How a US LLC can Uniquely Benefit a UK Resident

A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

The Most Important Thing We Don’t Want to Think About: Asset Protection

14915380_605027526288899_4904488283081663198_nWhat an important topic! But sadly one that elicits so little interest!

I have been practicing law for about 25 years, and I have sadly concluded that people will not pay attention to asset protection issues until they lose everything they have, or they get pretty close to it and are scared. Fear seems to be the only motivation for asset protection planning. Sadly I must admit to suffering from this same problem myself when I was younger.

I was recently asked what is the most common mistake in Asset Protection?

My Answer:

Thinking nothing bad will ever happen to you and doing nothing.

There are so many good strategies out there. But you actually have to do something before they sue you, or you get the service of divorce papers, etc. I find people don’t like to think about depressing things. Thus they fail to prepare for them.

I like to consider myself a stoic (not the kind that stands around in hair shirts and such), and one of the lessons is to consider all the things that can go wrong in your life without getting hysterical about it. It helps you to prioritize and prepare.

Some good reading: https://read.amazon.com/kp/embed?asin=B0040JHNQG&preview=newtab&linkCode=kpe&ref_=cm_sw_r_kb_dp_PbXpybDCZM1NF

Investing Opportunities in the Republic of Georgia

14915380_605027526288899_4904488283081663198_nI have now lived in the Republic of Georgia for over a year. When I first got here I believed 3 things:

  1. It is a great place to live,
  2. It is a great place to invest, and
  3. It is a great place to start and run a local business.

Well 2 out of 3 is not bad. Georgia is a great place to live and invest. Running a local business here is problematic. The rules are great, and the authorities are eager, but things are constantly changing. Very hard to deal with a system where the rules essentially do not exist because they are always being changed. I am hoping that after the recent parliamentary elections things will calm down a bit.

But there are great investments available. For as little as $10,000 you can get a darned good rate on a 1 year CD in USD or other foreign currencies (7% to 8%). For a bit more you can negotiate a higher rate, or you can take the risk of the Georgian Lari and get 12% to 13%.

If you want to invest in real estate there are a lot of short term flipping opportunities due to how Georgians must finance apartment construction. In short there is no financing; everything has to be self-financed. So as a nice project is coming to completion the builder is usually looking to sell apartments at a substantial discount. I have a few of those in the works and I expect to get a quick 20% ROI. If you are ever interested in checking it out get in touch with me. I have some nice apartments I am renting out! 😉

An interesting article on Georgia confirming my own opinion (we all like that!): http://www.valuewalk.com/2016/11/incredible-opportunities-hidden-corner-world/ 

“Disregarded Entity” vs “Taxable Association”: What is the best way to structure your LLC?

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven” for non-residents). My traditional proposal was to simply set up a US LLC, take the default election of ‘disregarded entity’ (“disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer entirely the case. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really understands how to use. And the penalties for getting it wrong are quite serious so payors are paying a lot more attention, or just choosing not to do business with anyone who cannot execute a W-9.

In short, it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors.

My solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. The US LLC will elect to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation), but it will only act as an agent of a non-resident business (with a written agency agreement) to resell non-resident goods and services in the USA. 90% of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. The only downside is that there is now a requirement to file an annual tax return which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the return. There may be no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

If you have any further questions please do not hesitate to contact me.

Can the IRS take your US Passport? Yes.

The IRS can now take away your passport.

A little-noticed provision in the highway funding bill Congress passed this week threatens a right most Americans take for granted: the right to travel abroad. The provision in question gives the Internal Revenue Service the authority to revoke the passport of anyone the IRS claims owes more than $50,000 in back taxes.

Congress is giving the IRS this new power because a decline in gas tax receipts has bankrupted the federal highway trust fund. Of course, Congress would rather squeeze more money from the American people than reduce spending, repeal costly regulations, or return responsibility for highway construction to the states, local governments, and the private sector. On the other hand, most in Congress fear the political consequences of raising gas, or other, taxes. Giving the IRS new powers allows politicians to increase government revenue without having to increase tax rates. Some even brag about how they are “cracking down on tax cheats.”

If you think this is nothing to worry about then you are not paying attention. The IRS can and does routinely fabricate/estimate tax liabilities prior to auditing someone for a variety of reasons. Usually it involves some kind of missed filing or missing documentation. But the IRS is now a highly politicized organization that has been used to attack political opponents. This measure will make it even easier. The IRS can simply “estimate” that you owe more than $50,000 and you will not allowed to leave the country. Beware. You need a second passport more than ever if you plan on staying in the USA.

read more:  Ron Paul: Will The IRS Take Your Passport? – OpEd

Why You Need a Second Passport

passports

There is a great deal of confusion about the issue of getting a second passport or citizenship. What is the difference between residency and citizenship? Is it legal to have another citizenship? Do I need to abandon my current citizenship? What are the reasons?

Residency is the right of a foreigner to live in a country and perhaps work in that country. The rights of a foreign resident are often significantly less than that of a citizen. Not only can foreign residents not vote, but they are also denied many civil and economic benefits usually granted to citizens. In some countries ownership of land is restricted in various ways as is the right to form companies, operate businesses, get jobs, etc. Also, the very status of a foreign resident can be terminated or denied at will, property rights can be suspended, and constitutional rights are often absent or limited. Not so for a citizen. Being a citizen of a country imparts much greater benefits.

Is it legal to have a second citizenship, and will I have to abandon my current citizenship? In most countries the answer is yes, it is legal, and no, you will not have to abandon your current citizenship. Even in those countries that do not allow dual citizenship for its citizens, enforcement is often lax or non-existent. All the same it would be wise to seek legal advise regarding your country’s rules and regulations.

What are the reasons to get a second passport? There are many reasons, and they vary from person to person, but the primary ones are:

  • Banking Options – for some people it is very difficult to establish foreign bank accounts. Due to recent changes in US law it is extremely difficult to open bank accounts as a citizen of the USA.  It can often be much easier with a second passport.
  • Economic Benefits – It is often much easier to establish and operate businesses, and invest in real estate when you are a citizen of the country. Almost every country has some form of restrictions on business ownership, operation, and land ownership by foreigners. Becoming a citizen solves this problem.
  • Expat Lifestyle Benefits – If you plan on becoming an expat (or expatriate) it is often very helpful to have a citizenship from another country for tax purposes as well as security issues. In order to claim expat tax privileges you usually have to prove that you are domiciled outside your home country.
  • Travel Security – When you travel abroad not all passports are treated equally. Yes, US citizens are treated very well at most airports by the immigration control officers, but not so well by criminals, terrorists, etc. Often having a US (or other major country’s) passport makes you a target. In some situations having a more neutral passport could save your life.
  • Domestic Insecurity – People in democratic nations often take their freedoms for granted, specifically the right to travel outside the country. Historically most regimes that are under pressure and experiencing domestic unrest limit the ability of its citizens to leave. They impose capital restrictions to keep you from moving your assets, reporting requirements on foreign assets and travel, exit visa requirements in order to discourage leaving, restrictions on the issuance of passports except under government approved purposes, and finally complete restrictions on exiting the country at all. When this happens foreign nationals (those with foreign passports) are generally allowed to leave. Having a foreign passport may mean you can leave your country without being smuggled out, and without becoming an “undocumented” refugee or worse. You will also have a place to go to if things get bad. Something to think about.
  • Renunciation of Current Citizenship – there are a lot of reasons why people want to renounce their citizenship: political, economic, religious, philosophical, etc. Renouncing your citizenship is a very serious matter and should not be done without considering all the options, and obtaining competent legal advice, but for some there are a lot of benefits. For some it is lower taxes, and for others it is obtaining significant economic or political freedoms. For some it may simply be escaping an intolerable situation. If you are even considering renouncing your current citizenship, you need to have another citizenship and a passport from that country to prove it.

gepassportThe Republic of Georgia offers some very appealing programs for those looking to obtain legal residency and citizenship. Georgia is one of the last bastions of free market capitalism in the world, and it offers great opportunities for those who wish to participate. Of particular interest is the Georgian Presidential Citizenship Program. Under this program the President of Georgia is given a great deal of discretion in regards to issuing citizenship. Click here for more information: [GEORGIAN CITIZENSHIP]. Georgia is also a good place to obtain a legal residency. It is fast and easy, and once obtained provides many benefits.

Important Updates to the Privacy Passport®

Nothing ever stays the same, but sometimes things get better. This is the case for the Privacy Passport®. For more information see:

http://www.alexander-hay.com/offshore-financial-planning/the-privacy-passport/

 

 

High-Tax Nations Under Increasing Pressure

OECD_logo.svgThe Organization for Economic Co-operation and Development (OECD) was initially established to promote economic progress and world trade. It has now become a front organization committed to protecting the high-tax inefficient elements of the First World Economies from economic competition.

Twenty years ago the OECD took aim at “tax havens” that provide(d) tax-free and private banking for the wealthy businesses and individuals of the world. This effort has largely been successful by dishonestly painting “tax havens” as facilitators of drug cartels and terrorist organizations. As such the ability to freely move your money around the world has been severely curtailed, at least among the members of the OECD nations.

Now the OECD nations have taken it upon themselves to stamp out “tax competition” where ever it may be found. Tax competition is when one jurisdiction competes with another jurisdiction for business by lowering or simplifying the tax rate. For the high-tax rate nations who control the OECD this is a grave danger. They have already taxed their nations into economic stagnation with low growth rates and high unemployment. They have bought off restive populations with expensive social programs that provide cradle to grave security, but give little hope of jobs or economic advancement. Up and coming nations that try to attract industry by creating a lower and more efficient tax climate for business are real threats.

It remains to be seen how successful these efforts will be. Attacking the “tax havens” was a much easier project since most of them were small economically struggling Third World nations trying to us private banking, beneficial legal systems, and liberal financial service regulations to bootstrap themselves out of poverty. Such countries were relatively easy to intimidate into compliance. Even Switzerland was forced to dramatically adjust its age-old banking rules in order to comply with its neighbors.

However, the OECD seems to be having less success in the area of “tax competition”. In Europe, the heart of OECD darkness, countries are modernizing their tax codes in order to provide their own citizens and foreign businesses better opportunities to compete. Ireland, Latvia, Estonia, Hungary, etc. have all established lower flat rate tax systems that have increased the efficiency of the tax system making these countries more attractive for foreign investors. Russia has recently implemented a broad ranging tax reform that lowered the tax rate to a flat 12%. In most cases, as the tax rates go down and the tax codes are simplified, the tax receipts actually go up. Companies spend less money trying to avoid taxes, and instead invest their time and efforts in making more money which in turn creates more tax revenue.

Attacking impoverished Third World countries who tried to become “tax havens” is one thing. “Tax Competition” is a much harder concept to stamp out as is seen even among the OECD nations themselves.

Why a United Kingdom Limited Partnership?

business_2172838bFor clients who wish to protect their assets, reduce their taxes, and obtain financial privacy using a corporate entity is ideal. One of my favorits is the United Kingdom Limited Partnership (UK LP).

The UK LP is easy to establish, and once established requires zero reporting since it is a truly 100% “pass through” entity. The income from the UK LP is attributed to the partners without the need to file a partnership return in the UK. If the partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no reports or tax returns that need to be filed. Now since the UK has some of the best tax treaties around, this income may also be tax exempt in your home country.

In addition, as long as you are not “doing business” in the USA (this usually means making, providing, storing and/or transporting goods or services inside the USA), there will be no tax liability in the USA either, although you may end up owing taxes on the profits of the UK LP if you are a citizen or resident of the USA and depending upon how ownership was set-up.

There are many ways of setting up a UK LP depending upon the needs of the client. Let’s chat if you have any questions!