- 1 Wealthy Entrepreneurs Moving Operations Abroad
- 2 Just Opening a Business No Tax Benefit (TCJA)
- 3 GILTI, Subpart F and More
- 4 Formal Expatriation and US Exit Tax
- 5 Strict Rules Involving Corporate Inversion
- 6 Owning a Foreign Trust Taxed to Avoid Income Shifting
- 7 Interested in Expatriation from the U.S.?
Wealthy Entrepreneurs Moving Operations Abroad
Should Wealthy Entrepreneurs Move their Business Abroad: Working 7-days a week for many years finally pays off, right? As the old saying goes “I work an 80-hour week, to avoid working a 40-hour week.” In a common situation, an entrepreneur who has been working at building their dream for many years, hits it big. The hard-work pays off — and now a person who spent many years struggling, is in the position of earning significant money. They see that their IRS Tax bill balloon — and their net effective tax rate went from maybe around 5% or 10% to nearly 40%. In addition, the Taxpayer resides in California, New York, New Jersey — or some other high tax state — and so they have to add an additional 10%+ to their Federal Tax bill. What now? Obviously, a common (and understandable) thought is to take any and all actions that may reduce their tax liability. But, with limited opportunities in the Internal Revenue Code for entrepreneurs — the question becomes, should a wealthy entrepreneur move their business offshore? For the most part and in our many years of experience, we have learned that unless the Entrepreneur already resides overseas or has dual-citizenship and is ready to expatriate — it oftentimes will sounds better in the brochure. Let’s review the basics of wealthy entrepreneurs moving abroad for tax benefits.
Just Opening a Business No Tax Benefit (TCJA)
In a very common type of scenario, a US-based entrepreneur decides to launch a business offshore and begin operating the company from overseas. If it is a small business and own entirely by the entrepreneur herself, then the company will be categorized as a controlled foreign corporation. And as a controlled foreign corporation, the taxpayer will have a significant amount of recording as well as (usually) a significant amount of income tax due, including: GILTI and Subpart F Income.
To possibly avoid this outcome, the taxpayer would want to formally expatriate first — but this comes with its own set of headaches, taxes and reporting — that the entrepreneur may not have considered before opening a business in a foreign country.
GILTI, Subpart F and More
Especially in situations in which the majority or a substantial amount of income is foreign passive income — in addition to any other income that is earned in which there are not significant assets sufficient to reduce tested income — the negatives of GILTI and Subpart F will usually far outweigh any tax benefit (or perceived tax benefit) of opening a foreign company.
Formal Expatriation and US Exit Tax
For many Long-Term Lawful Permanent Residents (LTR) and US Citizens, formal expatriation will be a great opportunity to start anew — and then after the expatriation is complete, the Taxpayer can launch their new business venture.. Prior to formally expatriating from the US — the Taxpayer should have conducted extensive tax planning an offshore analysis of different countries tax laws, various Golden Visa Programs (if applicable) — and the interplay between different foreign country tax treaties, in order to assess the post-expatriation tax benefits. The reason for the importance of expatriation planning is that at the time of expatriation the entrepreneur may become subject to an extensive mark-to-market tax exit tax liability or deemed distribution — which is something to carefully consider for taking the plunge.
Strict Rules Involving Corporate Inversion
The IRS knows you want to just disband/reorganize your US company into a foreign company so that you can take advantage of the lower corporate tax rates that most countries offer. There are strict rules that must be adhered to, and if it is not done correctly or approved by the US government — Taxpayer may be hit with a significant tax implication at the time of the inversion.
Owning a Foreign Trust Taxed to Avoid Income Shifting
When wealthy entrepreneurs move abroad for tax purposes, it is important that they have evaluated the pros and cons beforehand. Many entrepreneurs are (unfortunately) goaded into forming foreign trusts in which they do not have any ownership, but yet or still able to maintain some control. The IRS can still go ahead and impute the ownership to the US Person. In addition, the income generated (if it is a grantor trust) is usually the responsibility of the grantor, despite any protocols taken in the foreign trust to avoid that outcome.
Interested in Expatriation from the U.S.?
Our firm specializes exclusively in international tax and expatriation.
Contact our firm for assistance with getting compliant.