The fact is that the U.S. tax code can provide tax deferral on an overseas trading businesses but not on an overseas firms dealing in capital. The Foreign Account Tax Compliance Act (FATCA) does not define the difference between trade and capital. Therefore, the big operations overseas, or the very small ones for that matter, that are dealing in capital or the related fields of people who are actually trading money themselves or on the behalf of other people do not get a deferral whereas trading companies can receive tax deferral on their retained earnings when they are not an effectively connected to the U.S. business.
What people tend to forget is that if have a trading company which is doing business on the internet the difficulty we face with the internet is that 90% of the traffic is going through the U.S. anyway. The IRS have raised this question , and it is a fair enough question when you think about it, ” Well hang on a second, I mean, you are actually using servers in the USA to do business aren’t you?”. ”So please explain why that is not an effectively connected U.S. business?” If the servers were in the Maldives the argument could be easier to understand but the internet servers are not located outside of the USA most of the time.
There is so much confusion about what is an effectively connected to the U.S. business and then there is also the fundamental question of ownership in any event. You are an effectively connected to the U.S. company where you are a director or effectively in control of an overseas company. Whether or not that leads to a further reporting or further inquiry whether it is under the tax code or FATCA or what have you is really beside the point because there are three separate issues any one of which defines your status:
- am I actually trading outside the USA and if I am what exactly am I doing so that I can demonstrate that I am definitely a trader and not a dealer of capital?
- in any event is my business effectively connected to the U.S. or not? (Marketing, U.S. clients or operationally?)
- despite all of that exactly how is this business owned?
You definitely have a reporting obligation when you are a director, or when you effectively control, an overseas company as there are three considerations:
- establishing a foreign company does not determine residency
- where the company is controlled determines the residency
- determining residency depends on who is the owner with the command and control
Therefore, if you have command and control of a foreign company owned by a BVI, Puerto Rico, Panama or Cayman company then what you have is a
disguise that backfires on you because you are saying where the company is controlled from and therefore the foreign company is only a devise for criminal tax evasion.
For all of the above reasons it is required to find out first how to establish a legal basis for a tax deferral structure that really has nothing to do with the U.S. You can have your cake and eat it too, plus an icing of privacy, no-matter where in the world you live. It’s all a matter of legal structure and navigating the laws for overseas retirement (provided by the IRS) in regulated, registered and recognized, overseas 402(b).
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