A Nevada LLC Should Not Be Blindly Trusted… Nothing Should

Some bad news for those who think Nevada is some sort of Magical Talisman against creditors:
 
“This Opinion once again illustrates, as have so many similar opinions before it, that it is not nearly enough that a person set up a labyrinth of legal structures to protect themselves, but that for the legal structures to hold up against creditors they must be respected as such. Here, the debtor set up a complicated structure that might normally have put off creditors, but then treated the structure willy-nilly, transferred assets around with little or no purpose or documentation, and then also — the Mortal Sin in creditor-debtor law from time immemorial — personally used and benefitted from the very assets that he claimed were not his.
 
We also again see the implicit application of the ancient legal maxim of delicatus debitor est odiosus in lege, which is translated as “the extravagant debtor is condemned in the eyes of the law”. In other words, a debtor who continues to live a wealthy lifestyle should get no sympathy from the court. So it is here, another case where the debtor claims that he has no money with which to pay their creditors, but maintains a wealthy lifestyle including the use of residences in both in Las Vegas and Southern California. Is it really any wonder that the courts frequently go out of their way to slam such debtors? Not paying one’s debtors while living it up is not only flipping The Bird to creditors, but is also doing the same thing to the Court which has an interest in seeing that judgments are enforced. Why do debtors have such a hard time seeing that?
 
The problem is fundamentally one of clients (1) having some common sense and knowing when they should live an austere lifestyle, and (2) being able to actually follow the legal structure that was created for them. An attorney can create the very best asset protection structure for a client, but if the client then starts ignoring the structure and treating all the assets as his own, then good luck defending that.”
 
Another problem with Nevada noted in the article: Nevada has a very thin record of court rulings compared with other states, and as a result tends to favor California law in the absence of Nevada decisions. This is never a good thing.
 

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.

What is Jurisdiction?

I thought I would discuss the important issue of “Jurisdiction”. This is because I have been hearing a lot about some countries enacting “draconian” anti-offshore rules and regulations. I thought I would explain how and why most of these stories are rather apocryphal and mostly just propaganda to scare people into submission.

Here is a fairly good definition of jurisdiction:

‘In law, jurisdiction (from the Latin ius, iuris meaning “law” and dicere meaning “to speak”) is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility.’ (Wikipedia)

Now if, let’s say, Australia (or the USA, or the UK, etc.) says in its propaganda literature produced by the tax authorities that new laws are being enacted to do away with “illegal offshore tax dodges”, I want to explain why people should not be too terrified. If done properly, systems can be created that will legally remove the transactions from the jurisdiction of that country making the hyperbole meaningless.

I would like to try to explain what Jurisdiction is by using an allegory.

Let us pretend that there is an odd little country named OustMuensterMark. No one really knows quite where this place is, but it is a fairly backward place. It is ruled by a rather mad Baron named Ruprecht the Red. Ruprecht recently enacted a series of tax laws which require any company doing business in OustMuensterMark to pay roughly 150% of its net profits in taxes, and require the officers to submit their eldest children hostage to the Secret Police. Although the taxes are punitive, there are so many loopholes and exceptions to the tax rules that business manages to limp along in the country, but the place is far from prosperous.

Now let us further pretend that you have a little company chartered and operating out of Florida. Your company’s name is “Wingnuts R Us, LLC” and you sell wingnuts. Every month the Museum for the Science and History of Torture and Decapitation of OustMuensterMark orders $5.35 in wingnuts to be used to tightly enclose their numerous and ever growing display cases. Are you now bound by the laws of OustMuensterMark? Should you be forking over all your money to either Ruprecht’s Tax Collection and Torture Agency or to tax attorneys in OustMuensterMark? Perhaps you should hand over your eldest child to the Secret Police? I think it is fairly clear that your sale of wingnuts to the Museum does not bring you under the jurisdiction of Ruprecht the Red. Have no fear!

One day, Ruprecht wakes up and leaps out of bed stark naked and starts running through the palace screaming, “The British are coming! The British are coming! To Arms! To Arms!!!!” The only British that are found are a few nannies on their way to work at the Royal Orphanage. After directing the thorough interrogation and torture of the unfortunate nannies to no effect, Ruprecht collapses on the floor, a victim of his own hysterical energies. His attendants put pants on him, his doctors put a straight-jacket on him, and the Thingamajig, the Legislature of OustMuensterMark, meets and finally declares Ruprecht the Red to be unfit to rule, and appoints Waldwak the Wise, an adopted child of one of Ruprecht’s distant cousins, to become the new Baron. Luckily for the unhappy state, Waldwak does not suffer from any of the mental infirmities so common in Ruprecht and his other relations. Waldwak completely abolishes the tax code and torture (putting thousands of tax attorneys and tax collectors out of work). Instead of the confusing tax code of Ruprecht, a simple 10% sales tax on goods sold inside the country is imposed and things start to change for the better. Business booms, tax receipts grow, and the Thingamajig votes to rename the country OustWaldwakMark (hereinafter OWM).

One day you get an email from an enterprising tax attorney from OWM offering to establish a Limited Liability Company for you. The email explains that your taxes will be next to nothing, and that you will be able to keep the rest of the money for your pet project of saving orphaned giraffes. You sign up and immediately notice the dramatic increase in your cash register since you are no longer paying Florida and US taxes, and you only have to pay $0.54 cents in taxes a month for the sale of wingnuts to the Museum.

At least until the State of Florida and the US IRS impound your bank accounts, factory, warehouse, cars, house, furnishings, inventory, and dental work. Although you were in complete compliance with the laws of OWM, you were under the jurisdiction of the State of Florida and the USA since your factory, warehouse, distribution center, headquarters, house, car and bank accounts were all located there. Just as the repressive and illogical laws of Ruprecht the Red had no effect upon you when you sold a few wingnuts to the Museum, neither did the enlightened actions of Waldwak the Wise protect you from the jurisdiction of the location where you are located and doing business. And simply establishing a company in OWM did not change that since the new company simply came under the same jurisdiction for the same reasons.

If only you had better understood the concept of jurisdiction! You see, the idea was not so bad, it was just the sloppy, perhaps greedy, execution of the system that was flawed. It was possible to take advantage of the benefits of an OWM Company, but you needed to structure things very differently. First of all, the Florida company should not have been terminated, but should have been kept for the purpose of managing the domestic production and sale of wingnuts. The OWM Company should have been used to manage your considerable foreign sales. The Florida Company should have sold wingnuts to the OWM Company at a reasonable profit based on wholesale prices (not retail), and then the OWM Company would have sold the wingnuts around the world out of their modest offices in OWM. If only $5.35 in wingnuts were sold in OWM, then the tax would remain at $0.54, but if $10,000,000 in wingnuts were sold elsewhere (except the USA) these sales would be tax free. Although the US tax authorities may or may not like such a transaction, as long as the initial wholesale transaction from the Florida Company to the OWM Company was legitimate and resulted in reasonable taxable gains, the additional profits earned by the OWM Company in global sales are simply outside the jurisdiction of the USA. This system is legal, ethical and completely acceptable.

Now on a more philosophical note…

How can jurisdiction be established?

  1. A nation has jurisdiction over you because you were born there and you are forever subject to its whims; or
  2. Jurisdiction is based upon an agreement between the individual and the governing entity.

In the first case, jurisdiction seems to be based upon some strange power that is imputed to a location. Rather like the saying that you can pick your friends but are stuck with your family. But this seems irrational and unreasonable. Why should an individual be subject to the jurisdiction of a particular place merely because of an accident of birth? The second choice seems more logical. You are subject to a particular jurisdiction because you “agree” by your actions and/or your presence. The agreement may be far from voluntary, but it is an agreement to submit to authority all the same. If someone holds a knife to your throat, holds your family and all your property hostage, and deprives you of the ability to go elsewhere, although it may be morally repugnant, accepting this person’s authority is all the same a choice you made even if under duress.

History suggests that most agreements regarding jurisdiction have been formed in just such coercive ways. In a way it is only logical, since authority is something that must be imposed to one degree or another. Only in recent history has the concept of jurisdictional agreement been treated as a matter of true choice which a “free” person can choose to accept or reject. In point of fact, this right to reject a jurisdiction is the basis of most of Western Political thought. But this is still mostly philosophical. The fact of the matter is that you are bound by a jurisdiction simply because you are within the grasp and power of the authorities, and it would be foolish to ever expect such authorities to willfully relinquish that which gives them power.

What can we make of this? In most modern democratic countries it is possible to take advantage of different jurisdictions in order to protect your assets, reduce your taxes, and to obtain greater financial privacy. This is because even as they complain about the loss of tax revenue, these nations still acknowledge the ancient concept of jurisdiction. However, this must be done with attention to the laws and with proper execution. If you wish to take advantage of the low tax rates of a “tax haven” you must make sure that the transactions which you are imputing to the “tax haven” do not fall within the jurisdiction of another more rapacious government authority. Simply getting a company from another country and waiving it around like a magic wand will only make you look foolish and cause you great harm when the trick does not work.

If you would like to chat about asset protection, tax planning, and financial privacy, please feel free to contact me.