Offshore Corporation

by mark.shead on May 23, 2007

It is common to hear people talking about creating an offshore company in order to avoid paying taxes in the US. There can be some tax advantages to forming a company outside the US, but it doesn’t automatically make you exempt from US taxes.

US citizens are taxed on their income regardless of what country it comes from. So if you are a citizen of the United States and you earn money from Belize, you are still liable for paying taxes on the money you earn. There is an exemption of about $80,000 for people who live outside the US for the vast majority of a year or who have established bona fide residence in a foreign country.

The place where you can save money on taxes is on corporate tax. If your business is truly located outside of the US, it will not have to pay US corporate tax. This is good for your company, but it doesn’t help you much because once, you move any of the profit into your personal accounts, it becomes taxable income.

Also keep in mind that many of the countries popular for offshore businesses, have their own tax for local businesses. Many times these taxes are waived for corporations that conduct no business locally. There are some countries that have no tax for local or foreign businesses. These countries could be attractive places to form a corporation to build assets to be distributed later. This type of arrangement might be beneficial if you plan to be in a lower tax bracket in the future than you are currently. However, since taxes generally go up, your total liability might be much higher ten years down the road.

If you are dealing with a small business and plan to spend a great deal of time overseas, you might be able to create the business, but only take a salary during the years where you will meet the requirements for the $80,000 exemption. If you and your spouse both take the $80,000 exemption, then you could move about $160,000 per year into your pocket without a tax liability in the US. However, the expense of meeting the requirements to be eligible for the $80,000 exemption may be greater than the taxes you would save.

For most organizations, going offshore has very little real benefit because the costs are greater than any tax savings. In addition it may make your company look suspicious to the IRS and increase the chances of an audit by the US government.

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