If you help me set up an offshore subsidiary for my business, will that strip out income and lower US taxes?
As businesses get larger in size, there are some moderate tax savings that can be achieved by going international. But really, there should be some reason for the subsidiary other than tax avoidance to experience any real savings. For instance, either your service or product would need to be manufactured overseas, or if a foreign nation is a large export market. All of the US and foreign based work that needs to be done to set up the business properly can average between $500,000 and a million dollars in total fees.
Going overseas is not for everyone, especially when there are abundant domestic strategies available like Research & Development Credits, Cost-Segregation, and Defined Benefit Programs.
What about foreign trusts? Don’t they shield income from US taxes?
Despite fairly misleading marketing, the use of foreign trusts to shield income could lead (and has led) to charges of tax evasion. There is no magic wand that transforms income overseas to non-taxable income. Your income, no matter where it is earned and no matter where you live, is subject to the universal tax jurisdiction of the IRS.
Why is there a popular opinion that going offshore lowers taxes?
Two main reasons. First, it used to be possible as a general rule (now it is an exception). It was quite easy to indefinitely defer income earned overseas. Meaning you wouldn’t have to pay taxes year after year, but only upon repatriation to the US. This all changed a long time ago…1962 to be precise. But popular culture doesn’t want to dig into tax all too deep, and sometimes a myth is more popular than the truth.
The other reason is that many promoters will try to sell you an international tax strategy by using ignorance or “wish-casting” to convince you that you can defer income indefinitely.
The 1962 law change not only closed a large loophole, it made the income tax rates higher for income earned overseas than for the same income if it was earned in the US. For instance, if you or your business had rental income in the US it would be subject to the lower passive real estate rate. If it was rental income in a factory in Singapore it would be taxed at the higher ordinary income tax rates — as high as 39.6% for individuals or 35% for corporations. This is call Subpart F; we can help you lefally avoid this tax treatment by taking a special tax election.
My business pays taxes in the foreign country it is in. Why does it have to pay US taxes? Isn’t that double taxation?
It sure sounds like it, but the technical answer is no because the law allows the IRS to do so. There are tax treaties which will allow full credit for taxes paid, but there are myriads of traps. Not every country has a treaty. In some instances, the IRS says the income taxes aren’t applicable to the credit in a country that does have a treaty. If you are unsure of the rules of the treaty the US has with the country you are doing business in, contact us. We work to decipher treaties from all around the world.
Why is the taxation of foreign investments and ventures so onerous?
The answer is probably because the US tax code is used a protection measure. It makes it more expensive to do business overseas, encouraging domestic investment.
If you would like to set up a free, confidential consultation to discuss the best options for your case, contact us. Call 888-727-8796 or email info@irsmedic.com.
We invite you to review success stories and case studies of clients of ours.
