"To Be Or Not To Be (Offshore)’"
May 25, 2001
Many citizens of tax-burdened countries like the U.S. are under the impression that you can setup an offshore corporation and avoid paying taxes. Simply register an International Business Corporation (IBC) in one of the tax havens like Nevis, Belize, BVI, Panama, Ireland and others, pass all your income through that IBC and no US taxes. Or maybe you need to live “offshore” for 180 days to comply. These tax havens around the world offer very low tax rates or no taxation at all for companies incorporated within their borders but conducting their business outside such jurisdictions.
Wrong! The Internal Revenue Service (IRS) got wise to the tax havens and instituted rules and regulations that will tax citizens on all income earned anywhere in the world. According to Canadian Barrister & Solicitor David S. Leperance, "Every other major country has tax rules that say, 'If you reside here, then we start talking about taxation.' The U.S. says 'Even if you haven't even visited the U.S. in years, we will still tax you and your estate, because you have the original tax sin of being an American citizen.'" David is a world-renowned expert in dealing with individuals who are acquiring residency or citizenship to fulfill tax or estate planning objectives, and has written many papers on these subjects.
To qualify for an offshore deduction you need to be out of the US for 330 days a year. A U.S. citizen who moves offshore and establishes a foreign tax home can save income tax on the first $75,000 to $80,000 in income. This may be all they need to do if they can deal with their additional income, capital gains, gift and estate tax liabilities in other ways.
There are two ways a citizen can move out of the U.S. and gain significant tax and asset protection benefits.
1. Remain a U.S. citizen but establish a foreign tax home.
2. Become an expatriate where someone not only establishes a home outside the United States, but who also gives up U.S. citizenship.
Generally, expatriation is worth a serious look if you have more than $350,000 in annual income or, if you are married and have an estate of greater than $3 million or $1.5 million if you are single.
Some of these tax exiles are heading to the traditional tax havens in the Caribbean, Central America and Europe. But a significant number of people are looking elsewhere; at Ireland, New Zealand, the United Kingdom and Canada. The choice of where to head is driven by the type of lifestyle the person wants to maintain. The other crucial factor is the type of offshore strategy that an individual wants and needs to adopt.
SECOND COUNTRY PASSPORTS AND/OR ECONOMIC CITIZENSHIPS
Second Country Passports and/or Economic Citizenship programs do carry a price tag, but in the right situation, a second citizenship may pay for itself many times over. Many folks are purchasing economic citizenships for tax, privacy and security reasons.
In considering economic citizenships, a simple but critical point to understand is that passports are the travel documents issued by a country to its citizens. First you become a citizen, then you get the passport. Some enterprising "consultants" are actually trying to sell "passports for non-citizens". This is an oxymoron, but, no doubt they have managed to separate some people from their money.
BECOMING A NON-RESIDENT U.S. CITIZEN
In order for an American to become a non-resident "qualified individual", it is necessary to change residency from the U.S. The immediate advantage is a significant saving in income tax.
As a qualified individual, you would not pay income tax on the first $72,000 of foreign earned income. Under the U.S. Taxpayer Relief Act 1997, this exclusion was increased by $2000 per year starting in 1998 and will be capped at $80,000 in 2002. After 2007, the $80,000 will be indexed to the cost of living adjustment.
There is second advantage through the wise use of tax treaty provisions that grant relief on some foreign capital gains, U.S.-source income and pension income. You can also deduct housing expenses in excess of a base amount of approximately $7000 a year.
You can become a "qualified individual" under either the bona fide residence test or the physical presence test. In either case, you must also have your tax home in a foreign country.
OFFSHORE IS COSTLY
Traditionally, offshore industry has been dominated by the British law firms that used to charge minimum 15,000-20,000 USD for the formation of a new company and about the same amount for maintenance of such a company. Lately, the trend has changed, and now more and more offshore-based law companies like ILC, Ltd. offer similar services for a much lower cost. ILC, Ltd. works directly with the governmental officials in the offshore zones.
A WORD OF CAUTION: If you are looking for a new residency, take the time to research and plan carefully. You do not want to jump out of the U.S. tax cauldron and into another country’s tax fire. In addition, since this strategy likely involves other family members as well as personal and business realities, the plan must be relatively easy to set in motion and to live with for a period of time.
It must also provide a level of long and short-term comfort to everyone involved. Leafy tropical islands may seem like paradise to you but your teenaged children may not share your viewpoint. Family discontent exacts a high toll on a tax plan.
SECOND CITIZENSHIP'S AND PASSPORTS
Second citizenships can be costly. However, you need to weigh the total cost to the potential tax savings. For example, second citizenship for a family in Grenada is $75,000. You need to weigh those costs to your total joint tax liability to determine the ROI. ILC, Ltd offers information about second citizenships and passports some of which include…
A good backdoor to Spain costing US $45,000 and providing fair visa free travel to over 30 countries. An excellent residency program in one of the more highly developed nations in the western hemisphere.
Belize Providing excellent visa-free travel, Belize is also a great tax haven country. This is a popular program, but the visa-free travel is not as good as Dominica, Grenada, or St. Kitts / Nevis. US $55,000.
Brazil A rapid citizenship program costing US $60,000 and providing reasonably good visa free travel.
Commonwealth of Dominica
A beautiful island nation offering two different citizenship options, one costing a non-refundable US $50,000 and the other costing US $110,000 with US $75,000 returned after 15 years. Benefits include a Commonwealth passport, which allows visa-free travel to over 90 countries. This is probably the most reputable Economic Citizenship program.
Grenada This is a great citizenship program offering visa free travel to over 100 countries. However, it is a new and somewhat unorganized government run program, but is very similar to system adopted by the Commonwealth of Dominica. Exact prices cannot be quoted, but you can expect to pay around US $75,000 for your family.
Ireland The Rolls Royce of offshore economic citizenship programs. Irish passports provide the best visa free travel possible and even allow you and your family lifetime rights to live and work in any EU country. However, you will have to visit Ireland twice, pass an Interpol check, pay US $350,000, and purchase a minimum of US $150,000 in real estate.
Panama A good visa free travel full citizenship program costing US $42,500.
St. Kitts / Nevis
This citizenship program was established in 1984 and is one of the oldest and finest passport programs available. Benefits include a Commonwealth passport, which allows visa-free travel to over 90 countries. The cost for this program is US $55,000, however the government also requires an investment in real estate of US $150,000 to US $200,000.
South African Nation
An undisclosed South African nation offering poor visa free travel, but almost non-existent citizenship qualification requirements and costing a phenomenally low US $11,000.
Uruguay A government run citizenship program costing US $48,000 and provides excellent visa free travel. However, you will be issued a "non-citizen passport", must visit the country twice, and must purchase a US $70,000 government bond.
Venezuela An excellent program costing US $45,000 and providing great visa free travel, also serves as a back door to Canada.
Some of these citizenships can be process in 60-90 days. Some require a visit to the country, others do not.
As with anything else, caveat emptor buyer beware. Check out all the facts before you decide to move offshore or before you obtain a second citizenship. And be sure to use a reputable resource.
David S. Lesperance
Barrister & Solicitor
84 King Street West, Suite 202
Dundas, Ontario, Canada L9H 1T9
International Legal Consultants