Can an Overseas LLC Help You Save on Taxes?
Occasionally, subscribers who consult with me as part of my Global Citizen service want to establish an offshore corporate structure in order to “save taxes.”
There’s certainly no shortage of websites out there promising that you can do this…
Most of the clients who approach me with this idea, however, leave with an alternative plan.
That’s because for US tax residents—setting up an offshore company has little tax benefit.
Let’s say you set up a Limited Liability Company (LLC) in the zero-tax Cayman Islands, and route your income from an online business through it…
The IRS considers your company a Controlled Foreign Corporation, or CFC. The company’s profit is considered your personal income, and is taxed even if you don’t take it out as dividends.
It’s true that the Caymans won’t tax you on the LLC’s income. But the IRS will tax you on that income even if you leave it in the LLC’s accounts. So ultimately, there’s no net tax benefit of having an LLC in that jurisdiction.
On the other hand, let’s say you set up an LLC in the United Arab Emirates, which levies a 9% corporate tax on income over a certain amount. In that case, you would pay 9% of the company’s profit to the UAE. You would then get credit from the IRS for those taxes, reducing your tax obligation to the IRS… but not your overall tax bill.
In other words, setting up a foreign corporation controlled by yourself isn’t going to save you any taxes. The same is true if you set up a partnership with other US persons. As long as you own 10% or more of the total voting power of the company’s stock, you must report your share of the company’s profit as personal income, even if you don’t withdraw it.
All this is true even if you don’t own a company directly. The rules apply even if your ownership of a CFC is indirect, such as when one company owns another. It’s also true if a trust of which you are a beneficiary owns a CFC. Basically, if you are ultimately in a position to benefit from the income of a CFC, it’s taxable for you.
Now for the good news… There are many benefits to creating a company in a foreign jurisdiction, especially if you live abroad yourself.
By combining the benefits of a low-tax company jurisdiction and claiming benefits like the IRS’ Foreign Earned Income Exclusion or the foreign tax credit, you can save on your taxes.
If that sounds like something you’d like to do… shoot me a line, and let’s talk!
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