{"id":11871,"date":"2017-06-03T09:00:12","date_gmt":"2017-06-03T13:00:12","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=11871"},"modified":"2020-06-18T05:19:13","modified_gmt":"2020-06-18T09:19:13","slug":"risks-offshore-tax-deferral","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/risks-offshore-tax-deferral\/","title":{"rendered":"The risks of offshore tax deferral"},"content":{"rendered":"
When you have an active business offshore generating foreign source income, you can generally retain those profits in the foreign corporation tax deferred. Foreign retained earnings can remain in the corporation indefinitely and will be taxed in the United States only when paid out as a dividend. <\/span><\/p>\n There are substantial risks associated with offshore tax deferral in an active business. For example, unfairly valuing the contribution from a group offshore in a large business (transfer pricing), management and control from the US of workers abroad, pushing the bounds of the foreign earned income exclusion for small businesses, and the use of nominee shareholders to avoid Controlled Foreign Corporation status, are all major risks. <\/span><\/p>\n This article only considers <\/span>active businesses with substantial operations offshore<\/span>. I do not review passive investments, holding companies, base company income, foreign personal holding company income, or Subpart F. Also, I\u2019m not considering US tax on the interest earned by retained earnings\u2026 just the foreign profits of an active business. <\/span><\/p>\n Foreign source income is profits generated by work performed outside of the United States. The perfect scenario for foreign sourced profits is a US citizen who lives in Panama and operates her business through a Panama corporation. <\/span><\/p>\n This person either: 1) spends 330 days of the year in Panama, or 2) has residency in Panama and spends less than 4 months a year in the United States. You don\u2019t work on the business while in the United States. <\/span><\/p>\n This business has 6 employees and an office in Panama. All the work to generate the income is performed in Panama, the country of incorporation. Your customers contract with the Panama corporation and pay into a Panama bank account or by credit card through a Panama merchant account. <\/span><\/p>\n This is the perfect scenario for foreign retained earnings\u2026 and one that I rarely see. The risks of offshore tax deferral come from each and every step away from this scenario.<\/span><\/p>\n\n Here are the risks of offshore tax deferral and how to avoid them. <\/b><\/p>\n The first risk is when the owner lives in the United States and the business is based in a foreign country. When the beneficial owner \/ operator lives abroad and qualifies for the <\/span>Foreign Earned Income Exclusion<\/span><\/a>, her audit risk is greatly reduced. <\/span><\/p>\n In order to qualify for the FEIE, you must be a resident of a foreign country for a calendar year and spend less than 5 months a year in the US, or be out of the US for 330 out of any 365 day period. <\/span><\/p>\n