The United States as an "Offshore Tax Haven"

Most financial experts agree that the United States is a primary location for international business. The presence of good banks, advanced infrastructure, a consistent legal system and a stable government are all characteristics of the United States that are taken for granted.

However, many people do not realize the enormous tax benefits given to "non-resident aliens" making passive income in the United States, or earning income outside the United States and simply using the USA as their own personal "offshore tax haven."

The United States does not tax non-resident aliens for most interest income or dividend income derived from the United States. There is zero capital gains on profits from investments for non-resident aliens. There is zero tax on income earned outside the USA. Only active United States derived income is taxed. Also, various tax treaties give a United States company certain tax advantages when doing business outside the USA.

The Definition of "Resident"

One of the most important issues is that of maintaining a "non-resident" status. Unfortunately many people confuse the immigration definition of resident with the tax definition of resident.

Under the immigration laws of the United States, a resident is only someone who has been given a permanent residence visa. But under the tax laws a resident can also be someone who has maintained a "substantial presence" in the United States regardless of immigration status.

There is a formula that determines when someone meets the "substantial presence" test based upon the number of days they have been present in the United States for a given year and the two prior years. To be safe, the non-resident should stay in the United States no more than 182 days in any given year.

The "Pass Through" or "Disregarded" Tax Entity

The best way for a non-resident alien to take advantage of these tax benefits is to use the a "pass through" or "disregarded" entity. The single entity which I like to use is the US Limited Liability Company (US LLC).

A US LLC is an entity that has the same limited liability characteristics as a corporation, but the ease of management characteristics of a partnership.

If properly structured, the US Internal Revenue Service views the US LLC as a "disregarded" tax entity which means that the respective taxing authority disregards the existence of the entity and treats the income as if it were earned by the members, partners or shareholders.

In the case of the US LLC if there are two or more members of the US LLC, then it is treated as a partnership and must file a partnership tax return.

But if it has only one member who is an individual then it is treated as a sole proprietorship. For a non-resident alien who is the sole member, this means that the US LLC is disregarded by the I.R.S. and income of the company is taxed at the more beneficial non-resident rates.

In fact unless it earns active income derived from U.S. source income there is no reason for the US LLC or the non-resident to even file a Federal tax return.

Yet for all other purposes the US LLC will be treated as a "domestic" entity. As far as banks and other parties are concerned, the US LLC is a US domestic entity.

There are many states in which you can form an LLC, but I currently suggest the use of a Delaware LLC. Delaware has traditionally been the jurisdiction of choice due to the fact that Delaware case law is more mature and developed. However, in recent years, Delaware has further improved upon this advantage with aggressive statutory implementation that clearly and decisively makes Delaware the best US jurisdiction for company formation.

How can a US LLC Help You?

There are a lot of ways a non-resident alien can benefit by using a US LLC:

  • With a US LLC and a US office location, it is easy to open and maintain bank accounts, brokerage accounts, etc.
  • An investor looking to invest in stocks, bonds or other types of investments in the US will pay no tax on the income earned, and will also avoid withholding.
  • Investments in U.S. real property can be done with no capital gains, and with careful treatment, no withholding.
  • An investor can do business outside the USA since it will be outside the jurisdiction of the I.R.S., yet gain valuable tax reduction benefits that may accrue to U.S. entities.
  • An investor may be able to reduce non-U.S. taxes since the U.S. has tax treaties often give very favorable treatment to U.S. entities. (An example would be the US LLC owns land or other property in a jurisdiction with a tax treaty with the US - this will often reduce capital gains to zero.)
  • Some investors are able to obtain tax benefits by using "transfer pricing" strategies that transfer otherwise taxable income from a high tax jurisdiction to the no/low tax UK LP or US LLC. (An example would be a non-U.S. buyer of goods and or services using the US LLC as a middleman for purely export purchases. As long as the US LLC avoids certain pitfalls there will be no taxes on income earned from such transactions.)
  • Finally, it may just be a very nice way of protecting assets in a private and secure manner by simply depositing funds into a US bank account, brokerage account, or insurance policy.

Simple Yet Flexible Solutions

When setting up the US LLC there are many ways to structure the entity to maximize asset protection, legal tax reduction, and privacy.

For the US LLC, in order to maintain the "disregarded" tax treatment there can be only one owner. The easiest way to do this is to name the client as the sole owner. There are many advantages to being named as the sole owner, but privacy may not be one of them. Also, as the sole owner of the US LLC you may be legally required to declare and/or pay taxes on the income of the US LLC in your home country.

To provide greater privacy, asset protection, and better tax treatment, I suggest that the client obtain an International Privacy Trust to own the US LLC. In this case the Trust will be listed as the owner of the company, not the client, and if the Trust is properly structured the client may be able to legally avoid paying taxes on the income earned by the US LLC and the Trust in his home country.

Please feel free to contact us if you would like to discuss these matters further.

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