your offshore business, he’s “been there and done that.”