Escape Artist
  • Features
    • Interviews
    • News
    • Field Notes
    • Trending
  • Your Escape Plan
    • Finance
    • Real Estate
    • Second Citizenship
    • Events
    • Shop
  • Destinations
    • Europe
      • France
      • Germany
      • Italy
      • Portugal
      • Scandinavia
      • Spain
      • United Kingdom
      • Rest of Europe
    • Central America
      • Belize
      • Costa Rica
      • El Salvador
      • Guatemala
      • Honduras
      • Nicaragua
      • Panama
    • Others
      • Africa
      • Asia
      • Australia
      • North America
      • South America
      • Middle East
  • Travel Tips
    • Know Before You Go
    • Packing List
    • Food + Culture
    • Health + Wellness
  • Subscribe
Escape Artist
  • Features
    • Interviews
    • News
    • Field Notes
    • Trending
  • Your Escape Plan
    • Finance
    • Real Estate
    • Second Citizenship
    • Events
    • Shop
  • Destinations
    • Europe
      • France
      • Germany
      • Italy
      • Portugal
      • Scandinavia
      • Spain
      • United Kingdom
      • Rest of Europe
    • Central America
      • Belize
      • Costa Rica
      • El Salvador
      • Guatemala
      • Honduras
      • Nicaragua
      • Panama
    • Others
      • Africa
      • Asia
      • Australia
      • North America
      • South America
      • Middle East
  • Travel Tips
    • Know Before You Go
    • Packing List
    • Food + Culture
    • Health + Wellness
  • Subscribe
👤

THE NUMBER ONE SOURCE FOR EXPATS, DIGITAL NOMADS, AND DREAMERS.

This field is for validation purposes and should be left unchanged.
  • Finance

What type of income can be retained offshore in a foreign corporation?

  • BY staffwriter
  • February 25, 2017
Total
0
Shares
0
0
0

The following article is for U.S. citizens and describes the type of income that can be retained offshore in a foreign corporation. It also defines foreign source and U.S. source income and how to allocate between domestic and offshore activities.

Let’s start with the basics. We U.S. citizens are taxed on our worldwide income. If we’re living and working abroad, we can use the Foreign Earned Income Exclusion to exclude the first $102,100 in salary from our U.S. taxes.

Also, if you’re living and operating a business abroad, you can retain ordinary business income in excess of the FEIE in an offshore corporation.

For example, you’re living in Panama, operating an internet marketing company, and net $300,000. You can take out $100.000 tax free and defer U.S. tax on $200,000 by leaving it in the corporation.

  • Ordinary business income is earnings and profits from an active business… from the sale of a product or service. It does not include capital gains, passive income, rents, royalties, or any type of passive income.

Only foreign source income is eligible to be retained offshore. Foreign source income is ordinary business income earned by work done outside of the United States.


For example, you have a U.S. division and an offshore division in Panama. Income earned from work performed in Panama is foreign source. Income earned from work done in the United States is U.S. source income.

U.S. source income is always taxable in the United States. Foreign source income is eligible to be held tax deferred in your foreign corporation.

The key to creating foreign source income that can be retained offshore is to set up an active foreign division with employees. Whatever income they generate from work performed offshore is foreign source and eligible to be retained offshore.

Note that this requires a real company with employees that’s managed outside of the United States and which operates independently. If you form an offshore corporation without any substance behind it (employees), that company will provide zero tax benefit.

If you form an offshore company, hire independent contractors around the world, and manage those contractors from the United States, your offshore structure will provide zero tax benefit. This is because the foreign entity is providing no benefit and all management and control of these independent contractors is being done in the U.S.

Instead, you set up an offshore corporation, move abroad, qualify for the Foreign Earned Income Exclusion, manage independent contractors from around the word, and otherwise run your active business from a tax free country. Then you have a solid tax plan that can operate tax free or tax deferred.

The most common form of income that can be retained offshore is ordinary business income generated from work performed outside of the United States by employees of your offshore corporation.

Here is a complete chart of foreign source income and U.S. source income:

Summary of Source Rules for Income of Nonresident Aliens

Item of Income Factor Determining Source
Salaries, wages, etc. Where services performed
Business income:

Personal services

Where services performed
Business income:

Sale of inventory -purchased

Where sold
Business income:

Sale of inventory -produced

Where produced (Allocation may be necessary)
I have not considered royalties in this post. Royalties create a complex web of sourcing rules based on where the technology was created (onshore or offshore) and where the product is sold.

If you’re planning an offshore division which will have foreign sourced income and retained earnings, you must hire a U.S. expert to build your structure and advise you on the U.S. tax issues. When done right, an offshore company with employees is a powerful tax savings tool… just ask Apple. When done wrong, the penalties and risks from the IRS can be severe.

I hope you’ve found this article on what type of income can be retained offshore in a foreign corporation to be helpful. For more information on setting up an active business offshore, please contact me at info@premieroffshore.com or give us a call at (619) 550-2743. All consultations are free of charge and confidential.

Total
0
Shares
Share 0
Tweet 0
Pin it 0
Previous Article
  • Your Escape Plan

Teak: Frequently Asked Questions Part 2

  • BY Adam McGeehan
  • November 6, 2016
View Post
Next Article
  • Your Escape Plan

Retiring in Colombia

  • BY David Steckenreiter
  • April 19, 2017
View Post
You May Also Like
How Belize is emerging as a digital gateway for global investors
View Post
  • Plan B
Belize Is Emerging as a Digital Gateway for Global Investors
  • BY Luigi Wewege
  • October 22, 2025
Starting a Business Abroad - A world of new markets and global possibilities
View Post
  • Business
The Beauty of Starting a Business Abroad
  • BY Aneesa Marufu
  • October 17, 2025
How to Legally Pay Less Tax Abroad
View Post
  • Plan B
How to Legally Pay Less Tax Abroad
  • BY EA Editorial Staff
  • October 15, 2025
The Tale of the Tael - A timeless store of value across centuries
View Post
  • Finance
The Tale of the Tael’s: A Hard Lesson about Hard Money
  • BY Michael Checkan
  • September 24, 2025
Craggy cliffs and quiet harbors frame life in the Isle of Man
View Post
  • Your Escape Plan
Life and Opportunity on the Isle of Man
  • BY Aneesa Marufu
  • September 19, 2025
Central America’s strategic position is reshaping the global offshore banking map
View Post
  • Plan B
The Future of Global Finance Runs Through Central America
  • BY Luigi Wewege
  • September 17, 2025
Global Diversification Tips from Experts
View Post
  • Plan B
Staying in One Country Could Be Your Biggest Financial Risk
  • BY Isha Sesay
  • September 3, 2025
Find Your Next Chapter: Top Countries with Retirement Visa Pathways
View Post
  • Your Escape Plan
Top Countries with Retirement Visa Pathways
  • BY Carla Rodrigues
  • September 1, 2025
Trending Posts
  • Buying a Property abroad 1
    • Your Escape Plan
    Why More Investors Are Buying Homes Offshore
    • October 8, 2025
  • Life between borders 2
    • Field Notes
    Living Between Continents, Cultures, and Contradictions
    • October 13, 2025
  • How to Legally Pay Less Tax Abroad 3
    • Plan B
    How to Legally Pay Less Tax Abroad
    • October 15, 2025
  • Living in Paris: Digital Nomad Guide 4
    • Digital Nomadism
    A Digital Nomad’s Guide to Living Like a Local in Paris
    • October 10, 2025
  • Starting a Business Abroad - A world of new markets and global possibilities 5
    • Business
    The Beauty of Starting a Business Abroad
    • October 17, 2025
Subscribe
Know Before You Go
  • Welcome sign in Puerto Viejo de Talamanca, a laid-back Caribbean town that offers one of Costa Rica’s most colorful and affordable coastal lifestyles. 1
    • Costa Rica
    Moving to Costa Rica: Your Guide for a Smooth Transition
    • October 20, 2025
  • Top 10 Cities in Ecuador to Visit and Live In 2
    • Know Before You Go
    Top 10 Cities in Ecuador to Visit and Live In
    • October 17, 2025
  • Costa Rica Cost of Living Guide: Prices, Budgets, and Tips 3
    • Costa Rica
    Costa Rica Cost of Living Guide: Prices, Budgets, and Tips
    • October 15, 2025
  • 7 Best Cities to Live in Mexico for Safety, Cost, and Lifestyle 4
    • Mexico
    7 Best Cities to Live in Mexico for Safety, Cost, and Lifestyle
    • October 14, 2025
  • Cost of Living in Spain: What to Expect in 2026 5
    • Spain
    Cost of Living in Spain: What to Expect in 2026
    • October 13, 2025
Learn More
  • About us
  • Contact
  • Advertise
  • Subscribe
Why Subscribe

The newly imagined Escape Artist brings you fresh content with a global focus, and sharp, up-to-the-minute coverage of the joys, challenges, and opportunities of life abroad.

For a limited time, we’re offering a special discount on all subscription deals, so be sure to lock-in these incredible savings and start receiving top-notch travel and expat content today!

Sign up for the EA Newsletter

Get important news delivered directly to your inbox and stay connected!

This field is for validation purposes and should be left unchanged.
Escape Artist
  • Terms & Conditions
  • Privacy Policy
  • Cookies Policy
  • Disclaimer

Input your search keywords and press Enter.

Newsletter Subscription
Our Spring Sale Has Started

You can see how this popup was set up in our step-by-step guide: https://wppopupmaker.com/guides/auto-opening-announcement-popups/