The Practical Use of Offshore Trusts, Foundations or Corporations
When Most people are very interested in hearing about ways to legally reduce their tax liabilities and gain valuable asset protection in the process. The real problem for most is of course getting the proper and sound information they need. If you speak to your attorney, financial planner or neighbor, many seem to hold the opinion that offshore-structures and offshore investments are only for the super wealthy or criminals. That is the myth. The reality is that individuals and businessmen alike have been successfully using these programs and strategies for years.
The Practical Use of Offshore Companies
I think it is safe to say that most business people understand the idea of setting up a domestic corporation in order to keep their business assets separate from their personal assets, and to gain additional tax deductions not available to the individual. Lets expand that idea a bit further and discuss a Corporation that is located in a tax-advantaged location, such as Panama or The Bahamas. When you are operating your business out of a jurisdiction that permits you to operate on a tax-free basis, you now truly have the best of both worlds. This is possible because these jurisdictions do not access taxes if your business activity in conducted outside of that jurisdiction. To state this another way, if you have a Panamanian Corporation, but you are physically doing business in Kansas, you have absolutely no business related tax liabilities to the Panamanian government. Of course there is still the question of what the IRS likes to call "effectively connected income". This means that any business income derived from activities within US borders are subject to taxation, but there are some legitimate strategies to address this.
The types of businesses that benefit most from an offshore company structure are Internet based businesses, mail order firms and service firms. Why is that? Well, let us take the
Business that markets or offers clients the ability to make a purchase via the Internet. If the company is incorporated in The Bahamas, the companies web page is hosted out of a "free zone" in the Dominican Republic, all customer payments are sent to the company bank account in Panama, in theory the company has no tax liability anywhere. Sound too good to be true? The US government thinks so, that is why they had been talking about taxing every company that markets or does business over the Internet. This is based upon the theory that all Internet activity passes through US telephone lines at one point or another. But, because of the uproar by the local and International Business Community, discussions about taxing the Internet have been put on hold. Think about it. First of all, how would the US or any other government legally be able to say that a company which has no presence in that country should be required to pay tax? Second, how would they track the sales process? If a client made a purchase from a company in Germany and the credit card payment were cleared outside of the US, how would they go about collecting a tax? What about the company that has a web-page in England and receives client payments via check or money order in their Bahamas office? It would be ridiculous for the US government, or any other government, to claim the right to tax every company that has a presence on the world wide web simply because there is a chance that an internet connection may get routed through that particular country.
Herein lies the argument against taxation for the net and the loophole for a company that wishes to do business via the Internet.
This same argument can be made for mail order and sales tax as well. If you live in Illinois and purchase a book via mail order from California, to whom do you pay the sales tax? Certainly the company based in California has to pay business earnings tax to California. But normally they say, if you are a resident outside of California, you do not have to pay sales tax on your purchase. Fair Enough, but how many people add the out of state mail order tax liabilities to their local state income tax return. I would bet not many people. What if the mail order Company was located in the British Virgin Islands, but the product was shipped from Costa Rica? Who pays the sales tax? Who collects the sales tax? What if there is no sales tax in the jurisdiction where the product was purchased?
The point of this discussion is not to encourage tax dodging or tax evasion. I am simply pointing out both logistical and actual problems with the current tax codes and how businessmen can restructure the way they do business. The tax codes can be your enemy, but they can also be your best friend. Set up your business affairs in such a way that offer you the maximum income. Investigate the idea of moving your current business (on paper) to a place that can offer you the best tax advantages. This is not illegal, nor is it immoral. It is just good business.
Even if taxes are not the issue, but privacy and protection are, the offshore structure makes sense for most small businessmen. Let us take the example of a Bookstore, Pizzeria or 7-Eleven type convenience store. We all know that there are people out there that would love nothing more than to "fall down" in your store and sue you. The new "American get rich quick scheme" seems to be the frivolous lawsuit. You could loose your business, your home and your savings simply because someone bumped into the canned peaches in aisle three. The worst part of it is, they just might find a jury who thinks bruises from a canned peaches display is worth $ 5 Million. Sound far-fetched? Well, if someone can sue the McDonalds hamburger chain for hot coffee, and win, what chance do you have? The answer lies in being poor and having your money away from access. Not many lawyers will take a case once they find out you have no money to grab. More correctly, most of the ambulance chasers that take these cases for a percentage of the winnings will drop their client like a hot potato once they learn that the US Company that owns your business has no assets. In addition, once they find out that you have no personal assets, they most likely will stop taking their clients phone calls altogether.
How can this be done? All Legally through the use of an offshore private interest foundation, trust or company arrangement.
In many jurisdictions, such lawsuits will be thrown out of the courtroom within five minutes. I have seen it happen. The reasons for this are too varied to discuss here, but the short answer is the difference in legal systems and the civil law code found in many non-English speaking countries. It is unfortunate, but for many businessmen, the only protection they have is to place their assets in a jurisdiction where common sense and law still means more than greed.
For additional information regarding offshore structures, tax-free investing offshore, residency and real estate in the Dominican Republic or Panama-Please email us.