{"id":12099,"date":"2017-06-14T05:57:47","date_gmt":"2017-06-14T09:57:47","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=12099"},"modified":"2020-06-03T02:08:03","modified_gmt":"2020-06-03T06:08:03","slug":"get-heart-active-offshore-business-taxation-2","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/get-heart-active-offshore-business-taxation-2\/","title":{"rendered":"Get to the Heart of Active Offshore Business Taxation"},"content":{"rendered":"
The following is a guest post by Attorney Joel Nagel on offshore business taxation. <\/span><\/i><\/p>\n Question<\/i><\/b>: What are the tax considerations for having a U.S. owned offshore business?<\/span><\/i><\/p>\n When thinking about <\/span>active<\/span><\/i> offshore business taxation and how to plan an international operation, there are three tracks to consider: <\/span><\/p>\n This article is on the taxation of active offshore businesses. It does not cover intellectual property or passive income. <\/span><\/p>\n A \u201cU.S. owned business\u201d is one where U.S. citizens, residents, or green card holders <\/span>own or control <\/b>more than 50% of the company. <\/span><\/p>\n Ownership<\/span><\/i> means U.S. persons directly or indirectly (through family or structures) <\/span>hold the stock of the company<\/b>. <\/span><\/p>\n Control<\/span><\/i> of the business means <\/span>voting rights or other measures of control<\/b>, such as directing transactions, controlling distributions, etc. <\/span><\/p>\n \u201cControl\u201d is meant to target offshore businesses set up with nominee shareholders, officers and directors. This is where the true beneficial owner doesn\u2019t appear in the corporate documents but is pulling the strings behind the scenes. <\/span><\/p>\n Let\u2019s Get to the Heart of Active Offshore Business Taxation<\/b><\/p>\n When U.S. persons own an offshore corporation, and it has no employees and no operations abroad, we call this an <\/span>international shell company<\/b>. <\/span><\/p>\n Shells are offshore corporations used for <\/span><\/p>\n All of that is to say that an offshore corporation without foreign employees can be used for <\/span>business and asset protection purposes only<\/b>. This offshore business <\/span>does not<\/span><\/i> provide its U.S. owners any U.S. tax benefit. <\/span><\/p>\n An offshore company that doesn\u2019t have employees and operations outside of the U.S. is <\/span>tax neutral<\/span><\/i>. Profits earned are being generated by work done by people in the United States and are thus <\/span>U.S. source income taxable in the U.S. as earned<\/b>. <\/span><\/p>\n 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. <\/span><\/p>\n Offshore Businesses Owned by the U.S. but Operated Abroad<\/b><\/p>\n The next category is an offshore business <\/span>owned by U.S. persons but operated abroad<\/i><\/b>. It is an international business with employees and management outside the U.S. that runs <\/span>independently<\/span><\/i> (without significant control by persons living in the US). <\/span><\/p>\n An offshore company, where the \u201cmind and management\u201d of the business and the work to create the income, are both outside of the United States, generates <\/span>foreign source income<\/b>. \u00a0<\/span><\/p>\n Foreign source income is <\/span>not taxable<\/b> in the US <\/span>until<\/i><\/b> it\u2019s transferred from the offshore company to the U.S. owners or otherwise \u201crepatriated.\u201d<\/span><\/p>\n That is to say, foreign source income from an active business can be held in an offshore corporation <\/span>tax deferred<\/b>. When it\u2019s paid out to the U.S. owners (usually as a dividend), it will be taxed in the United States. <\/span><\/p>\n Special rules may apply to <\/span>income earned from services<\/span><\/i>. This article does not consider Subpart F and Foreign Base Company Sales or Service income issues. <\/span><\/p>\n Foreign Joint Ventures<\/b><\/p>\n 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, <\/span>you have a lot of tax planning options<\/b>. <\/span><\/p>\n In most cases<\/span><\/i>, 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\u2019t typically do business in the United States and don\u2019t have U.S. source income, they should operate <\/span>tax deferred<\/span><\/i>. <\/span><\/p>\n\n
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