Thinking of Forming an Offshore Company? Carefully Consider the US Tax Aspects

Let's take an in-depth look at the US tax aspects of owning and operating an offshore company.

Written by Stewart Patton

Offshore companies typically come in two flavors: the International Business Company (“IBC”) and the Limited Liability Company (“LLC”). This article uses the term “offshore company” to refer to them both.

A Very Versatile Structure

Offshore companies have a variety of uses, by both expats and US residents.

Expats can own and operate a business through an offshore company. Holding a business through an offshore company provides protection from business liabilities, a business name, a central point for the business’s payment web, and an easy way to consolidate business assets.

Offshore companies also provide separation between the owner’s local country and the owner’s income and assets. This can be helpful for expats who hop around quite a bit (digital nomads) and those who want to isolate their business from any potential concerns about local tax or other local issues.

For US residents, offshore companies provide asset protection benefits at a much lower cost than an offshore trust. If you were to get sued, assets you hold in a US bank or securities account can be frozen very quickly pending the outcome of the lawsuit. However, assets you hold outside the US through an offshore company are not so easily removed from your control.

Additionally, an offshore company removes your investment assets from the view of potential plaintiffs, making you a less juicy target in the first place. The offshore company may seem pretty tame in comparison to the offshore trust, but that is one of its advantages—it accomplishes the owner’s offshore asset protection goals without all the bells and whistles (and costs) associated with its more exalted brethren.

Finally, US citizens can also use an offshore company as part of an offshore IRA. Instead of investing your retirement savings in the limited set of options offered by a typical IRA custodian (e.g., Vanguard, Fidelity, Ameriprise etc. etc.), you can directly control your IRA funds and invest in just about anything. An offshore IRA also provides the same asset protection and international diversification benefits described above. See here for more details on this structure.

As Always: Tax Opportunities and Pitfalls

Owning an offshore company can provide tax advantages for those who plan correctly and tax disadvantages for those who don’t understand the tax rules and reporting implications.

On the tax advantages side, an offshore company is a fantastic structure for US citizens who live outside the US and operate an active business. Click here to see if an offshore company is right for you.

In brief, operating your business through an offshore company can allow you to

  1. pay zero US tax on the first $100,000 or so of business profits each year and
  2. defer US federal income tax on business profits left in the company.

Now for the downside: an offshore company will definitely spice up your tax return—you’ll need to file several different specialized forms depending on your exact facts. Failing to file these forms comes with a potential penalty of $10,000 per year, but the IRS offers several amnesty programs to allow late-filers to get caught up. Owning an offshore company is not illegal all by itself, you just need to make sure you give the IRS all the new paperwork it wants.

Finally, in certain circumstances it’s better for your offshore company to be disregarded as a separate entity from you for US tax purposes. Both an IBC and an LLC are classified as corporations for US tax purposes by default. (This can be a bit confusing—an LLC formed in the US with a single member is a disregarded entity by default, but the opposite is the case for an LLC formed outside the US)

To cause your offshore company to be disregarded as a separate entity from you as of its formation date, you must make an election within 75 days of formation. The offshore company must first obtain an Employer Identification Number from the IRS to make the election.

Use your Offshore Company with Confidence

An entire industry has sprung up around forming offshore companies—you could form 50 offshore companies online before having your morning coffee. The people who form these companies will at best advise you to consult your own US tax advisor and at worst provide you with all sorts of bad US tax advice.

That’s where I come in.

I provide a complete planning and compliance solution that covers you from formation all the way through the life of your offshore company. My clients have the knowledge to form and use an offshore company without fear of negative tax consequences, and their required US tax filings are completed in a correct and timely manner.

Let’s discuss how I can help you navigate the tax complexity of offshore companies so you can achieve the tax and other benefits these structures can provide. Get in touch and we can schedule a call.

Offshore Company FAQs

Here are answers to my most frequently asked questions about offshore companies.

What is an offshore company?

An offshore company is simply a business entity formed in a low- or no-tax jurisdiction such as Belize, Nevis, BVI, etc.

Offshore companies come in two principal forms: the IBC and the LLC. These two types of entities are virtually identical as a practical matter. The IBC is owned by shareholders and controlled by directors and officers, whereas the LLC is owned by members and controlled by managers.

IBCs offer more traditional corporate formalities and control structures (directors make major decisions and officers, if any, make day-to-day decisions), but they are fairly rigid on the economic side of things (they only allow common and preferred stock). LLCs offer more flexibility on the economic side (an LLC’s operating agreement can be written to contemplate a more partnership-like arrangement among the members) and less rigidity on the governance side (the manager can have complete control without the need for corporate resolutions and board meetings, etc.).

Will the IRS think I am trying to hide something if I form an offshore company?

Absolutely not, as long as you comply with the additional reporting requirements. With solid tax planning upfront and a good tax compliance program in place, there is no reason to worry about the IRS having an issue with your offshore company.

How is an offshore company treated for US tax purposes?

Both an IBC and an LLC are automatically treated as a corporation for US tax purposes (i.e., a separate “person” apart from its owner(s)). However, you can elect for your IBC or LLC to be treated for U.S. tax purposes as either a partnership (if it has more than one owner) or a disregarded entity (if it has a single owner). This election can be given retroactive effect of up to 75 days, meaning that you generally must act within about two and a half months of formation for the election to be effective as of formation.

When should I get you involved?

Before you form your offshore company. An offshore company may not be right for you depending on your goals, and timing can be critical to insure proper US tax treatment. Talk to me first and I can make sure you get started on the right foot.

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Stewart Patton

I'm Stewart Patton, US tax attorney and expat entrepreneur based in beautiful Belize. Read more about me here, or email me at [email protected] to discuss how I can help.

U.S. Tax Services, P.O Box 2651 Belize City, Belize • Belize tel: (+501) 629-6007 • U.S. VOIP: (312) 675-8571 • Email: [email protected]