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I am a US citizen living in CA and have been looking into the

Tax benefits of creating a...
I am a US citizen living in CA and have been looking into the Tax benefits of creating a corp in Cayman islands for investments in the US And abroad. Here are my questions

a) My understanding is that profits are not taxed until the money is brought into the US. At that time, the funds disbursed have to be declared as ordinary income to the share holders, is this correct?
b) Is it still true that the stockholders of this corp can remain undisclosed? As a US citizen would I have to list my holdings in this offshore corp or only in the year the money is disbursed?
c) what tax rules apply to this corp? Are they stfandard accounting practices? what about salaries, healthcare benefits, travel expenses, etc, are they all deductible?
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Answered in 2 hours by:
7/16/2013
Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4,545
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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rakhivasavada :

Dear Friend,

Hello and welcome. Thank you for using Just answer. Let me get straight to the point.

rakhivasavada :

a) To begin with, YES, no tax would be due on the profits until the Money is brought to the US. There is no taxation in Cayman other than stamp duty and import duties.

rakhivasavada :

Citizens of the United States use Cayman as a tax haven for two purposes: tax evasion and tax avoidance. Tax avoidance is any legal measure used to lower actual tax liability. However, as you also rightly understood, that once the money brought to the US, would be taxed as ordinary income.

rakhivasavada :

b) No, it is not true that the shareholders are not required to be disclosed. Please note that the Cayman allows you to be used as a tax saving / deferment tools. However, it would be illegal if you take it forward to conceal money and indulge in money laundering. All disclosures would be mandatory.You will list your holding wherever required irrespective your the year when the money is disbursed or not.

rakhivasavada :

c) Standard GAAP rules would apply to this. All expenses like salaries, travel, etc. would be deductible. Only the profits that you have would be TAX FREE in the Cayman. For the tax laws, the following link would be an excellent resource for you.

http://www.tia.gov.ky/html/FAQs.htm

rakhivasavada :

Hope this helps.

Please rate this positively if this helps as this is the only way we get credit for assisting you. Alternatively, feel absolutely free to revert with further queries.

Warm Regards....

Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4,545
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
Verified
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Customer reply replied 4 years ago
I want to better understand how profits of this Cayman corp would be treated when disbursed. Would the money paid to shareholders be dividends or can part also be paid as salaries? What about the initial investment capital if the corp is discontinued in the future? can it be transferred into a US corp?
Dear Leia,

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.

Hope this helps.

Please rate this positively if this helps as this is the only way we get credit for assisting you. Alternatively, feel absolutely free to revert with further queries. If this still does not help, let me know, I shall opt out and let other expert assist you with this.

Warm Regards....

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