Offshore Flag Theory for 2017, U.S. Edition
Offshore flag theory in 2017 is all about diversifying your international life. It’s also a roadmap to protecting your family’s assets and maximizing your privacy. This version of flag theory is directed at American citizens, as it covers tax and other considerations unique to us gringos.
Offshore flag theory shows you how to separate your business, investment, residency, citizenship, and tax lives into separate baskets. Plant multiple flags around the world in the most efficient jurisdictions… the country where you get the highest returns, which has the strongest business climate and low cost employees, that sells their citizenship at a low cost, offers the best asset protection, etc.
It’s all about diversifying your life and your holdings to minimize taxes and protect what you have from the government and civil creditors.
Here are the 6 primary offshore flags for 2017. Under each category you may have multiple sub-flags, but here are the major building blocks.
- Build your personal asset protection structure in a zero tax high security country.
Transfer ownership of assets to an offshore trust formed a max privacy and max security jurisdiction. You will need to put in the time to research each country and find the one that fits your needs. But, once that’s done, you’ll have a solid foundation on which to build your offshore life.
For example, Cook Islands might be the best offshore trust option for someone who wants to move a nest egg offshore and forget about it. However, costs are high and this is not the right structure for an active trader or business.
If you need total control, then you might choose a Panama Foundation and corporation combination. A Panama Foundation is a hybrid holding company and trust structure that gives you the best of asset protection, estate planning, and parent company.
After you have your base structure, diversify your country risk with subsidiaries or management entities in different jurisdictions. For example, a Nevis LLC, Belize IBC, and/or Seychelles corporation can be used as the settlor, founder, protector, and manager of a trust or foundation.
You can maximize the privacy of a Panama Foundation by adding a Belize LLC as the Founder. While Panama has a public registry of ownership, the “owner” can be an offshore company so only the name of this entity is reflected in the records. For more on this, see: The Bearer Share Company Hack
- Place your assets in a secure country that won’t tax your capital gains.
Open the bank and brokerage accounts outside of your country of incorporation. If you set up in Cook Islands, look to Europe for banking. If you set up in Panama, business accounts might need to be in there, but consider Cook Islands for retained earnings and investment management.
And, when you’re transferring cash out of the United States, don’t forget about your retirement account! Your IRA and 401-K are fully portable and can be moved offshore just like your personal and business accounts.
To move a retirement account out of harm’s way, form an offshore IRA LLC, convert the account to cash, and wire it to an international bank. You don’t need a fancy structure or trust… just a basic single member LLC owned by your retirement account.
Once the IRA is offshore, you’ll need to follow all of the U.S. rules. This means you should treat the account as a fiduciary managing the money for the benefit of the IRA. No borrowing from your IRA, or using it for your personal benefit. No renting a house offshore and living in it, no buying artwork for your walls, etc.
- Become a legal resident of a country different from your countries of incorporation and asset management.
Under the US tax code, your country of residence should be your home base. It’s where you plan to make your life. It’s where you depart from and return to when you travel. It’s where you put down roots.
And this concept of legal residency is an important one. As US citizens, were taxed on our worldwide income. If we qualify for the Foreign Earned Income Exclusion, the first $102,100 in salary earned in 2017 is tax free. This salary can come from a foreign employer (you are working for someone else) or from your own corporation (you’re working for yourself).
If you’re a legal resident of a country, you will need to be out of the US for 7 or 8 months of the year to qualify for the Exclusion. If you’re not a legal resident, then you must be out of the US for 330 of 365 days.
So, if you plan to spend time in the US, find a home base and get a residency visa.
One of the lowest cost residency options is Panama. A US, UK, EU or Canadian citizen can become a resident with an investment of only $20,000. If you’re not from a “friendly nation,” the investment amount will be $80,000 to $250,000.
And you can use your US retirement account to get the $20,000 residency package. For more on this, see: How to get Residency in Panama with your IRA.
- Incorporate your business in a country that won’t tax your foreign sourced profits.
If you’re living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can incorporate your business to operate tax free or tax deferred. Earn less than $100,000 and you will pay no tax. Earn more and you can hold the excess in your corporation as retained earnings.
An offshore business should be incorporated in a zero tax jurisdiction. A zero tax country is one that will not tax your foreign source income… money you make from selling to people located in another country.
Every country will tax local source income. If your Panama corporation is selling to Panamanians, you’ll pay tax in Panama on that portion of your profits. Operate an online business with no (or few) local customers, and you have only foreign sourced income with zero local taxes due.
For this reason, I recommend you incorporate your business in a country that doesn’t tax foreign sourced income. Next, setup in a country that’s separate from your investments, residency, and citizenship. A country where you have no ties but the corporation.
- Get a second passport and plan your escape from the IRS.
So long as you have a US passport, you will pay taxes to Uncle Sam. You might defer them with an offshore corporation, but that bill will come due someday. Also, capital gains and passive income are not covered by the Foreign Earned Income Exclusion. All citizens pay tax on those gains as earned.
If you want to get the IRS out of your pocket, you must give up your US citizenship. Before you can expatriate, you must have a new citizenship and passport in hand.
There are three paths to a second passport:
- Through ancestry – your parents or grandparents hook you up with citizenship.
- Through residency – you live as a legal resident in a foreign country for 5 years or more and then apply for citizenship.
- Buy a second passport or get one with an investment.
We can assist you with residency and purchase / investment options. In these cases, you have the option of paying for your second passport with time or with cash. You can spend 5 years to build up “credit” or give the government money and become a citizen.
As I said above, residency in Panama is one of the best deals around for US citizens. As with most countries, you can apply for citizenship and a passport after 5 years of residency.
If you can’t wait, many countries sell their passports. For example, if money’s no object, you can become a citizen of Malta with an investment of $1.2 million. This gets you a top tier passport with visa free access to the United States.
If Malta is out of your price range, consider Dominica. For $140,000 for a single applicant, you get a sold passport with visa free access to the European Union. I believe Dominica is the best purchase option available today.
If you’re not ready to expatriate, and just want a backup passport in case something goes wrong, take a look at the Dominican Republic. You can buy this passport for about $35,000 and have full citizenship in about 8 months from the date you receive your permanent residency card.
A second passport from the Dominican Republic doesn’t have the same visa free travel options of Dominica, which is why it’s priced so low. However, the government is working to add EU travel. If that happens, the value will jump over night.
I hope you’ve found this article on offshore flag theory for Americans to be helpful. For more information on how to structure your affairs offshore, or to buy a second passport, please send an email to email@example.com or call me at (619) 550-2743. I will be happy to work with you to plan your new life overseas.
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