Why set up a company in a tax haven?
If you ask someone what an offshore company is, they’ll often reply that it’s a company set up in a tax haven (so far, so good), but also that only traffickers, terrorists, and the mafia use them, and that they’re obviously immoral and illegal. Even the most well-informed people will tell you that it’s an expensive and complicated kind of company that isn’t worth the effort.
(I assume something similar happens when you ask about investing on the stock exchange.)
As you can guess, none of these statements are true, however widespread they may be. It’s no surprise; neither the State nor the media will go to great lengths to demystify the system.
The truth is that neither the State, nor the people who use it to make profits and live off others, have any right over your money or your property. In fact, however much they try, they can’t even prevent you from quitting the system, because you always have offshore companies at your disposal.
In today’s article, you can read about what an offshore company is and why creating one may be worthwhile. We’ll talk about the reality of tax havens and why taking advantage of them isn’t illegal, immoral, or even that complicated.
Note: tax haven and offshore are used as synonyms; onshore is the opposite of offshore.
Why you shouldn’t be afraid of registering companies in tax havens
Setting up an offshore company in any tax haven doesn’t constitute tax evasion or money laundering. Setting up an offshore company is:
· completely legal
· common practice among most of the big companies you know
· much cheaper than you may think
· simpler and quicker than you can imagine
· a piece of cake if you have the necessary contacts and knowledge
Transferring your company to a tax haven is just a decision: an intelligent decision to help you benefit from the opportunities of the global market (similar to transferring your residence). It simply means putting the maxim “go where they treat you best” into practice (which we talked about in Flag theory).
States don’t have the right or the capacity to control what you do. In fact, there’s great competition between them for you to become a citizen of their country (so you can pay taxes there, obviously).
“And if you aren’t convinced by the services and treatment offered by your State, then get out.”
Of course, States try to create cartels to take away your freedom of movement, resulting in associations like the Organization for Economic Co-operation and Development (OECD), which promotes blacklists of tax havens in order to brush aside any country whose conditions are “too good” for their clients (i.e. citizens).
But this doesn’t matter to those States that depend on the income they earn as tax havens, and whose function only they truly understand:
“Serving our citizens, instead of milking them for every penny they have.”
Reasons to transfer your company to a tax haven
What factors lead business owners to transfer their companies to tax havens?
· They want to protect their assets from possible lawsuits and legal problems.
· They want to protect their companies from political and economic instability.
· They want to avoid their useless and costly duty to inform the government about the state of their companies’ finances (audits, forms, balance sheets, etc.).
· They want to escape the heavy tax burden that endangers their survival.
As you can see, it’s not a question of money laundering or tax evasion; the only thing they want is to increase their capital and save on taxes.
Taking advantage of the benefits of the offshore world is a simple option for any intelligent entrepreneurs who have decided to stop working for others, want to protect their shareholders, and are looking to maximize their profits. It’s a 100% legal method that lets them follow the rules imposed by their country of origin to the letter.
Wherever you’re from, you have nothing to fear, as long as you comply with the law.
Who should consider transferring their company to a tax haven?
At Tax Free Today, we have all kinds of readers. There are managers and students, young people and the elderly, people with international experience and people without… For many of you, it doesn’t make sense to set up an offshore company or transfer your existing one to a tax haven. In fact, you first have to focus on creating a business model that generates money.
To maintain an offshore company in a cost-effective jurisdiction, you have to bring in at least €500 a year. Logically, it doesn’t make sense to set up a company in a tax haven until you can save more in taxes than the costs of maintaining your company (in fact, you should think carefully about establishing any kind of company, whether onshore or offshore, before you have sufficient income to do so).
Besides these limitations, anyone can register their company in a tax haven, but some people will find it easier and more appropriate than others.
In particular, it’s simpler and more advantageous for digital nomads and entrepreneurs who aren’t tied down to any one place. If your business, project, or situation is one of the following, you have it easy:
· e-commerce and internet-based companies
· international companies
· succession and inheritance within companies
· investors and traders
· owners of mobile assets (like yachts, for example)
· beneficiaries of intellectual property
1. E-commerce and internet-based companies
For many people, this is the simplest gateway; in fact, it’s the most common kind of business for digital nomads. Tax Free Today itself is defined as an internet-based company.
And why not? These are globalized businesses that don’t require more than a laptop with access to the internet.
If your clients are spread out around the world and your company works in different countries, it makes sense to create an international business, doesn’t it?
Together with an offshore account, you can protect your company from the ever-present risk of inflation in your company, avoid capital controls like those in Greece, and bypass highly possible laws against keeping large sums of money in cash.
2. International companies
There are all kinds of international companies. Everyone knows Google, Amazon, and Facebook, and we often read about their fiscal practices in the news.
Anyone can do what their armies of lawyers and consultants do, no matter how small your company.
Giving your company an international vocation lets you make purchases and sales according to the laws of the offshore jurisdiction, often reflected in lower taxes.
Ireland, a country we’ve already discussed on this blog (the advantages of setting up a company in Ireland), is a place known for catering to the many technology companies that have established their European subsidiaries there. The 12.5% corporate tax burden is much more affordable than the 40% they pay in California.
Given the levels of income of these companies, they’ve gone above and beyond to find this method, which often lets them pay less than 5% tax. The “Double Irish with a Dutch Sandwich” model is especially notorious for reducing the tax burden in Europe, but now has an expiration date.
Without a doubt, the big multinationals will keep searching for ways to legally avoid taxes (and for the sake of their company and investors, it’s their duty to do so). These companies include Adobe, Amazon, Apple, Facebook, Google, IBM, IKEA, Microsoft, Oracle, Starbucks, and Yahoo.
Many people think it’s unfair for these companies to pay so little tax, when in reality; the injustice is that smaller companies don’t have the money for specialist services to help them build the necessary structures. This is where the Tax Free Today blog can help. We offer free information (you can sign up for free so you don’t miss a thing) and direct support for a fraction of the price usually found on the market (if you want, you can hire our services).
3. Succession and inheritance within companies
You can combine your company with other companies in tax havens to optimize your taxes in succession cases, thereby avoiding the heavy tax burden on inheritance of property. Many medium-sized companies have to confront the serious burden of inheritance tax when the founder of a company dies and leaves everything to their successor. This tax can make a theoretically profitable company quickly cease to be so.
Going offshore in these cases is an especially attractive option when the inheritance is transferred from one country to another.
As a successful business owner who has built your company from the ground up, surely you’d rather support your family than leave a large portion of your property in the hands of the current heads of State, wouldn’t you?
At the end of the day, you’ve already given the State enough money over the course of your career.
4. Investors and traders
As with the other cases, if you’re an investor or trader, you’ll have no problem managing your profits with your company in a tax haven; you just have to observe the law.
5. Owners of mobile assets
There’s a good reason why so many boats sail under the Liberian or Maltan flag. These countries offer certain advantages for people who register their vessels there.
In fact, it’s possible to legally transfer anything up to houses from one country to another. This doesn’t mean you have to physically uproot it from its country of origin, obviously. The conditions to do so vary considerably from country to country; indeed; it’s a fairly complex process that requires very specialized knowledge.
6. Beneficiaries of intellectual property
If you have patents or branding rights, an offshore company will let you easily sell your rights and acquire new ones. It’s also much simpler to cede your rights to third parties in this way.
For consultants, the advantages of having a company in a tax haven are fairly clear. On the one hand, you save a lot on taxes, and on the other, you can manage your company in the simplest way possible, without having to worry about piles of paperwork and useless rules.
Why? Because in offshore jurisdictions, the requirements to keep company accounts and update the authorities are small to non-existent.
Just imagine: no more monthly or tri-monthly forms, no more audits, and no more tax returns!
This is a question we receive often. With the implementation and enforcement of FATCA (Foreign Account Tax Compliance Act), the United States is increasing enforcement priority of noncompliant US account holders.
More than 100 countries and tens of thousands of foreign financial institutions have agreed to report US account holder information to the United States.
But I am not a U.S. Citizen?
This is a common misconception. The requirement for FATCA reporting is for the individual to be a US account holder – not a US citizen. In other words, whether you are a US citizen, Legal Permanent Resident, Visa Holder who meets the substantial presence test, or a former green card holder who was considered a long-term resident – you are generally considered a US person.
As a US person, you are required to report your foreign accounts and global foreign income to the United States (the United States taxes individuals on their worldwide income). With that said, the question generally arises as to whether a person can transfer their money from an offshore account into the United States, without issue?
Transferring Your Money to the United States
The fact of the matter is, the money overseas is your money. The IRS is not seeking to penalize you for the mere fact that you are transferring your foreign money into the United States (presuming the money was received legally). Rather, the United States is penalizing you for failing to report the existence of this money to the US government while it was overseas in a foreign account.
There are many individuals who have a reporting requirement because the value of their foreign accounts/specified assets exceeds $10,000 in annual aggregate total on any given day — but do not have any taxable income. In this situation, there is a reporting requirement, but no taxation (since there was no foreign income earned). Nevertheless, they still must report the accounts properly. If the money was “earned” income and U.S. Taxes weren’t filed and/or paid to report the money, it can complicate the situation — but through voluntary disclosure a person can usually get into compliance relatively simply.
Depending on the facts and circumstances of your case, you may be able to avoid penalties altogether. The following is a summary of the basic requirements of individuals who were considered “US persons” and therefore may have a foreign account reporting and/or foreign income reporting requirement:
FATCA & Reporting Foreign Income – The Basics
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
We all work hard for our money, whether we are living and working in the UK, or overseas as an expat. But the key ingredient to successful money management is often missing: we fail to make our money work hard enough.
So, if you are one of those people who just let your salary sit in an account paying paltry interest, then you need to start looking at how to make your money do more for you.
Our guide to offshore deposits takes you step by step through choosing the right account and making sure you continue to get the best deal.
Know what you need
The first thing you need to do before deciding what type of account you want is to ask yourself what you need that account to do.
When doing that, you should consider all of the following points:
· Do you need to visit the bank regularly?
· Can you use internet access for an account?
· Are you happy with using a bank you have never heard of?
· Can you afford to have your money tied up for a period of time or do you need instant access?
· Do you need to hold your money in a different currency to the one you are paid in?
· How do you want your interest paid?
· Are you subject to tax in a jurisdiction where you are not resident?
· How safe will your money be in the account?
· For most expats, choosing an offshore account will be the most sensible option when the answers to these questions are taken into account, as you have more control over how the tax on the interest is paid.
If you can allow the interest in the account to roll up without the tax being taken off at source each time, then you will benefit from a higher return. But you need to be careful to ensure you are not breaching any tax regulations.
There are a variety of accounts available to expats, and while this means you have a wide choice, it can make for a bewildering array of options. You should research the type of account that will work best for you. Here are some options:
These accounts allow you to access your money at any time, without giving the bank prior notice. You will often receive a lower rate of interest than you would on an account that ties your money up for a period of time. But this is not always the case, so compare them carefully.
As you can guess from the name, you have to give the bank a period of notice before you can withdraw your money without penalty.
In most cases you can withdraw your money in an emergency without giving the specified notice period; but, at the very least, you will suffer interest penalties.
Generally, you will have to give 30 days, 60 days or 90 days’ notice of withdrawal from these accounts; in return you should get a higher rate of interest.
It is possible to hold your savings in specific currencies, such as pounds sterling, euro or the US dollar. Choosing these accounts can improve the interest you receive, and mean you hold your money in the same currency you are paid in or have to spend.
Multi-currency accounts allow you to switch currencies, which can help reduce exchange fees if you have income and expenditure in different currencies.
Most accounts pay interest annually, but if you would prefer to receive your interest more regularly, perhaps to augment your income, then you can use a monthly interest account.
The advantage of this is that the interest will sit in your account, if you do not withdraw it as income, and will build up each month, rather than coming as a lump sum at the end of the year.
The interest rates on these accounts are usually slightly lower than the equivalent annual interest accounts.
This is calculated to take into account the additional interest you will accumulate on the monthly payments (interest on the interest) to ensure you do not receive more overall than an annual interest customer.
These offer a fixed rate of interest, usually higher than elsewhere, provided you leave your money in the account for a set period of time, which can be anything from one year to five years. You can sometimes make withdrawals within strict rules. If you withdraw money outside these, you face losing all the interest you would have earned. You should never sign up to an account like this if there is even a small chance you could need your money outside the permitted allowances.
Deferred interest accounts
If you would prefer to tell the bank when you want your interest paid, for tax purposes, use a deferred interest account. In most cases, the interest on these accounts would automatically be paid when it is closed, unless you ask the bank to pay your interest at a specific time – perhaps when your other income has fallen and you want to take advantage of paying a lower amount in tax.
Compare Bank Accounts
Once you know what you need, you must find the accounts that offer you those services. This has been made a lot simpler thanks to the comparison services, such as moneyfacts.co.uk, which are now available on the internet.
You can look at everything – what the account's rate is, whether it is fixed for a period of time, how you can access the account, whether any additional bonus is applied to the interest rate for a period of time – and compare the benefits of different accounts.
The bonus rate is particularly important, as banks will often add a bonus to a standard interest rate to get the account to the top of the best-buy tables, but when the bonus expires the rate may be pedestrian at best.
There is no reason to avoid the accounts that have a bonus rate added – you may as well get the extra while it is on offer. But always make a diary note of when the bonus expires, and then check the rates on offer again to see if you can move your money to a better paying account.
As an expat, you should consider using an offshore account based in a jurisdiction that has a high level of consumer protection. The key areas are the Channel Islands and the Isle of Man, and often their banks are subsidiaries of onshore banks that are household names.
It is vital you understand what protection you would get from each regime if your bank fails – something few of us worried about before the banking crisis.
Guernsey, Jersey and the Isle of Man all have depositor protection schemes that will pay out the first £50,000 of any savings deposited with a bank within their jurisdiction. Gibraltar will pay out 100 per cent of the amount deposited up to €50,000.
In the European Economic Area, the minimum deposit protection is €50,000, although Cyprus, the Netherlands and, from January 1, 2011, Ireland have increased protection to €100,000.
However, you should always check the depositor protection scheme for the bank you are interested in, as these limits can change at any time.
Find Out How to Apply
Once you have decided on an account, you need to apply for it. If you have a branch of the bank nearby, it may be easiest to call in to complete the relevant forms. That way, you can present the information the bank needs to establish who you are and where you live – usually a passport or driving license with a photo, and utility bills sent to your address within the past three months.
Of course, for many expats this is not possible, so you will have to open the account by post or online. You will still need to provide proof of identity, and usually the banks will not accept photocopies, as these are easy to doctor.
Call the bank using the relevant numbers online, and ask for the details and any paperwork you would need to open the account you want. Always check with the bank what its policy is before you send your documents through the post – and make sure you send them by registered or recorded delivery, so if they go missing you will have an idea of where they have gone astray.
Many banks will allow you to go through the account-opening process online now – Alliance & Leicester International have one of the most sophisticated online facilities – but, even so, you will have to prove who you are, so the bank complies with money laundering rules.
Read the Terms and Conditions
It is always tempting to throw the bumf you get from banks into a drawer, never to be looked at again, but if you do not know what terms are applied to your account, you could end up losing out. Yes, reading these documents can be very dull, but ignoring them can leave you open to unexpected problems.
Banking literature is never easy to get through, but remember: if it is hard to understand, that is most likely to be the area where you are going to get caught out. Make sure you read the small print and don't get stung by the banks because of your ignorance.
It works the other way too. Knowledge is power, and if you know what the bank should be offering, you can make sure it keeps its end of the bargain.
Transfer your Money
If you are transferring money from another account into the one you have just opened – and most people will be – then you have to make arrangements to do this with your existing bank.
If you want to close the account where the money is currently held, you will need to instruct the bank and fill in any necessary paperwork.
This can be easier in some countries than in others, and if you are planning on leaving a country and you want to close the account and have the money transferred before you go, give yourself plenty of time. The UK banking system is, believe it or not, relatively efficient at such requests. If you are dealing with banks in other countries, they may not act so quickly.
In any case, if you are leaving a country and closing accounts, make sure the accounts are closed before you leave to avoid any problems, such as having to go back to sign a document to release funds.
If you returning to the UK from Australia, for example, this could be an expensive mistake.
Tax for expats can be phenomenally complicated, and there is no "one-size-fits-all" solution, so the best thing is to get advice that is specific to the country you are living in and to your circumstances.
The one thing you cannot do with tax is ignore it.
The UK HM Revenue & Customs is cracking down hard on tax evasion by expats, where people have held money offshore and not declared it to the UK tax office.
The powers HMRC now has to force banks to provide details of customers are extensive and, with the announcement in the Comprehensive Spending Review that a further £900 million will be used to tackle tax and benefit fraud, things are only going to get tougher.
It is only fair that you pay the right tax. If you have a bank account offshore and you are subject to tax in the UK, then you must declare it.
The European Savings Directive came into effect in 2005, and gives you the option of having a withholding tax automatically applied to your savings by the EU member state in which you reside, or the institution holding your money will pass on information on the interest you have been paid to the UK tax authorities. Switzerland, Jersey Guernsey and the Isle of Man, although not part of the EU, have put equivalent voluntary measures in place.
Depending on where you hold your account, you may not have this choice – some areas have a default option of the withholding tax.
You need to check with the bank holding your account to be sure what measures apply.
Monitor the Rate at which you’re being paid
Banks are famous for getting your money through the door with a tempting rate, then cutting it while you are not looking. So play them at their own game – check the rate regularly and vote with your feet if you are not getting what you want.