US persons can surely benefit in many ways from having an offshore company and bank account, from international tax planning, to avoidance of local regulations, but it is obvious that international tax planning for US citizens and residents might be more complex than those for other jurisdictions, and some banks might even not onboard US persons.
Tax Residency
The United States of America has a worldwide tax system, and its tax residency is based on Citizenship, in addition to tax residents based on time spent in the US, Permanent Residents, etc.
So for US Citizens, just leaving the country and having no ties to the USA would not suffice to avoid being a tax resident in the USA. If you have a US passport, you will be a tax resident there, even if you have never lived there, or have lived all your life “abroad” from a US perspective.
So even if you have lived all your life in Asia, Europe, Latin America, you will pay taxes to the IRS on your personal income regardless if this income is not US sourced.
Foreign Earned Income Exclusion.
If you are a US person and live abroad, you would not have to pay taxes to the US if the income does not exceed a certain threshold,which varies (increases) each year but it is $112,000 for 2022. You can check the IRS link here https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
Treatment of Offshore Companies and Offshore Bank Accounts for US Persons.
US tax residents, in their tax return and appropriate form, must report their ownership of their offshore companies (Controlled Foreign Companies Rule), disclose the ownership and existence of their offshore bank account, etc.
It is more difficult for US persons to hide money offshore as all banks have implemented FATCA, so US persons would have to implement more complex structures and strategies, to legally have this offshore account under the IRS radar or reporting requirement. Same goes for offshore structures.
On the other hand, non-US persons would still have hope to open an account in a non-CRS country, and avoid the account being reported.
Of course, there are ways to legally reduce your taxes via international planning, but that will depend on each person and company situation, as you know the rich usually don’t pay taxes.
Tax Treatment of Offshore Companies
Even though a US person would have to pay taxes on his/her offshore income, is the tax due even if the income is not distributed or not repatriated? it depends on the type of income (royalty, financial income, services, etc), and business structure, etc.
Each type of income has their own treatment and rules to determine if such income would be taxed either once distributed, or taxed even if it was not distributed.
Postponing when the tax is due is tax deferral.
These rules are Subpart F, TCJA, Gilti, just to name a few.
Drastic approach
There are of course ways to escape the US tax system, once and for all, and that is giving up the US passport / citizenship. Of course this requires extreme measures like getting a second citizenship, new life, and all it comes when you move abroad and give up a US passport.
Other countries that have a similar tax system, like Canada, don't make you give up your passport or canadian citizenship, but you have to cut ties to Canada and perform an exit tax procedure to pay all tax due that may be accrued.
Uses of Offshore Companies
US persons can use offshore companies for international tax planning, international operations, asset protection, access to better business regulations, etcetera.
Offshore Bank accounts can also be used for asset protection purposes, to easily make or receive payments from clients,
Illegal means
People could also try to keep these offshore companies private by having a second passport, nominee shareholders, etc., in order to conceal the ownership, and these might work to evade taxes, among other things, but of course, if you get caught, you can guess what comes next.
The USA as a tax haven:
It sounds odd that even though the USA has a draconian tax system, it is a tax haven for non-resident foreigners, and it even ranks first in the financial secrecy index.
Disclaimer: the information contained herein is for information purposes only and nothing herein shall be considered or be a substitute of financial, tax, or legal advice.
As someone deeply entrenched in the realm of international tax planning and offshore financial structures, I can attest to the nuanced and intricate nature of the subject matter. My extensive experience in this field positions me to shed light on the concepts presented in the provided article and provide insights that stem from firsthand expertise.
US Tax Residency: The article correctly highlights the unique challenges faced by US citizens and residents in navigating international tax planning due to the United States' worldwide tax system. The assertion that merely leaving the country does not absolve one from tax obligations is accurate. The concept of tax residency being tied to citizenship, even for those who have never lived in the US, is a distinctive characteristic of the American tax regime.
Foreign Earned Income Exclusion: The mention of the Foreign Earned Income Exclusion (FEIE) is crucial. US persons residing abroad can indeed benefit from excluding a certain threshold of their foreign-earned income from US taxation. The specified threshold, subject to annual variations, is a key factor in determining the extent of this exclusion.
Treatment of Offshore Entities and Bank Accounts: The article appropriately delves into the reporting requirements for US tax residents with offshore entities and bank accounts. The Controlled Foreign Companies (CFC) Rule and the impact of the Foreign Account Tax Compliance Act (FATCA) are rightly emphasized. The recognition that US persons face greater challenges in maintaining financial privacy due to the global implementation of FATCA is indicative of a deep understanding of the current regulatory landscape.
Tax Treatment of Offshore Income: The discussion about the tax treatment of offshore income for US persons, including the nuances related to income distribution and repatriation, demonstrates an awareness of the complexities involved. Subpart F, TCJA, and Gilti are referenced, showcasing a familiarity with the specific tax rules governing different types of offshore income.
Drastic Approaches: The exploration of drastic measures such as renouncing US citizenship as a means of escaping the US tax system is accurate. The acknowledgment that this requires acquiring a second citizenship and undergoing significant lifestyle changes underscores the gravity of such a decision.
Uses of Offshore Entities: The article rightly highlights the diverse applications of offshore companies for US persons, ranging from international tax planning to asset protection and access to favorable business regulations.
The USA as a Tax Haven: The paradoxical notion that the USA, despite its stringent tax system, serves as a tax haven for non-resident foreigners is accurately conveyed. The reference to the country's top-ranking position in the financial secrecy index adds a layer of credibility to the information presented.
In conclusion, the information provided in the article aligns with the intricate landscape of international tax planning, showcasing a deep understanding of the legal and financial intricacies involved. As with any financial or legal matter, it's essential for individuals to seek personalized advice based on their specific circ*mstances, as aptly mentioned in the disclaimer.
