Can US Persons Benefit from Offshore Companies and Bank Accounts?

Introduction

The benefits of offshore companies and bank accounts for US persons are numerous, ranging from international tax planning to avoiding local regulations. However, the complex international tax landscape for US citizens and residents makes it challenging to navigate these benefits. Moreover, some banks might not even onboard US persons.

Tax Residency

The United States has a worldwide tax system, and its tax residency is based on citizenship, in addition to time spent in the country, permanent residency, and other factors.

Citizenship-based taxation

Even if a US citizen lives abroad with no ties to the country, they are still considered a tax resident. This means that individuals who have lived their entire lives outside the US are still subject to paying taxes on their personal income to the IRS, regardless of the source of the income.

Foreign Earned Income Exclusion

For US persons living abroad, there is a tax exemption on income below a specific threshold, which changes annually. For 2022, the threshold is $112,000. More information can be found on the IRS website here.

Treatment of Offshore Companies and Offshore Bank Accounts for US Persons

US tax residents must report their offshore company ownership and bank accounts in their tax return and appropriate forms.

Controlled Foreign Companies Rule

The Controlled Foreign Companies (CFC) Rule requires US persons to disclose their ownership of offshore companies.

FATCA and CRS

With the implementation of the Foreign Account Tax Compliance Act (FATCA), it has become more difficult for US persons to hide money offshore. Non-US persons still have the option to open accounts in non-Common Reporting Standard (CRS) countries and avoid reporting.

Legal Tax Reduction Strategies

There are ways to legally reduce taxes via international planning, depending on each person's situation.

Types of income

Different types of income, such as royalties, financial income, and services, have their own tax treatment rules, which determine whether the income is taxed once distributed or even if it's not distributed.

Tax deferral

Postponing when the tax is due is known as tax deferral. The rules governing this practice include Subpart F, the Tax Cuts and Jobs Act (TCJA), and the Global Intangible Low-Taxed Income (GILTI).

Subpart F, TCJA, Gilti

Subpart F, TCJA, and GILTI are specific tax regulations that govern the treatment of income from offshore companies for US persons. These rules help determine the tax treatment for various types of income and can be utilised for effective tax planning.

Drastic Approach

One way to escape the US tax system is to renounce US citizenship, but this requires extreme measures like obtaining a second citizenship and starting a new life abroad.

Renouncing US citizenship

Giving up US citizenship is a drastic measure that some individuals might consider to avoid the US tax system. However, this process entails significant life changes, such as acquiring a new citizenship and adjusting to life in a different country.

Exit tax procedure

In countries like Canada, which have a similar tax system, individuals don't need to renounce their citizenship to avoid being tax residents. Instead, they can cut ties with their home country and undergo an exit tax procedure to pay any accrued taxes.

Uses of Offshore Companies and Bank Accounts

Offshore companies and bank accounts offer various benefits for US persons, including international tax planning, asset protection, and access to better business regulations.

International tax planning

Offshore companies can be utilised for effective international tax planning, depending on each person's and company's specific situation.

Asset protection

Offshore bank accounts and companies can provide an additional layer of asset protection, shielding wealth from potential liabilities and risks.

Better business regulations

Offshore jurisdictions often have more favourable business regulations, which can make it easier to conduct international operations and expand into new markets.

Illegal Means

Some people may attempt to conceal their offshore company ownership through illegal means, such as using a second passport or nominee shareholders. While this might help evade taxes, the consequences of getting caught can be severe.

Concealing ownership

Using a second passport or nominee shareholders to hide offshore company ownership can be a risky strategy to evade taxes. If caught, the penalties and repercussions can be severe.

Consequences of tax evasion

Tax evasion carries significant risks, including substantial fines, penalties, and even imprisonment, depending on the severity of the offence.

The USA as a Tax Haven

Surprisingly, the United States is considered a tax haven for non-resident foreigners. The country ranks first in the Financial Secrecy Index, despite its strict tax system for its own citizens and residents.

Conclusion

While US persons can benefit from offshore companies and bank accounts in various ways, they must navigate a complex international tax landscape. Understanding the tax implications and utilising legal strategies can help optimise the benefits of offshore structures while complying with regulations. Careful planning and adherence to tax laws are crucial to avoid potential penalties and legal consequences.