For Wealthy Americans (HNW) Seeking Offshore Tax Planning

For Wealthy Americans (HNW) Seeking Offshore Tax Planning

High-Net-Worth Americans Who Seek Offshore Tax Planning

It can be very alluring for wealthy Americans who are high-net-worth or ultra-high-net-worth to fall victim to internet shysters who make it seem that wealthy Americans can just move overseas and avoid much of the taxes that they currently pay to Uncle Sam each year. Making matters worse are the heaps of false information online peddled by non-licensed companies making grand statements about offshore planning techniques which:

      • do not work,

      • probably never worked, and

      • in some situations, could actually make your tax situation worse than it is now.

From a baseline perspective, the United States follows a worldwide income tax model. Thus, until an American formally expatriates from the United States and renounces their U.S. Citizenship, they are still considered a U.S. person for tax purposes — even if they live overseas. And, due to the increased complexity of international tax law, including U.S. corporate anti-inversion rules, Subpart F income requirements, GILTI, and FBAR/FATCA (and various other acronyms) — it is important that high net worth Americans have a solid understanding of what they are getting themselves into before they go abroad with the idea that they are escaping U.S. tax.

Let’s look at five important tax hurdles that high-net-worth Americans have to deal with when relocating abroad.

First, Please Beware of ‘Internet Gurus’

These days, anyone can jump on the Internet and claim to be a specialist. Just because someone may have moved overseas does not mean they have any experience in helping high-net-worth taxpayers with complex tax restructuring — or that you should follow their ‘advice.’ (read: remember what your Grandma taught you about jumping off cliffs just because your friends are doing it). 

Moving overseas does not make a person qualified in complex tax and offshore planning.

 For example:

      • Did they have a high net worth when they moved overseas?

      • Were the tax rules the same then as they are now?

      • Are they based in the United States so that you can confirm their licensing?

      • Are they even operating under their own name?

      • Can they clearly explain to you the tax and legal ramifications to their offshore planning methods, so that you, a high net worth American, can safely transition your assets abroad?

Attorneys and other financial professionals spend years honing their craft, learning the interplay between tax rules, and applying the rules and laws in order to assist taxpayers with planning to go offshore. Just creating a website and claiming to develop mythical tax strategies that cost you six figures to ‘implement’ can very significantly injure your net worth and divest you of your assets.

You have worked hard to get where you are, so please be careful before taking any proactive steps with an unlicensed ‘professional.’

Is the HNW Individual Renouncing U.S. Citizenship?

Unlike most countries, the United States follows a worldwide income tax model based on citizenship and not just residency. Thus, even if a U.S. person moves overseas and generates all of their income from overseas and foreign sources, they are still subject to U.S. tax on their worldwide income. The only way to escape the worldwide income tax model is to formally expatriate or renounce US citizenship (or if you are a long-term lawful permanent resident, relinquish your Permanent Residency Status). The problem is common for high-net-worth Americans they may become subject to the exit tax. Therefore, before a person decides whether they are going to go abroad, they must determine:

      • If they are going to formally expatriate

      • Are they considered a covered expatriate, and

      • Will they have an exit tax?

Is the HNW Individual Covered Expatriate?

When a high-net-worth taxpayer wants to formally expatriate, chances are they will be considered a covered expatriate. If they are considered a covered expatriate, then they may have an exit tax at the time of renouncing their U.S. citizenship or relinquishing their lawful permanent residency status. While many taxpayers know about the mark-to-market gains and exclusions when exiting, there are various other categories of income that may become subject to exit tax as well, including:

      • Ineligible Deferred Compensation

      • Specified Tax Deferred Accounts

      • Trust Ownership

      • Covered Gifts And Bequests

      • Eligible Deferred Compensation (such as 401K has a post exit tax implication in that taxpayer will generally be taxed at a 30% tax rate with no ability to reduce withholding based on treaty).

Does the HNW Individual Own a Foreign Company?

Assuming that the high-net-worth American does not formally renounce their U.S. citizenship, if they own companies overseas as a U.S. person and U.S.  persons in general own more than 50% of the company, then the company is considered a Controlled Foreign Corporation (or may alternatively qualify as an SFC). If the company is a Controlled Foreign Corporation (CFC), then the taxpayer has an annual filing requirement on Form 5471 — which is a very complicated and in-depth form. In addition, there are various IRS tax rules that high-net-worth Americans living overseas with foreign business/investments will have to contend with, including:

      • CFC

      • PFIC

      • Subpart F

      • GILTI

Does the Taxpayer Have Foreign Accounts?

Presumably, once the American moves overseas, they will want to move some of their assets, accounts, and investments into foreign institutions. As a result, the Taxpayer may now be required to meet various international information reporting requirements each year on a myriad of different forms. The failure to follow these forms can result in significant fines and penalties, so in essence, by moving overseas and investing assets abroad as a high-net-worth individual they may have inadvertently made their annual reporting much more complicated than it was before. Some of the more common international information reporting forms include:

      • FBAR

      • FATCA Form 8938

      • Form 3520

      • Form 3520-A

      • Form 5471

      • Form 8621

      • Form 8865

Closing a U.S. Business and Re-Launching Abroad

Notwithstanding the Controlled Foreign Corporation rules identified above, some taxpayers will consider shutting down their company in the United States, and then relaunching the company overseas. Depending on the specific company, assets, and business operations — this may be considered a corporate inversion, which may result in a significant tax implication at the time of the corporate inversion. For high-net-worth Americans who are moving overseas in order to relaunch or move their business abroad, they will want to consider different strategies ss

      • whether they should formally renounce their citizenship or not,

      • should they move the entire company overseas or just a portion,

      • Whether their income will be generated from the United States or abroad, and

      • What their tax implication will be in the country where they are relaunching their business (and will it be in the same country that they claim foreign residence).

Plan Properly and Take the Necessary Precautions

For high-net-worth Americans, it is important to properly evaluate the different strategies and options when moving overseas before doing so. Typically, taxpayers must formally expatriate in order to escape the clutches of the US tax system, but doing so may come with its own set of taxes and headaches so it is important to work with experienced professionals to develop and execute a plan of action.

Interested in Expatriation from the U.S.?

Our firm specializes exclusively in offshore disclosure and expatriation.

Contact our firm today for assistance.

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