U.S. Tax Shelters for Offshore Investors
FAS CPA & Consultants
We have been talking a lot about offshore banking and the benefits of it in previous posts, but today we are going to take a look at the reverse situation where the USA becomes a preferred banking destination for many foreign investors, corporations and rich individuals. It was no secret that several years ago Switzerland was the place where the wealthy people of the world used to keep their money because it provided a high level of privacy. Unfortunately, many mistreated this opportunity and avoid declaring their wealth to the relevant tax institutions in their home countries. This led to sanctions to a number of Swiss banks and subsequently, tighter rules for offshore banking in the tiny country situated in the heart of Europe.
U.S. was one of the loudest countries to condemn such illegal activities (failure to declare foreign accounts to the home country authorities) and enacted FATCA, but ironically, it is now becoming the new tax haven for foreign investors, due to the fact that provides a greater level of privacy than any other popular offshore banking destination, including the Cayman Islands, the Bahamas, and the U.S. Virgin Islands.
How did the U.S. turn into an offshore haven
After many of the foreign banks were exposed for helping various individuals evade taxes, a large number of the traditional offshore locations tightened their rules, procedures, and monitoring of clients. At the same time, however, the United States is not signed on the global disclosure standards CRS, which means setting up an anonymous shell company in some states of the U.S., such as Nevada, is still possible. As a matter of fact, it is a piece-of-cake process because in many states you will not even be required to present any form of an identity document such as the passport or a driving license if you do the filing online. The beneficial owner will have to give their name, address and phone number, but those can be kept anonymous and a ‘nominee’ can be appointed to be the public face of the company.
Shell companies are not necessarily associated with illegal activities as their main purpose is to provide shelter over a brand’s new product until the release date or as a form of security to rich individuals who may be concerned about their safety and the such of their families. What are more U.S. firms and banks are prohibited by law to knowingly assist any person or a corporation in avoiding taxes, however, the benefits of U.S. banking for offshore customers comes from the fact that few questions are asked and that ensures a greater level of privacy.
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What other benefits are there for offshore investors who bank in the U.S.
Non-residents of the U.S. are taxed in a different way than residents. In a nutshell, foreign account holders will only be taxed on income earned in the United States, but not on the money earned elsewhere and deposited in their U.S. account. So it makes good sense for a foreign businessman or woman to keep a chunk of their assets in an offshore account in the States.
If a foreigner decides to invest in the U.S. there’s a fantastic opportunity for them to increase their wealth without even trying too hard, again thanks to the different taxation rules for non-residents. To briefly illustrate, if a foreign investor buys growth shares and sells them immediately after for profit, they would not be taxable. For more guidance please check IRS Publication 519 U.S. tax guide for aliens. For capital gains from real estate transactions the tax rate is up to 15% for the foreign seller, if the property is kept for over one year and 10% of the proceed (35% if seller is a foreign entity rather than an individual) of the sale will be retained and sent directly to the IRS within 20 days from the execution of the transaction, to comply with FIRPTA regulation. This will force the foreigner to file a tax return to claim any amount paid in excess.
Also, in order to be competitive on the world financial market, the U.S. participates in the Portfolio Investment Loans scheme, where foreign investors who invest in the States and give loans to Americans are granted an exemption from paying taxes on the income they made from their investment.
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What are the best places in the U.S for foreign investors offshore accounts
The four absolute U.S. tax haven states for offshore investors are Delaware, Wyoming, South Dakota and Nevada. Those are the states which have rejected to accept a bill, requesting the identity of the true owner of a shell company (the beneficial owner) to be revealed. Furthermore, Nevada was one of the stars of the notorious Panama Papers report. The reason for Nevada to be one of the most preferred offshore banking destination by the richest 1% of the world’s population is that there’s no income tax and annual franchise tax in the state and the privacy of account holders is guaranteed. What is more, courts in Nevada are historically known to protect the ‘corporate veil.
One of the oldest European financial institution, Rothschild, has opened a trust company in Reno, Nevada, stating that the U.S. is now the biggest tax haven in the world. The trust company helps wealthy families enjoy the security of banking in the U.S. and all they need to do is prove that they comply with all the regulations in their home country and their tax balances are up to date.
Many of the investors who had offshore accounts in the Cayman Islands and Switzerland have moved to banks in South Dakota due to the state’s low-income taxes and confidentiality in the trust laws.
One particular building on 1209 North Orange St. in Wilmington, Delaware (which happens to be not too big) is the registered address for over 250,000 companies, many of which owned by foreigners. The loophole exists because the state has very business-friendly laws, which appeal to investors and entrepreneurs of the world, who wouldn’t be able to benefit from Delaware laws if their companies were not registered in the state.
Although the United States tax laws can be quite tough to the country’s citizens and residents they provide a number of shelters for foreign investors. The U.S. faces a lot of criticism from other countries for maintaining a high level of confidentiality for offshore investors but requiring large amounts of data on U.S. account holders in other offshore destinations. This is exactly the reason, though, that turned the States into the world’s new biggest tax haven and drove loads of foreign investment and cash into the economy. So by all means, a smart move.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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