OFFSHORE INVESTMENTS: OFFSHORE STOCK TRADING

Use of Offshore Foundation Structure to Trade Stocks Tax Free

Offshore banks and companies are not subject to U.S. capital gains taxes on their publicly traded Wall Street type stock, bond, and commodity trades. The United States has never taxed the capital gains of the non-resident alien, unless the foreigner was ³doing business within the U.S.² ³Doing business within the United States², generally means operating through a U.S. office or permanent establishment from within the U.S. However, the U.S. tax code even exempts a non-resident company from U.S. capital gains taxes even when it does have an office and staff inside the U.S., if all the company¹s business amounts to merely trading in the Stock Market. From his home or office on Fifth Avenue in New York, or the Sears Tower in Chicago, or from Beverly Hills, any person working for an offshore company could call his broker at Merrill Lynch or Payne Webber and day trade NYSE, NASDAQ or AMEX listed securities 1,000 times a week, and no tax on the profits would be owed the U.S. Treasury.

Today, nearby tax havens like the Cayman Islands, Panama, Barbados, and The Bahamas rival the industrial cities including London, Tokyo and New York for business. The pint sized Cayman Islands now boast more commercial banks (530) in the commercial registrar than in all California. The dollars on deposit in these Cayman banks exceeds $500 billion, which is also more than all the commercial banks in California. The Bahamas, just 50 miles off the coast of Florida, was once the third largest financial center in the world next to New York and London. Today, the Bahamas ranks in the top ten as a financial center, just behind the Cayman Islands. There are more than 390 banks and trust companies registered here in Nassau.

Panama, Belize, the Cayman Islands, Turks & Caicos Islands, Anguilla and Bermuda have no personal income taxes, no corporate income taxes, no capital gains taxes, no withholding taxes, no estate, gift or inheritance taxes, no sales taxes, no employment taxes, no death duties, and no probate fees. Guarantees against future taxes are provided by these governments for periods up to 50 years. Exempt trusts can receive guarantee up to 100 years.

Unfortunately, the American taxpayer cannot qualify for the aforementioned tax exemptions allowed nonresidents, unless he can avoid both the Controlled Foreign Corporation provisions enacted during the Kennedy Administration and the Passive Foreign Investment Company provisions enacted in 1986. Most tax attorneys and big 8 accounting firms will probably tell you that is not possible. This is not to imply that U.S. taxpayers don¹t attempt to secure the above tax exemption for foreigners anyway. They do.

The bottom line is, while the foreign investor can get a complete tax exemption from U.S. capital gains taxes from the U.S. government on its publicly traded stock, bond and commodity transactions, the U.S. person operating in an almost identical manner is taking risk.

The investment banking firm of Warburg Dillion Read (on Park Ave. N.Y.) have offices in 39 foreign countries - including the Bahamas, the tiny Cayman Islands, Hong Kong and the Channel Islands. Makes you wonder why, doesn't it? And, Warburg Dillion Read are not the only large U.S. investment firms offshore. The list of U.S. companies with operations in the tax havens is too long to name here, but include Brown Brothers/Harriman & Company (Cayman), Solomon Brothers (Bahamas), Citicorp Bank & Trust (Panama), Chase Manhattan (Cayman Islands).

Operating tax free over the Internet

Many businesses that operate on the internet could be organized in the TAX FREE Belize (or any of the other tax havens), and legally not owe U.S. income taxes on their earnings. The IRS taxes U.S. shareholders of a foreign corporation only on the subpart F income that the offshore company earns. Profits from services performed in the tax haven itself are not considered sub-part F income by the IRS! The American laws curbing the use and abuse of the offshore tax havens have been around since the Kennedy Administration. In over 37 years, only minor changes to the U.S. Controlled Foreign Corporation provisions under §951 to §960 have been enacted. There are still many uses for tax havens by foreign and American investors.

North Americans Investing Offshore

Two summers ago, Michael Jordan of the Chicago Bulls purchased the Bahamian island known as Crab Cay for $3.9 million. Business people from around the globe use the Bahamas, Caymans and other tax havens. Former U.S. citizen Sir John Templeton lives in Nassau. Templeton managed over $20,000,000,000 for clients worldwide. He gave up his U.S. citizenship years ago, probably to escape the USA's 55% estate tax on estates over $2.6 million dollars. U.S. Treasury Secretary Nicholas F. Brady has a home in Lyford Cay. There are forty or fifty Bacardi's (the rum distillers) living in Nassau.

A few months ago, Michael Jackson reportedly invested $70,000,000 in the new Atlantis Hotel and Casino  in the Bahamas. The opening of the Atlantis complex was celebrated with a $2 million dollar bash. Celebrities from all over the world attended. If Mr. Jackson used a foreign Bahamian company to own his partnership interest in Atlantis, he wouldn't have a U.S. tax liability. Offshore rents and other business activities performed in the tax haven itself are not considered sub-part F income under the Internal Revenue Code. M. Jackson would not have to pay taxes on these profits, unless the offshore company distributed a dividend to him. Furthermore, U.S. law suits and court ordered judgments against the company or Mr. Jackson are not enforceable in Bahamian courts.

More tax exemptions

American owned service oriented businesses, where the services are performed in the tax haven itself (i.e., consulting, architectural designs, computer chip manufacturing) through an offshore holding company, can legally avoid U.S. income taxes. The U.S.. employees of these businesses could exclude up to $70,000 of their annual salary (called Foreign Earned Income by the IRS) from the foreign company, as the IRS allows for such an exclusion. the bottom line here is, if you¹re in the right business, it may be worthwhile to investigate the possibilities.

Loophole from U.S. Estate Taxes

Foreign individuals (called nonresident alien individuals by the IRS) are subject to U.S. estate taxes on their U.S. assets (stocks, bonds, real estate) when they die, just like the American taxpayer, at the same high tax rates. But, under U.S. tax law, foreign, nonresident alien individuals that hold their U.S. assets in an offshore holding company (instead of in their own name) can legally avoid all U.S. estate taxes when they die. And since foreign individuals only get a $60,000 exemption from u.s. estate taxes on their U.S. holdings, a wealthy foreigner could lose more than half his wealth to the IRS when he dies, unless he plans carefully.

Asset Protection Haven

A secondary reason people bank in Belize and the other tax havens is for asset protection. The IRS cannot seize, lien on or investigate bank records here. The government of Belize has a bank secrecy code. All the largest banks in the world have offices here and in Cayman. U.S. judgments have to go through the local courts. I've never witnessed an IRS court proceeding of any type in this country - ridiculous. U.S. lawyers have a problem too. Only citizens of Belize can practice law here. U.S. lawyers need to hire a Belize law firm to pursue judgments, etc. Generally speaking, foreign generated judgments are frowned upon by the authorities.