Offshore Tax Reduction Strategies and Tax Planning

High Tax Jurisdiction Residency Dilemma

Living in a High Tax Jurisdiction can leave you paying an exuberant amount of taxes especially if you are operating a business. If the business conducts all of its operations in a country overseas and have you no physical presence in the country where you live and do not conduct any local transactions, you may be paying more taxes that you need.

Many countries used to allow you to set up a business or investment activity in another country under a foreign entity and not require you to report its activities nor tax the entity until the income is repatriated. 

This was the general modus operandi in every high tax country. However, little by little tax bureaucrats started to close loopholes, requiring you to report income earned even if no income was repatriated and it was all earned by a foreign entity using foreign accounts. The only exceptions were for certain types of business activities and through double-taxation agreements.

Double-tax agreements can be useful for many types of business activities as it prevents one from being taxed twice on the same income, though treaties are limited to a limited number of participating countries. If your business or investment is located in no-tax jurisdiction then it is important to make sure that your corporate structure complies with company tax laws in your country of residence. 

Businesses have more options and loopholes available to them than individuals looking to invest in foreign markets through international structures. In general, the question is one of ownership.  If legal ownership and control of the structure that holds the funds are held by a different corporate vehicle, even the most draconian reporting laws can be bypassed.

Table of Contents:

• High Tax Jurisdiction Residency Dilemma
• Taking up Residency in a Tax Haven 
• Offshore Tax Reduction Strategies
• Outsourcing Service Companies
• Tax-Deferral
• Offshore Foundation
• Back-To-Back Loan
• Triangulation
• Private Annuity Contracts

Taking up Residency 

Taking up residence in countries that offer attractive options related to tax plabenefits and wealth management is a strategy many have taken up after finding the right opportunities. As more and more people’s lifestyles become mobile this is increasingly possible, especially since most high-tax countries only tax you if you remain a resident within their borders.  

The U.S. is the exception, which taxes its citizens regardless of where they choose to live, which has led many Americans take up citizenship of another country and renounce their American citizenship. Panama has is becoming increasingly popular as a tax-advantaged residency for many North Americans and Europeans as the country offers many different residency options and no tax benefits for investors.

There are a number of other low tax countries that offer easy access residency with minimal hassle such as Costa Rica, Vanuatu, or Guatemala, where you effectively can become a tax resident after fulfilling the requirements, which usually is (183 days a year).

However, setting up a tax residency is not all that clear cut as many western countries have very strict regulations of what constitutes being a tax resident.  Everybody wants to pay as little tax as possible and offshore tax havens are popular precisely because they allow companies and other entities to pay little or no taxes (though company's and individuals are still required to report income and assets within their country of residence). 

In the case of Panama there are no capital gains, inheritance, or gift tax and all foreign-sourced income is considered to be tax-free. Similarly, there is no income tax for residents of Panama on any income they earn outside the country and they are free to remit it back into the country without it being taxed.

Even companies that are physically set up here in Panama pay no taxes on their worldwide income if it is not remitted into Panama. This requires a simple corporate structure with a bank account outside of Panama to ensure only those funds needed by the Panama company, to meet its obligations, are remitted. 

Tax Reduction Strategies

The current trend for companies to outsource many aspects of their business to various foreign-based companies has created many new possibilities for tax planning.

Outsourcing service companies

Onshore businesses can create their own outsourcing service companies (i.e. in web design, hosting, call centres, direct sales, advertising or a host of other activities) that then can be outsourced with the home company set-up to receive the invoices for all of the services, which reduces the bottom line tax-payable. 

Tax-deferral

Additional accrued income can stay outside ones country of residence for an indefinite tax-deferral.

Setting up insurance captives can provide your own in-house insurance coverage provides a host of interesting options and is another favoured tax-reduction strategy. 

Not only can you eliminate outrageous insurance premiums that are required by conventional insurers for certain lines of business, such as healthcare, but you can reap enormous tax benefits by claiming the insurance premium deductions on your business tax returns, and at the same time invest your own insurance premiums on a tax deferred basis through the offshore captive. See our section on captive insurance for more information on this strategy.

Offshore Foundation

A good strategy to consider is setting up a foundation to own the company to operate the business or investment rather than for it to be owned personally.

There are a number of asset protection advantages that come when one is not considered the legal owner of their business, even if the company is operating in a low/no tax jurisdiction that does not recognize foreign judgments.  

This is because a determined opponent can always bring a suit into the country where you have located your business. If a foundation is established and registered as the sole shareholder of the company, it takes the individual out of the ownership position - as by definition no one can own a foundation.

So long as you do not repatriate income from the structure to yourself you can indefinitely postpone the paying of any taxes and let your earnings compound as you invest into other opportunities abroad. At some point you are going to want to repatriate income back to your home country. You can then receive the funds and declare them in your regular tax returns as earned income. 

However, it is possible to use a correctly established foundation to grant tax-free gifts to relatives and family members (other than your spouse). This income shifting allows your family members to receive foreign gifts tax-free. 

In some countries, such as the US and Canada, this income would still need to be reported, but no income taxes would need to be paid since it is considered a foreign gift (please make sure to check the specifics in your own country of residence whether or not a gift tax is applicable).

Back-to-back loan

Another solution is referred to as a 'back-to-back' loan that many offshore banks offer that involves collateralizing a foreign account and then drawing out a loan from the bank based upon the collateral of the foreign account. The income received is then classified as a loan or a credit line (such loans need to be done with very judiciously)

Another option, that generally involves more detail, is to set up a separate finance company that is attached to the main company that can issue mortgages on properties and loans for physical property or other capital equipment.

Triangulation

A popular option for importers who are looking to establish a trading company in a popular jurisdiction like Panama or Hong Kong for instance, is known as business of triangulation where the trading company becomes an intermediary between the exporter and the importer that keeps the spread of the profit between the original purchase price and the final sale price. 

The trading company then bills the producer and then re-invoices the importer. This could involve setting up the company in a free zone, such as Colon, Panama, where products can be imported, re-packaged and then shipped to its final destination. 

The Colon-Free-Zone also offers you a cheaper virtual presence solution, whereby you use the services of a Free-Zone based service provider who can then follow your precise product receiving, packaging, shipping, and distribution requirements.

Private Annuity Contracts

Private annuity contracts involve the exchange of appreciated assets, such as stock or cash realized from the sale of a business or property, to a foreign company in return for a future income stream. The periodic payments, more commonly referred to as annuity payments, are made to the 'Annuitant' (receiver of the annuity income) on a monthly, quarterly, semi-annual or annual basis.

These payments may be deferred as long as the Annuitant wishes and together with appropriate estate-planning, the value of the appreciated foreign property can be transferred to heirs and beneficiaries without paying estate tax.

Detailed information about this invaluable tax reduction strategy, which also has estate planning and asset protection features can be found in our Private Annuity Contract article.

Conclusion

These are just a few ideas on ways to eliminate or optimize the amount of taxes you have to pay. This is not intended as specific advice, but rather as an overview to stimulate further discussion and investigation.

There are many other strategies that can be pursued and must be diligently researched before starting anyone of these strategies. Please do not start any of these strategies before a thorough consultation as tax reduction strategies change often, and what might be viable one year, may no longer work.