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socrateaser, Lawyer
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Can a small corporation benefit from an offshore account in

Resolved Question:

Can a small corporation benefit from an offshore account in Bermuda?
Submitted: 1 year ago.
Category: Tax
Expert:  Phillip B, EA replied 1 year ago.
Thanks for using JustAnswer.com!

It depends.

If you have a business operation in a foreign country, you could defer US taxes by keeping earnings from the foreign operation in the foreign account. However, the income from the foreign operation would be taxable if (and when) the funds were brought back on US shores.

Most likely, having an off-shore bank account would be more of a headache than it is worth for a small US business. From US foreign bank account and asset reporting to maintaining a corporation and possibly dealing with foreign income tax reporting issues, in most cases the foreign bank accounts are not a logical option.

However, as with any situation, you should consult directly with your corporation's tax professionals to determine what options make the most financial and tax sense for your specific situation.

If there are additional questions, please reply to this answer so that I may assist you further. If this answers your question, please rate my performance between OK and Excellent so that I may be paid. Thanks for your business.
Customer: replied 1 year ago.

Basically I have two small corporations. What I was thinking of doing is starting in management consulting firm in a tax-free country and have each Corporation pay about 50 K a year in consulting fees. After miscellaneous expenses I would probably divert about 80 K year and earnings to say a Bermuda Corporation. So if I understand this correctly, the 80K a Bermuda Corporation earns Corporation would not pay tax on that amount as long as the funds did not enter the US.

Expert:  Phillip B, EA replied 1 year ago.
Sorry it took so long to get back with you. In my opinion, this scenario seems like it is one that may rouse IRS ire if done incorrectly. However, I will admit that my experience running tax plans with foreign accounts is limited (I generally avoid them). I will opt out so that a different professional can work with you
Expert:  socrateaser replied 1 year ago.
Hello,

Different contributor here. Please permit me to assist. You asked:

What I was thinking of doing is starting in management consulting firm in a tax-free country and have each Corporation pay about 50 K a year in consulting fees. After miscellaneous expenses I would probably divert about 80 K year and earnings to say a Bermuda Corporation. So if I understand this correctly, the 80K a Bermuda Corporation earns Corporation would not pay tax on that amount as long as the funds did not enter the US.


A: Here's the deal. The IRS can tax the income produced by a Controlled Foreign Corporation (CFC) to its domestic owners. A CFC exists where more than 50% of the corporation stock is owned by U.S. persons, and a shareholder is liable for taxes on the income if he/she is at least a 10% shareholder in the CFC.

The means by which multinational corporations avoid the CFC result is because their employees are located in a foreign nation, income is derived from foreign sources, and the foreign corporation is not owned more than 50% by the domestic corporation parent.

For an individual with a small corporation, such as yourself, you could easily expect to pay $25,000 per year to maintain a CFC in a tax haven jurisdiction, because you will have costs associated with trustees and management, etc. which will have to be offshore. If you retain control by some indirect mechanism, then the IRS can decide that you really are the sole or majority shareholder, and you will be subject to tax on the corporate earnings, even if you didn't receive them.

There is no means of avoiding this outcome, except by spending large sums of money to set up and maintain the offshore presence, which is why this type of solution is only available to large business organizations. It's just not cost effective for any small business owner -- UNLESS, you choose to move to the tax haven nation, and operate your business from the foreign location. Then, you can take advantage of the foreign earned income tax credit, which can offset nearly $100,000 in annual income based upon your foreign residency.

Based on your description of your circumstances, there is no way to make your contemplated transaction economically feasible (unless you are prepared to deny that you have any ownership interest in the corporation, on your Form 1040, Schedule B -- which would be felony tax evasion, and so I can't recommend this to you, for obvious reasons).

These laws may change in the very near future, with all of the "fiscal cliff," nonsense, and the strong desire to try to repatriate foreign income into the USA. But at this time, the best move for you, may be to just wait and see what happens with the tax laws.

Hope this helps.
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34860
Experience: Retired (mostly)
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