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"One of the greatest pieces of economic wisdom is to know what you do not know"   John Kenneth Galbraith

Buzzword: IBC (International Business Company):
The "IBC" is a Caribbean flavored "legal entity" similar to the U.S. based corporation or limited liability company. The IBC, like any corporation, has members (shareholders), officers, and directors.

Major Advantages of IBCs:
Simplicity and Flexibility.
International Business Companies are generally created in a "tax haven" jurisdiction, and must be owned or controlled by non-residents. IBCs are authorized and readily accepted to do business world-wide, excluding the country of incorporation. In exchange, IBCs pay NO taxes, whatsoever, in the jurisdiction of incorporation. 

Other buzzwords are: FLLC (Foreign Limited Liability Company), FAPT (Foreign Asset Protection Trust).

The International Business Company (IBC) "Legal Entity" is used for international wealth preservation and asset protection. If you have been told more than that, congratulations! you’ve just found an incompetent advisor, scam artist, or worse.  Don’t walk, RUN.

Warning:  --An incompetent advisor can cost you more than just money. 
When contemplating doing business internationally be certain that the advice you receive is from a competent professional familiar with such matters.  Avoid unpleasant legal and harmful tax consequences.  Only professionals familiar with international and offshore taxation can provide you (the "U.S. Person") with proper advice.  Foreign professionals, foreign banks and foreign institutions cannot be relied upon.

IBC Jurisdictions:
The British Virgin Islands (BVI) has the most registered IBCs, estimated at 360,000. Next, is the Bahamas at 113,000. Other jurisdictions include, Antigua, Cayman Islands, Belize, Isle of Man, Panama, the Channel Islands, Hong Kong, Gibraltar, Turks and Caicos Islands, Cook Islands, St. Vincent, Nevis, and Vanuatu, to name a few. So what’s the mystery? What’s the chatter all about?

Historical Perspective:
Offshore Financial Centres, in order to attract "new" financial business to their islands re-invented themselves by enacting "exempt"  legislation laws. The British Virgin Islands (BVI) was the first to implement the International Companies Act ("the ACT") of 1984. Because of it’s spectacular success others followed, but BVI remains the most sought after IBC registration jurisdiction.

The desirability of the BVI jurisdiction is related to the pro-business environment, flexibility as a corporate vehicle, minimal information and disclosure requirements, global identity, widespread recognition, and exemption from local taxation.  

Common to IBCs:
Common to all IBCs are the dedication to business use outside the  incorporating island jurisdiction.  Bearer shares are permitted in some jurisdictions, one person may act as the sole shareholder/director/officer and does not have to reside within the country of jurisdiction. "Bearer Shares" means he who owns the shares (undisclosed) owns the company. Shareholder meetings, corporate records, accounting records need not be kept within the country of jurisdiction. It’s entirely possible that the identity of the shareholder/director/officer may never be disclosed to the government.

Formation:
International Business Companies (IBCs) can be formed in any jurisdiction at very competitive prices, usually within 24 hours, by a locally registered trust company, accountant, or attorney.  (registered trust companies are generally bonded and insured).  There's approximately 2.5 million globally registered International Business Companies, of which 37% are to be found in the Caribbean and Latin America, 25% in Europe, 30% in Asia and the Pacific, 8% in Africa and the Middle East. -source: Working Paper of the United Nations Office for D.C.C.P.

Tax and Incentives of an IBC:
A lot of Americans don’t understand the popularity of an IBC "Legal Entity." Several  offshore international financial centres have made the IBC an uncomplicated business vehicle adaptable to all kinds of business, easy to implement with minimal paperwork requirements, with increasing global recognition and acceptance. Practical Applications

Some of the financial incentives are:

A minimal requirement of one (1) shareholder and director.

Assets placed within the IBC are protected from creditor suits, court judgments, or government seizure.

Another legal entity may serve as a director.

Local Jurisdiction Exemption from all corporate taxes.

Local Jurisdiction Exemption from income tax, or capital gains tax, or any tax on the transfer of assets or securities to any person.

Local Jurisdiction Exemption from all withholding taxes on dividends, interest or other returns to shareholders.

No Statutory audit restrictions or requirements. Company books can be kept anywhere in the world.

Shareholders meetings can be held anywhere in the world.

No minimum share capital requirements.

No annual returns or accounts requirements.

Availability of wide range of professional services.

Ability to issue bearer shares (undisclosed owners in the IBC).

What can an IBC do:

In general, an IBC "Legal Entity" may engage in any lawful activity(ies) not restricted by the country of incorporation or the jurisdiction in which it may want to operate, including shipping, manufacturing, consulting, transportation, communication, licensing, sub-licensing, etc.
An IBC may engage in any international lawful commerce, including within and without the United States. However an IBC may not engage in banking without a proper license, may not engage in trust services, insurance, re-insurance, or captive insurance without a proper license, may not engage in a stock broker or commodity trading company without proper licensing.

An IBC may act as a holding company with ownership in other legal entities.

An IBC may provide loans, collection services, act as a finder, collect finder’s fees and commissions.

An IBC may hold title to real and intangible property such as real estate or a patent.

An IBC may enter into leasing arrangements for real or personal property such as equipment, motor vehicles, or other machinery.

Act as an import / export company, or a fulfillment company take orders, invoice, drop ship, re-invoice.

An IBC can license intellectual property.

Added layer of wealth/asset protection and privacy. An IBC can become the medium from which to manage lawful international activities such as an Asset Protection Trust (domestic or foreign), a Limited Liability Company (domestic or foreign), be the General Partner in a Limited Partnership (domestic or foreign), or other legal entities to provide and protect privacy.

Probate avoidance.

Practical Applications

"  O f f s h o r e "  Is NOT a Dirty / Intimidating Word:
The International Monetary Fund (IMF) has written a most comprehensive offshore financial report.  I Strongly urge you to go to their website:

Click here: Offshore Financial Centers
IMF Background Paper
Prepared by the Monetary and Exchange Affairs Department
June 23, 2000
http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm

To quote the International Monetary Fund (IMF):  
"OFCs (Offshore Financial Centres) can be used for legitimate reasons, taking advantage of: (1) lower explicit taxation and consequentially increased after tax profit; (2) simpler prudential regulatory frameworks that reduce implicit taxation; (3) minimum formalities for incorporation; (4) the existence of adequate legal frameworks that safeguard the integrity of principal-agent relations; (5) the proximity to major economies, or to countries attracting capital inflows; (6) the reputation of specific OFCs, and the specialist services provided; (7) freedom from exchange controls; and (8) a means for safeguarding assets from the impact of litigation etc.
They can also be used for dubious purposes, such as tax evasion and money-laundering, by taking advantage of a higher potential for less transparent operating environments, including a higher level of anonymity, to escape the notice of the law enforcement agencies in the "home" country of the beneficial owner of the funds. "

U.S. Persons:
When a "U.S. Person" forms a foreign corporation in a  favorable "no-tax" international jurisdiction, the United States laws will recognize that corporation, for "LEGAL" purposes, as a corporation.  However, for "TAX" purposes (not legal purposes), the IRS may classify that legal corporation for TAX purposes as something else, such as a "disregarded entity" (one owner) or a partnership (two owners). A "disregarded entity" for TAX purposes means the Internal Revenue Service (IRS) will assign whichever entity produces the greatest tax liability for the disregarded entity.

The only real opportunity for U.S. tax avoidance and deferral is in the business arena rather than in the investment arena. To the extent that a non-U.S. based business can operate without having any employees or agents in the United States, the profits are not subject to U.S. taxes. That's true even if the products are sold to U.S. customers via the Internet.  Warning: Controlled Foreign Corporation (CFC) classification is complex (IRC §951 thru §960), consult with a competent professional.

It’s the law:   "U.S. Persons" are taxable on their word-wide income, no matter what/where/when/how the source of such income, unless there’s an exception or exemption i.e. Tax Treaty.

A "U.S. Person" is defined by Internal Revenue Code Section §957(d) as:

  1. A citizen of the United States,

  2. A resident of the United States, (Warning: A foreign citizen living in the United States for more than 182 days is considered a taxable U.S. resident by operation of IRS Code and is taxable on his world-wide income, even if he/she never did any business in the United States)

  3. A domestic corporation,

  4. A domestic partnership; or

  5. An estate or trust other than a foreign estate or trust.

Warning:   --Avoid legal and harmful unpleasant results.  There’s a myriad of  reporting requirements by a "U.S. Person" some of which may have financial penalties, tax adverse consequences, and/or criminal sanctions.  An incompetent advisor can cost you more than just money.  When contemplating doing business internationally be certain that the advice you receive is from a competent professional familiar with such matters. Foreign professionals, foreign banks and foreign institutions cannot be relied upon.

Recognizable names doing business internationally:
Michael Jackson, singer writer, producer.
Michael Jordan, basket ball player, Chicago Bulls.
Bill Gates, Microsoft.
Michael Dell, Dell Computer.
Rupert Murdoch, media magnate.
H. Ross Perot, former presidential candidate, owns large property in Bermuda.
Sir John Templeton, managed in excess of $2 billion for clients world-wide 
      gave up his US Citizenship years ago, now lives in the Bahamas.
Nicholas F. Brady, former U.S. Treasury Secretary whose department was
     responsible for Treasury Regulations under Internal Revenue Code
     (IRC) sections §951 thru §958 for Controlled Foreign Corporations 
     (CFCs) back in 1962.

 

 

Practical Applications

Consider this
:
  A secondary reason why noted people like Michael Jackson and others bank in the Bahamas and other recognizable tax haven jurisdictions, is for unbending asset protection and wealth preservation.  Creditors and their very clever contingent fee lawyers cannot seize, lien or investigate bank records in tax haven jurisdictions due to strong bank secrecy laws.  All of the largest banks in the world have to go through the local courts.  Judgments are not enforceable in non-United States jurisdictions.  U.S. contingent fee lawyers and their clients have a significant jurisdictional problem: only citizens of the tax haven jurisdiction can practice law.  U.S. lawyers or their clients will have to hire a local law firm and pay up-front legal fees, post bonds, pay court costs, and pre-pay other expenses to pursue their claims.  Generally speaking, foreign generated claims/judgments are frowned upon by the local authorities.

The internet is facilitating world-wide banking, exponentially:  It's a fact:  most businesses that operate on the internet could legally and legitimately be organized in any of the tax havens of the world, and legally not owe any United States income taxes on their earnings.  Most international U.S. based companies utilize this fact to its maximum potential.  The IRS taxes United States shareholders of a foreign corporation only on their "sub-part F income" that the foreign company earns.  Profits from services performed in the local tax haven jurisdiction or any foreign country itself, are not considered "sub-part F income" by the IRS!  American laws curbing the use and abuse of offshore tax havens have been around since the Kennedy Administration.  In over 37 years, only minor changes to the U.S. Controlled Foreign Corporation (CFC) provisions under Internal Revenue Code sections §951 to §960 have been enacted.  

Tax law benefit: "legally - trading U.S. stocks & bonds tax free"   Offshore banks and companies are not subject to United States capital gains taxes on their publicly traded Wall Street type stocks, bonds, and commodity trades, see section  §871(a)(2) of the Internal Revenue Code (IRC); also see IRC §881 and IRC §897(c)3 together with Treasury Regulations §864-2(C)1 & (2).  The United States has never taxed the capital gains of Non-Resident Aliens (NRA), offshore companies, offshore trusts, and offshore banks, unless the foreigner was doing business within the United States.  "Doing business within the United States," generally means operating through a U.S. office or permanent establishment from within/inside the United States.  (These same tax benefits for foreigners are NOT offered to it's own United States Citizens)

The United States Income Tax Code even exempts a non-resident company from United States capital gains taxes, even when it does have an office and staff inside the United States, "if all the company's business amounts to merely trading in the United States Stock Market."  From his home in Connecticut, or office on Fifth Avenue in New York, or in the Sears Tower in Chicago, or from Beverly Hills California, or Boston's Prudential Tower, any person working for an offshore company could call his broker at Merrill Lynch or Paine Webber, or use his Internet Discount Broker, and day trade NYSE, NASDAQ or AMEX listed securities 1,000 times a day/week/month, and no tax on the profits would be owed the United States Treasury.  IRC § 871(a)(2) gives Foreign Aliens non-taxable advantages not available to its resident-citizens.

With proper financial engineering:  Foreign investors may receive preferential tax treatment by utilizing tax exemptions created by Internal Revenue Code (IRC) §881; §897(c)(3); §936; U.S. Treasury Regulations §864-(C)(1) and §864-(C)(2); further enhanced by the Canadian / United States Tax Treaty.

This benefit is not available to
a "U.S. Person".

An example:
 
Paris, France resident Msr. Francois Dumont (or any non-United States person) investing $10 million in Canadian utility bonds with a  yeald of 12% would pay NO United States taxes on $1.2 million of yearly interest, and if he sold his bonds for $14 million, Msr. Dumont would pay NO capital gains taxes on his $4 million profit.  Moreover, by utilizing a “United States Virgin Island exempt company” not only does Msr. Dumont receive tax preferred investor treatment, but he is covered by the United States extensive network of treaties of Friendship, Commerce and Navigation and bi-lateral investment treaties that offer protection against "expropriation of assets" and other benefits, and including access to the United States Federal court system, and pay NO-United States Inheritance/Estate Taxes.  (Note:  Canadian withholding taxes are 25% on interest paid to non Canadian treaty countries, the statutory withholding requirement is dropped to 0% on interest by virtue of Canadian / U.S. treaty, and 15% on dividends).  

"Special Exemptions" under IRC §936 apply to The U.S. Virgin Islands, Puerto Rico, Guam, the Northern Mariana Islands, and the American Samoa.  These "possessions" of the United States have "mirror systems of U.S. taxation" by transforming the Internal Revenue Code (IRC), as amended, into a "local code" by substituting "its name" for the name of the "United States" when appropriate.  Residents are United States Citizens, but for "tax purposes" they can become "offshore" with access to the U.S. Court Systems and all bi-lateral tax treaties.

Warning:  -- An incompetent advisor can cost you more than just money. 
When contemplating doing business internationally be certain that the advice you receive is from a competent professional familiar with such matters.  Avoid unpleasant legal and tax-trapped consequences.  Only professionals familiar with international and offshore taxation can provide you (the "U.S. Person") with proper advice.  Foreign professionals, foreign banks and foreign institutions cannot be relied upon.  
(
Click here for reporting requirements)

Avoid unpleasant and harmful Tax-Traps by hiring a --Qualified, Competent Professional. 
Effective January 1, 2001 Treasury Regulations §§1.144-1 through 1.114-7 and CFC rules under the provisions of the Internal Revenue Code §§951-964 require foreign banks and foreign financial institutions to become "qualified intermediaries" or "QIs" with the Internal Revenue Service.  These onerous requirements if not handled appropriately will have severe unwanted and unpleasant adverse tax consequences:

Withholding tax of 30%.

Capital losses from investments by the "U.S. Person" are not deductible until the foreign entity is liquidated.

Capital gains normally taxed at 20% are converted to ordinary taxable income, taxed at 39.6%.

The "U.S. Person" may be double taxed on dividend distributions from U.S. sourced income i.e. dividends from US companies.

Sale of the foreign entity is taxed at ordinary income taxes (39.6%), NOT capital gains tax rate of 20%.

The basis in the foreign entity does not get the "stepped-up" basis for estate tax valuation.

Foreign inheritance taxes may apply if a "U.S. Person"  purchases foreign based securities.

Passive investment income may be subject to CFC (Foreign Corporation Classification) and PFIC (Passive Foreign Investment Company) complex rules and a 30% withholding tax.

Internal Revenue Tax Return Filing Requirements.

Disregarded entities for IRS income tax purposes.

 

 

 

 

Some Statistics:   "Statistics are like bikinis.  What they reveal is suggestive, but what they conceal is vital." - Aaron Levenstein

25% - the percentage of Americans investing offshore with an annual income over $100,000 (source: The US Department of Commerce)

20% - the percentage of reported growth of foreign bank accounts filed by U.S. individuals and corporations between 1995 and 1999. (source: The Economist)

25% - the chances of a U.S. citizen will have a catastrophic lawsuit during their lifetime. (source: The Economist)

1% - the percentage of the world's population represented by offshore financial centers. (source: The Tax Haven Guidebook)

50% - the percentage of the world's wealth found in those offshore financial centers. (source: The Tax Haven Guidebook)

31% - the percentage of profits of U.S. multinational corporation to be found in those offshore financial centers. (source: The Tax Haven Guidebook)

60% - percentage of Bermuda captive insurance business provided by U.S. companies. (source: The Economist)  Bermuda is the largest offshore insurance jurisdiction with over 1,500 registered insurance companies with annual premiums exceeding US$16 billion.

87% - percentage of offshore hedge funds which outperformed the S&P 500 in February 1999.(source: The Economist)

43% death tax rate or ($2,170,250 - the approximate "federal" estate taxes that would be owed by a California resident who died with a $5,000,000 estate.) California tax could be an additional 10%.

3,000,000 - estimated number of Visa cards issued by the Caribbean islands for the four quarters ended 3/31/99. (source: Visa.com)

$1,300,000,000 - estimated sales volume to those Caribbean cards. (source: Visa.com)

Final Thoughts:   Ask yourself?
Why do nearby tax havens like Cayman Islands, Barbados, and the Bahamas rival such money centers like London, Tokyo, and New York?  Why is that?

Tiny pint sized Cayman Islands, 5th largest banking in the world,  boasts more than 595 commercial banks exceeding  estimated $600 billion deposits (unconfirmed, probably that's more than on deposit in all California's commercial banks in comparison by size and scope of the tiny island Vs. California, where's the money coming from?), while Bahamas once the third largest financial center, just 50 miles from the Florida coast, has more than 400 banks and trust companies with unconfirmed estimates of $300 billion deposits.  Ask yourself, why is that?   Who's money is that? 

Last Question?
Why are most recognizable world banks, including U.S. banks,  U.S. Big Six accounting firms, and large law firms maintain fully staffed offices, offshore?

 

Estate Street Partners, LLC
71 Commercial Street #150
Boston, MA 02109
(508)429-0011 phone
(508)429-3034 fax
RBeatrice@TaxDeferrals.com email
Additional office (by appointment only):
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(702)615-7616 phone
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