How To Avoid Tax LEGALLY

A lot of time, money and energy is spent around the world each year by people looking to reduce their taxable income to the lowest possible figure. Some employ high level tax advisers, some set up Tax Free Offshore Companies, some try and disguise their income by engaging in all manner of questionable local tax schemes.

 

But there is another way…

 

Have you ever heard of a PT?

 

PT stands for Perpetual Traveller.

 

A Perpetual Traveller is a person who has no home, or, in legal speak, is not resident anywhere for tax purposes.

 

So how do you become a PT? By creating a situation where you are not resident for tax purposes anywhere.

 

To explain…

 

Most countries have a multifaceted tax residency test:

(a)   Generally speaking if you are inside a particular country for more than 6 months you would be classified as tax resident in that country and liable to declare income in, and pay tax in, that country

(b)   That said you can be resident somewhere for less than 6 months a year and still be classified as a local resident for tax purposes if you have a “substantial connection” to the country.

 

In determining whether you have a “substantial connection” the tax authorities would look at a range of factors including do you have a spouse from or living in that country? Do you own a residence there? Do you have children there? Do you own a car there? Do you have a bank account there? Do you own assets there? Do you have a driver’s license there? Do you have insurances there? Are you a member of a club there (eg golf club, tennis club, social club) etc etc etc.

 

If you want to become a PT the starting point is to create a situation where you are no longer tax resident in your home country.

 

How might you go about that?

 

To maximise the chances of being able to escape your home country’s tax system probably what you will need to do is:

 

  • Sell your current business (or quit your local job)
  • Sell your local home
  • Sell all your locally located assets
  • Close down your local bank accounts

 

Then what you do is you jump on a plane and head abroad. Once you’ve reached your next destination what you do is you send a letter to the tax office/IRS of the country you just left advising them that you’ve departed the country permanently and filed your last tax return.

 

In the perfect world what you then might do is spend 5 months in one country, 5 months in another country & spend a couple of months travelling.

 

Then you set up a tax free “Offshore” Company as your business ownership or income receiving vehicle.

 

It takes courage, time and effort to become non tax resident. But the rewards could be massive; (as well as living a more adventurous/exciting life) you might (LEGALLY) never have to pay income or business tax again!

 

How To Use A Private Foundation

I am often asked can I invest or do business Offshore using a Foundation?

 

There are limits, at law, to what a Foundation can do. Foundations are designed as passive asset holding vehicles eg to hold cash at bank or to hold a piece of real estate or to hold a parcel of shares. Any asset which you intend to hold onto for the mid-long term can be owned/held by a tax free Offshore Private Foundation.

 

A Foundation cannot however operate a Trading Operation or a Mercantile style business ie an enterprise which aims to generate a profit from regular buying and selling.

 

The starting point is to set up a Foundation then, once you want to take out a mortgage or once you want to start buying and selling regularly or once you want to start actively investing (eg trading shares/forex etc regularly) you could/would add a Company to the structure (ie the Foundation would resolve to form a/the Company ie the Foundation would be passive it would just hold the shares of the company).

 

The Company is your revenue raising machine. The role of the Foundation is to own the Company. Such a structure can deliver both asset protection and tax planning opportunities. Howso?

 

  1. Because at law a Foundation is both the legal and beneficial owner of any asset it holds. The makes it nigh on impossible for your judgment creditors to seize assets held by or income flowing to the Company.
  2. If you structure and manage the Combo correctly you should only have to pay tax on income paid to you by the Foundation or the Company. The rest of the money earned by the Company can be held and or reinvested offshore potentially tax free (and thanks to the power of compounding you should reach your ideal nett worth goal years if not decades sooner than you would otherwise).

 

What is the Power of Compounding?

 

The power of compounding is the snowball effect that happens when your earnings generate even more earnings. You receive interest not only on your original investment, but also on any interest, dividends, and capital gains that accumulate—so your money can grow faster and faster as the years roll on.

 

Here’s a comparison. Person A and Person B.

 

Both persons place $100,000 into a Managed Fund which pays 12.5% per annum.

 

Let’s assume Person A pays 12.5% tax each year on his earnings. Person B doesn’t have to pay tax on his earnings.

 

After 10 years person A will have $120,000. Person B will have $210,058 in his account (thanks to the Power of Compounding)..

 

As always local laws can have an impact. So be sure to seek local legal/tax/financial advice before committing to set up an Offshore Corporate structure like that described above.

 

 

How to Use an Offshore Company (IBC) to Invest in pre IPOs & Cryptocurrencies

Pre IPO buyin, and in particular Cryptocurrency speculation, is becoming a popular way to potentially make a lot of money very quickly.

 

We’ve seen many clients invest in the early stages of the development of new Technologies & Cryptocurrencies and go home with substantial sums of money in their pockets.

 

So what is a cryptocurrency and why are cryptocurrencies so popular?

 

In very simple terms a Cryptocurrency is a non-asset based digital means of exchange. Typically value is created by a mathematical process called mining whereby the ”coin’ is birthed once a mathematical equation has been closed. This equation grows mathematically tougher to solve the more coins are mined.

 

Particularly for those investing in the embryonic stages of a digital currency’s development (eg pre IPO) there is the potential for a massive capital gain to be realised. For example when Bitcoin came to market it started at circa $1 and grew at its height to over $1,200.

 

For those who get in on the ground (eg if you help fund the cost of bringing such products to market) the returns are potentially even higher.

 

If you are investing or thinking of investing in a program such as this, the prudent thing to do would be to set up a tax free Offshore Corporate structure to hold this investment before its value booms.

 

To summarise how it would work is:

 

  • You set up a zero tax Offshore Company eg an International Business Company (“IBC”).
  • The IBC would enter into a contract with you to buy the Investment/Cryptocurrency at its present value.
  • The sale will need to be seen to be at fair market value (you can’t just sell the Investment to the IBC for one Dollar/Euro!). And the contract of sale will need to be seen to be on normal or reasonable commercial terms. That said the sale contract could be an instalment or vendor finance contract ie where a deposit is paid and ownership is transferred but the seller retains a mortgage until such time as all the instalments have been paid.
  • Depending on where you live you may be able to “gift” the property to an Offshore entity. It might be difficult to explain why you’re gifting a piece of property to an IBC hence the smarter thing to do might be to set up (and transfer ownership of the property to) a PIF ie Private Interest Foundation (eg a Charitable Purpose Foundation). This one might survive the “sniff test”. Why? Because all day every day well intentioned wealthy persons gift money or assets to Charitable causes.
  • Once the investment booms your IBC sells or exchanges the investment for hard currency (eg USD) and banks the profit free of tax.
  • For all intents and purposes the IBC’s trading profits are generated in a nil tax environment tax free/offshore (ie provided the IBC Is structured properly).
  • If you structure the Company correctly you should only be liable for tax at home once you draw down money from the Company.
  • This should enable you, via the power of compounding, to grow your nest egg MUCH faster than you would otherwise had your company been liable to account for Corporate tax each year (eg up to 40%, depending on where you live).

 

Timing

 

Are you involved in an Investment or Trading Program (ie Trading bank/negotiable instruments) or a Private Placement Program and expecting a big pay day soon or in the not too distance future?

 

If so there are certain things you need to be aware of.

 

Often we are approached by persons looking to set up a tax free Offshore Company and or Tax Free Offshore Bank Account in anticipation of receiving profits from a private placement or bank trading programs.

 

The common misapprehension of 99% of such clients is that all they have to do to avoid paying tax at home on such a windfall is to set up an Offshore Company or Bank Account and have the proceeds paid into that

 

If you are in this position, to avoid tax in your home county, you will need more than just an offshore bank account to receive funds into.

 

Tips:

 

  1. You will need to ensure that any contracts or instruments held or signed entitling you to a payday are sold to, transferred to or assigned at law to your tax free Offshore Company before you becomes entitled to be paid the profit.
  2. Immediately you become entitled to receive the profit, even if you haven’t received the money yet, it’s a taxable event.
  3. Hence if you want to avoid having to pay tax at home on the profits of your trading or private placement program you will need to set up a tax free Offshore Company BEFORE he become entitled to the profit.

 

Local laws can have an impact. Hence it would be wise to seek local legal/tax/financial advice before committing to invest in such a product/offering and before committing to set up an Offshore Corporate structure for such purposes.

 

 

Differences Between Seychelles and Belize Foundations

 

We are often asked “What are the differences between a Seychelles Foundation and a Belize Foundation?”

 

What I can tell you is that the Seychelles Foundation Law is basically a copy of Panama’s and very similar to Belize’s (which is also modelled on Panama) but with a couple of additional (in my view, very attractive) features including:

 

  • The rights of the Founder of a Seychelles Foundation can be assigned. This enables complete privacy because normally the Founder’s name appears in the Charter (which is publicly filed as part of the registration process). With a Seychelles Foundation however you can use a Nominee Founder (who then immediately following registration assigns his/her/its rights to you).
  • The Seychelles law specifically states that the Foundation is both the legal and beneficial owner of any assets it holds. This is (a) a fantastic tax planning feature because traditionally onshore tax authorities have taxed such entities on the basis that the beneficiaries are the beneficial owners of the entity and thus entitled to income from the entity. It also means (b) when opening bank accounts or incorporating subsidiaries that you can avoid your name being recorded as the beneficial owner of the Company notwithstanding that you/your spouse/your family may be named as beneficiaries of the Foundation.
  • The Seychelles law also states that the beneficiaries are owed no fiduciary duty by the Foundation Council (which bolsters the above proposition ie that it is the Foundation which owns the assets/income for tax purposes)

 

 The Seychelles law also provides additional asset protection provisions eg:

 

  • It specifically says that a transfer of property to a Seychelles Foundation, shall not be void, voidable, liable to be set aside or otherwise defective in any manner by reference to a foreign rule of forced heirship or any other written law of a foreign jurisdiction
  • It also says that a transfer of property to a Seychelles Foundation, shall not be void as a consequence of the founder’s bankruptcy or the liquidation of the founder’s property; or any action, proceedings or other claims against the founder brought by any creditor of the founder. (Note: these asset protection provisions don’t appear in the Belize law).

 

 

CONTRACTORS: How To Run a Business From Offshore

With the advent of the internet, the spread of economic liberalisation and the rise of the global village more and more professionals (and skilled workers) are being offered the opportunity to work as contractors particularly for International/Multinational business/es.

 

No matter whether you a Civil Engineer, Software Developer, Accounting/Finance Professional or some other kind of skilled worker if you are able to work online or on the ground outside of your home country (or even if you are simply employed locally on a contract basis) the opportunity exists for you to potentially minimise your tax via “Offshore” Incorporation.

 

For the purposes of this article I’m going to break down the opportunists into 3 categories (ie Online Contractors, Expat Professionals an Local Contractors) and then explain how each can potentially benefit from “Offshore” Corporate Structuring.

 

  1. 1.      Online Contractors

 

Contractors capable of receiving “orders” (ie work instructions) online and delivering services online would include:

  • IT professionals
  • Design professionals (eg Engineers, Architects, Draftsmen etc)
  • Finance Professionals
  • Marketing Professionals
  • Etc.

 

If you fit into one of the above categories here’s how an Offshore Corporate Structure could work for you:

 

(a)   A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated

(b)   An Offshore account is set up in a nil tax banking centre

(c)    Customers/clients contract with and pay the IBC. The IBC Invoices the clients from offshore. Payment for invoices rendered are banked free of tax in the first instance.

(d)   In the case of an online business typically tax liability lies only in the country from which the Company is managed and controlled

(e)   The Company would be structured with a (tax haven based) Nominee Director/Shareholder (ie management and control would be “Offshore” ie in a nil tax environment)

(f)     (Thus) any profits earned have been earned (and ideally banked) Offshore ie in a nil tax environment

(g)   You or your local company would be sub-contracted by the IBC to actually perform the services

(h)   You would invoice the IBC periodically (eg monthly) for this work which income would be assessable income in your home country – though a smart Tax Accountant should be able to assist you to claim a series of expenses against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.

(i)     The rest of the income earned by the IBC can be held (and potentially invested) offshore tax free.

 

Note if you live in a country which has CFC Laws (see below which explains what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.

 

  1. 2.      Expat Professionals

 

The most common example here is a qualified eg technical professional who is offered a fat contract to work for several years in a faraway place.

 

If that’s you here’s how an Offshore Corporate Structure might work for you:

 

(j)     A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated

(k)    An Offshore account is set up in a nil tax banking centre

(l)     Your employer contracts with and pays the IBC. The IBC invoices the clients from offshore. Payment for invoices rendered will be banked free of tax in the first instance.

(m) As a general rule tax liability lies only in the country from which the Company is managed and controlled. Hence the Company would be structured with an Offshore (tax haven based) Nominee Director/Shareholder (ie management and control would be “Offshore” ie in a nil tax environment)

(n)   (Thus) any profits earned have been earned (and ideally banked) Offshore ie in a nil tax environment

(o)   You would be sub-contracted by the IBC to actually perform the services

(p)   You would invoice the IBC periodically (eg monthly) for this work – this money you would send home to your family and or to cover your expenses (eg mortgage/loans) back home.  These payments would be assessable income in your home country – though a smart Tax Accountant should be able to assist you to claim a series of expenses against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.

(q)   The rest of the income earned by the IBC can be held (and potentially invested) offshore tax free. (see also below re how to access money banked Offshore).

 

NOTE: if you fit the above criteria you could also set up an Offshore recruitment agency Company – see below which explains how that can/will work

 

Note further if you live in a country which has CFC Laws (see below which explains what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.

 

  1. 3.      Local Contractors

 

With the deregulation of the labor market world-wide, more and more workers are being shifted from “Full time” to “Contractor” status.

 

If you’ve recently been asked to (or decided, moving forward, to) work on a contract basis what you could do is set up an Offshore Recruitment Agency Company.

 

Here’s how that might work:

 

  1. You would incorporate a nil tax Offshore Company. It might be called something like International Professional Recruitment Services Ltd  (hereinafter, “IPRS Ltd” or the “Employment Agent”)
  2. This business would be characterized as and appear to the outside world to be a Professional Recruitment Agency or a (Specialist) Labour Hire Company
  3. You would tell anyone who wants to hire you eg your existing employers (or contract counterparty if you are on a contract) that, as IPRS Ltd can offer you (a) consistent employment + (b) jobs the world over, and as they are experts in finding contracts for your Profession/Trade/Occupation, you are contracted exclusively to IPRS Ltd and anyone who wants to hire you has to sign an agreement with, and must pay, IPRS Ltd.
  4. Your existing employers (or contract counterparty if you are on a contract), assuming they wish to keep you employed/engaged, would then have to sign a labour hire agreement with IPRS Ltd.
  5. Your existing employers (or contract counterparty if you are on a contract) would thereafter pay your wages (or contract fees as applicable) to IPRS Ltd.
  6. IPRS Ltd would keep a percentage of these payments as Agency commission (it could be anywhere from 2.5% to 50%).
  7. The remainder of monies (ie after IPRS Ltd has retained its agency commission) would be paid to you by IPRS Ltd
  8. The monies received by IPRS Ltd should be receipted free of tax and could be held and or invested Offshore potentially tax free.

 

For the above to work the agreement between your employers (and the agreement between you) and IPRS Ltd would need to be (and be seen to be) commercially realistic.

 

Note if you live in a country which has CFC Laws (see below which explain what they are) you’d be wise to include a Foundation as part of your Corporate structure. See below which explains why.

 

What is a Controlled Foreign Corporation Law?

 

A Controlled Foreign Corporation (or CFC) Law is one which purports to tax onshore income or capital gains made by Companies incorporated Offshore but which are controlled from onshore.

 

Essentially how a CFC law works is if an individual owns or has the capacity to own the overriding majority of shares in an Offshore Company (the percentage of which varies from country to country) the that person is required to declare in his local tax return profits made by the Offshore Company.

 

How CFC laws came about was around 30 years ago the big western countries began to realise that certain of their citizens were using nil tax Offshore companies to avoid having to pay tax at home on their non-local sourced (ie international) income. In particular the CFC laws target the use of Nominee Shareholders and Directors. If you live in a country which has CFC laws (regardless of whether you are the director/shareholder of the Company or not) if you have the capacity to own and control the company by reference to shareholdings then you would be required to declare and pay tax at home on your Offshore Company’s earnings.

 

There are several ways to get around CFC laws. Historically clients used commonly to deploy an Offshore (Discretionary) Trust to own the shares of the Offshore Company. However with more and more “Onshore” tax systems claiming tax from any Trust with an onshore resident beneficiary discerning clients these days choose to establish Private Foundations (in particular Seychelles Foundations) as the ultimate holding entity as such entities should not caught by CFC laws or by CFT (Controlled Foreign Trust) Laws. For more detail click on these links:

 

http://offshoreincorporate.com/private-interest-foundations/

 

http://offshoreincorporate.com/seychelles-foundations/

 

http://offshoreincorporate.com/seychelles-foundations-fact-sheet/

 

 

Why set up a Foundation?

 

If an IBC alone is used you will still be liable to declare and pay tax at home on your IBC’s earnings if/when you live in a country which has a Controlled Foreign Corporation (“CFC) law. Failure to do so I believe would constitute tax evasion.

 

What you might do then is set up a Private Interest Foundation to own the shares of the Offshore Company.

 

We used to use Offshore Trusts for such purposes back in the noughties but the problem there is that you have someone (ie a Trustee) holding property for the benefit of 3rd parties who are inarguably beneficial owners of that property and probably/potentially entitled to the income/capital of the Trust (which can have tax consequences onshore).

 

A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation. A key advantage of a Foundation is that it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and generally speaking the beneficiaries are not entitled to the income or capital of the Foundation until it’s actually received.

 

What this means as a beneficiary is that you should be able to defer paying tax at home on the income of investments held by the Foundation enabling you to reinvest 100% of that income not just the after tax component. (One jurisdiction ie Seychelles has even taken this a step further by specifically stating in their law that the legal and beneficial owner of any asset held by the Foundation is the Foundation itself).

 

Seychelles Foundations

 

If you are a resident or citizen of a country which has the ability to track Offshore Bank account beneficiary details and you would like to keep private details of your Offshore earnings (or if you plan to set up a very sensitive business eg one that might illegal if owned/operated from where you live) again a Seychelles Foundation can help:

 

How so?

 

It all comes back to the legal structure/operation of the Seychelles Private Interest Foundation.

 

Bottom line is notwithstanding that individuals (or a class of beneficiary) may be named as beneficiaries in the Regulations:

 

  1. The beneficiaries have no legal or beneficial interest in property owned by the Foundation (unless or until such time as that property is transferred to them – see section 71 of the Seychelles Foundations Act attached).
  2. The Foundation is a legal entity in its own right not a mere Trustee (See section 23)
  3. The Councillor of the Foundation owes no Fiduciary duty to the beneficiaries (see section 63)

 

As such there is no “beneficial owner” of the Foundation. The beneficial owner of any property/asset owned or held by the Foundation is the Foundation itself.

 

There are a number of ways to bring home money from an IBC. Contact me for details.  

 

Note also unless you (have expatriated or) live in a country that does not have CFC laws (and/or unless or are structured in a tax effective/compliant manner) you may still be required to declare and pay tax at home on your IBC’s earnings.

 

Local laws can have an impact. Hence you should seek local legal/tax/financial advise before committing to set up a Corporate structure such as that described above.