Offshore Companies and FATCA

Structuring Business Ownership of Offshore Companies with FATCA and GATCA Compliance

There is a misunderstanding as to what type of businesses the U.S. provides tax deferral overseas. Is it a trading company or a company dealing in capital overseas? The fact is that the U.S. provides tax deferral on overseas trading businesses but not on overseas firms dealing in capital. Your foreign company needs a legal basis for a tax deferral structure that is not effectively connected to the USA and is a foreign resident. The Foreign Account Tax Compliance Act (FATCA) does not define the difference between trade and capital.

Characteristics of offshore companies

Although all offshore companies differ to a degree depending upon the corporate law in the relevant jurisdiction, all offshore companies tend to enjoy certain core characteristics:

• They are broadly not subject to taxation in their home jurisdiction.
• The corporate regime will be designed to promote business flexibility.
• Regulation of corporate activities will normally be lighter than in a developed country.

[box type=”note”]The absence of taxation or regulation in the home jurisdiction does not of course exempt the relevant company from taxation or regulation abroad. For example, Michael Kors Holdings Limited is incorporated in the British Virgin Islands, but is listed on the New York Stock Exchange, where it is subject both the U.S. taxation and to financial regulation by the U.S. Securities and Exchange Commission.[/box]

Another common characteristic of offshore companies is the limited amount of information available to the public. This varies from jurisdiction to jurisdiction. At one end of the scale, in the Cayman Islands and Delaware, there is virtually no publicly available information. But at the other end of the scale, in Hong Kong companies file annual returns with particulars of directors, shareholders and annual accounts. However, even in jurisdictions where there is relatively little information available to the public as of right, most jurisdictions have laws which permit law enforcement authorities (either locally or from overseas) to have access to relevant information, and in some cases, private individuals.

There is so much confusion over the fundamental question of ownership of offshore corporations, in any event where you have a company effectively connected to a U.S. person. You definitely have a reporting obligation when you are a director, or when you effectively control, 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 issues:

• 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

You need a foreign company to collect commission, receive your contract buyout and to collect any payments in order to get paid gross rather than suffering current tax. You need a Tax Department Certificate to the effect that your foreign company has residency in that foreign country for Double Taxation Treaty purposes. Your foreign resident company also needs to be owned by your foreign resident registered IRC 402(b). You also may need some professional advice….