Panama Papers Antidote

Panama Papers Antidote – Business Ownership Overseas

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.

[box]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.[/box]

There is so much confusion over the fundamental question of ownership 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).

Therefore, our first step is to organize your business ownership, command and control, to be a tax recognized resident registered Hong Kong IRC 402(b) foreign retirement plan.

It is actually not possible in most foreign jurisdictions to bolt together a U.S. Internal Revenue Service IRC 402(b) on the individual tax compliant level with the tax deductible employer contribution level that is tax exempt at the individual tax level until received by the member.

This Hong Kong style 402(b) is tax deferred on gains and accumulation. It is a foreign regulated, registered and recognized retirement plan that is also acknowledged in the Foreign Account Tax Compliance Act (FATCA) as exempt from withholding. It is recognized in the O.E.C.D. Common Reporting Standard Automatic Exchange of Information (AEOI) globally as tax rules compliant and exempt non-reporting Foreign Financial Institution and excluded for reporting account.

[box type=”note”]The money flow must go from the funder to the Anti Money Laundering (AML) Licensed and recognized 402(b) plan registered Occupational Retirement Scheme Overseas (ORSO) and US Global Intermediary Identification Number (GIIN)- regulated Trustee Account that is Automatic Exchange of Information (AEOI) tax rules compliant and exempt; non-reporting Foreign Financial Institution (FFI) and excluded.[/box]

The compliant structure is your Hong Kong company signs the project contract and in turn that Hong Kong Company is owned by the Trustee of the 402(b) for your purpose. You stay a director of the Hong Kong Company alongside the Trustee as co-director. The funder signs a funding contract with your Hong Kong Company.

The cash flow is therefore from founder to Hong Kong Company to project.

The correct first step is paramount because, for example, if you have a foreign company owned by a BVI, Panama or Cayman Island 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 device for tax evasion.

BVI, Panama and Cayman Islands are included in the list of countries that do not have the legal basics to establish an occupational retirement plan compliant to IRC 402(b).

The legal basis for a pre-tax contribution and deferred-on-gain accumulation 402(b) client really boils down to five things:

1. It needs to be a foreign government regulated, registered and recognized occupational retirement plan.
2. It needs to be an employer tax deductible retirement plan contribution rather than an after tax capital injection.
3. It needs an exempt beneficial owner because of the government agreement with that foreign financial entity.
4. It needs an occupational retirement plan administrator that is FATCA compliant and has a FATCA Identification Number.
5. It needs a FATCA registered pre-authorized occupational retirement plan administrator who is authorized to sign a W-8BEN-E. The client/member has to have it.

Without authorization to sign a W-8BEN-E at the foreign financial institution level, a foreign financial account or a transaction in U.S. Dollars cannot be FATCA operational.

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