There was a time when U.S. taxpayers (corporations or individuals) could defer taxes simply by establishing an offshore corporation. Since the corporation was a foreign entity, its shareholders had to pay no U.S. income tax until they received dividends. Unfortunately, times have changed. The IRS now looks through offshore corporations and taxes US citizens on the company's earnings. More importantly, if the corporation's income is primarily "passive" income, such as securities or interest income, the IRS imposes penalty charges on the corporation's shareholders.
Fortunately, there are exceptions to these rules. First, the "look through" rule only applies to controlled foreign corporations (CFCs) who deal in passive business activities. Thus, if you de-control your company, i.e. spread the ownership among a group of people, you are not subject to the rule. Alternatively, you can defer taxation of income from non-passive activities such as real estate management, international trade, or manufacturing. Thus, there are still some strategies, which can be used to defer your tax liability indefinitely.
Nonetheless, even if you beat the “look through” (CFCs) rule by de-controlling your company, there is a second set of rules, which the IRS uses to tax offshore profits. These are the Passive Foreign Investment Company (PFIC) Rules. In order to avoid classification as a Passive Foreign Investment Company, and its penalties, at least 30% of your income must be "active" income. Active income can include any of the non-passive income categories described above, plus any fee income charged by your company.
Most jurisdictions with IBC legislation, do not keep or publish any records of either Directors, Officers or Shareholders. Many jurisdictions allow offshore corporations to issue bearer shares. Bearer shares are certificates of stock, which do not name the individual owner. Rather they have a number, which the corporation registers so that the owner’s name is XXXXX XXXXX The holder redeems the share much like a bond. Countries permitting bearer shares include Antigua, Austria, Bahamas, British Virgin Islands, Cayman Islands, Costa Rica, Germany, Liberia, Liechtenstein, Malta, Netherlands Antilles, Panama, Saudi Arabia and Switzerland. For U.S. tax purposes, bearer shares are treated as stock. If you own them, it is your responsibility to report them as you would any other stock. The bottomline
is even if you pay yourself as salary or distribution of income, it will be taxed in US anyway if it is not a decontrolled corporation.
In case of dissolution or sell off, it is important to note that U.S. citizens would be liable for tax on capital gains for shares sold in the Cayman company.
It is also important to note that setting up such company does not reduce the taxes of the U.S. citizen except to the extent the citizen may assign streams of income to the company.
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