Structuring Limited Partner Ownership Offshore

This Hedge Fund Limited Partners Ownership is the Only Tax Deferred Income on Gains & Accumulations Entity Not Subject to Self-Employment Tax

The effect of all these rulings in 2014 demolished common U.S. situs deferred compensation structures for members of a limited partnership (LLC/LLP) which is the reason that this solution is only found in a properly structured IRC 402(b)

The 23rd June, 2014, IRS ruling on IRC 457A is here – http://www.irs.gov/irb/2014-26_IRB/ar06.html

September 2014 decision on Section 1402(a)(13) eliminates the 409a option

Both 457A and the anti avoidance rule 409A mean no deferred compensation for working members of a limited partnership.

Section 83 rules on vesting and forfeiture and conversely, settled interests, are a key test of deferral.

[box type=”alert” style=”rounded” border=”full”]The IRS Issues Chief Counsel Advice on Self-Employment Tax September 5th 2014 (ILM 201436049) concludes that all members of the limited liability company are subject to self-employment tax on their distributive shares of income of the LLC.[/box]

Solution – Structuring Limited Partner Ownership Overseas

Firstly, 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 LLP 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.

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 LLP does not determine residency
• Where the LLP is controlled determines the residency
• Determining residency depends on who is the owner with the command and control

Therefore, our first step is to organize your business ownership, command and control, to be a tax recognized resident in a foreign retirement plan.

[box type=”note” style=”rounded” border=”full”]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. To understand Structuring Limited Partner Ownership Offshore click Here to get the White Paper[/box]

No cost to tax filings or financial reporting:

This specific 402(b) is for tax deferred income and accumulation. It is a foreign government 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 W-8BEN-E box 29e as exempt from Foreign Financial Institution U.S. person reporting. It is recognized in IRS Form 3520 as exempt from reporting. It is recognized in the O.E.C.D. Common Reporting Standard and Intergovernmental Agreements globally as exempt from reporting. That all means there is no cost to tax filings or financial reporting.

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 reporting exemption. The client/member has to have it.

[box]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.[/box]

Regardless of the headlines, the client needs to forget about capital injection and go for a retirement plan contribution, which is something that is not abusive, and he needs to be in a position to sign a W-8BEN-E.

With regards to IRAs, you have read the analysis that people are pumping IRAs full of low price, pre-IPO’s stock and when the IPO blooms somehow or another, that is supposedly a magic call. So these people are looking pretty slippery, however the IRS is investigating those who undervalue IRA assets.

The difference between the IRA onshore and the 402(b) offshore is that a 402(b) is not asking for tax breaks up front. You are asking for tax breaks later on, and later on is all that counts. It has to be sensible and justifiable. So it is a matter of evaluation, and that needs an experienced occupational retirement plan attorney.