The 8 Most Important Rules For Going Offshore In 2015
Do Not Buy An Offshore Company Until You Have Read This!
Some nay-sayers might believe the idea of doing business offshore is dead. Governments, meanwhile, seeking ever-expanding access to more taxpayers' money in order to expand their power, are keen to suggest there's something shady or even illegal about going offshore.
Rule #1: It's Not All About Tax!
If you listen to the mainstream media rattling on, going offshore is somehow associated with tax evasion. I don't know if these people are genuinely misinformed, or they just choose to lie for political reasons. Unfortunately, in this business you learn to be something of a cynic, and I think it must be the latter.
Saving or evading tax is rarely the primary reason for going offshore.
Well advised Americans, for example, will often structure their offshore assets using LLCs, since LLCs (even offshore ones from jurisdictions like Nevis, Belize and the Cook Islands) are completely tax neutral in the USA. Profits are only taxable in the hands of the owners. This feature is very attractive to Americans as it avoids the complex and costly reporting requirements involved with IBCs, which are traditional corporations limited by shares.
The IRS is just fine with this kind of structure because it doesn't affect the taxpayer's obligations either way. The client is happy too – because offshore investing at a stroke creates much better asset protection. The mere thought of having to hire lawyers, probably post a fidelity bond to cover the other party's legal fees in the event of losing, and sue in a foreign court in a country that makes a business of asset protection.... all that stops most lawsuits dead in their tracks.
Besides asset protection, however, going offshore means flexibility and freedom.
You are operating in a less regulated environment. For business people who are sophisticated enough to manage their own financial risks, and who believe in the free market and an open economy, lack of regulation is one very good thing. You can save a fortune in legal and compliance fees, and most importantly of all, win back time to spend on productive activity like developing your business, rather than on complying with endless bureaucratic requirements.
Often you can complete a deal offshore, with no complications, in a day …something that might take weeks or months and thousands in lawyers’ fees to complete in a more regulated environment.
Let's say an offshore entity owns the shares in an onshore business or property and you want to sell that interest. You simply transfer the shares in the offshore entity, a procedure that can be undertaken in a few hours, and there is no need to make changes to the ownership structure of the onshore business.
For individuals who have had modest success already in life, going offshore means access to international investments, accounts and currencies that may be off-limits to you based on your existing residence and citizenship.
Americans have it worst in this regard, since virtually all foreign financial institutions – even many under US ownership – refuse to deal with US citizens for fear of the wide-reaching implications of FATCA – the Foreign Account Tax Compliance Act.
Besides Americans, however, other people are also suffering from invasion of privacy and difficulty in accessing investment options. Where the US leads, countries like the UK and Australia typically follow: the UK has already proposed its own “Son of FATCA” legislation and the Revenue are actively harassing offshore banks.
“Asset protection” is a term originally coined by smart and expensive US lawyers, whereby assets such as property, businesses or cash are tied up in complicated legal structures like trusts, LLCs and foundations in order to make them harder to get at.
Please bear with me, as I'm going to go off at a bit of a tangent here to explain the traditional (and still very useful) style of asset protection first. After that I will move on to the point I consider more important: protecting your assets by hedging against macro-economic or political risks such as inflation, devaluation, currency controls and the like.
Traditional asset protection theory goes something like this: By putting various legal barriers in the way, what I call “fantasy lawsuits” are avoided, and/or their effects are mitigated.
Fantasy lawsuits are those with not much legal basis, where plaintiffs with doubtful claims go after the “deep pockets” of wealthy individuals and companies. These plaintiffs, who are nothing short of fraudulent, often end up winning because:
1) Judges and juries are often politically motivated to decide in favor of the “poor, down-trodden consumer” against big companies. For example, smokers who have known for decades that their habit was causing grave harm to their bodies, are now suing tobacco companies who are seen as big and evil ogres with deep pockets. And we've all heard of the woman who won a multi-million judgement against Macdonalds because she spilt hot coffee on herself.
2) In the US, “ambulance chasing” lawyers representing fantasy plaintiffs often get the lion's share of the judgement in legal fees. The US legal system positively encourages fantasy lawsuits, and again other countries are following suit with an equally unhealthy culture developing of “sue first, ask questions later.”
3) Even if the defendant is sure he can successfully defend the case in court, he probably can't afford the legal fees to do so. Just because he wins, doesn't mean his lawyers will work for free - and there is no hope of collecting any fee award from a penniless plaintiff. Therefore, it's often cheaper to agree an out-of-court settlement and just pay the plaintiff to go away. This in turn is a vicious circle, as word gets around that Mr Deep Pockets is paying people to stop bothering him, and encourages more fantasy lawsuits.
If the assets are legally offshore (all declared to the relevant authorities etc) it is still mighty hard for the plaintiff's lawyers even to be sure there are any assets, let alone to identify them. Therefore “Mr Deep Pockets” becomes “Mr Penniless on Paper” - and that alone makes him much less likely to be sued.
Even if the plaintiff's lawyers do identify assets held offshore, they will be forced to take legal action in a foreign court to enforce any judgments they get. Lawyers in offshore centres do not work on contingency: they will require large up-front retainers. Courts will usually require the posting of a fidelity bond to cover legal fees, typically $50,000 - $100,000, before action can commence.
Best of all is the 'poison pill' defence – a neat device using an LLC where a plaintiff who wins can end up being liable to tax on the profits generated by an asset, without actually gaining control of the asset or income stream.
Within the Q Wealth Report Members Area you will also find more specific and additional information in the form of legal reports, downloadable webinars with top lawyers, and referrals to recommended experts.
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OK...so traditional asset protection is very useful if you are in a high risk profession, such as a doctor. But most clients come to my firm for a strategy for protection against much broader macro-economic and political risk.
This is a grouping of risks that necessarily covers a lot of things, but the main risk I see is government. Basically, this kind of asset protection is for those who don't trust the government.
If you believe that the state always has your best interests at heart, and will always see to it that justice is done, and that the government will ensure you and your family are kept healthy and wealthy through to your old age, then you won't be interested in this kind of asset protection!
If, however, like me and most of my clients, you don't trust governments an inch, then it's really important to diversify your holdings and business interests internationally.
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