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Overseas
Investment Income
The
IRS has done quite a thorough job of catching
the income or capital gains from just about every
kind of offshore or foreign investment that US
residents can get involved in. Taxes are either
applied as gains are made, or they are applied
when an investment is realised, with taxes being
calculated back over the period of the investment
and compounded forward to the time of payment.
Some
of the key tax collection mechanisms are aimed
at Controlled Foreign Corporations, Foreign Personal
Holding Companies, Foreign Investment Companies,
Passive Foreign Investment Companies, Grantor
Trust Provisions and Foreign Trust Reporting Requirements.
Although
US citizens may still choose to set up offshore
trusts, the rationale will be asset protection
rather than tax minimisation. Trusts are caught
by the legislation as much as other types of investment
structure, and should be considered as tax-neutral
at best.
As
far as 'passive' income is concerned, international
tax planning for US residents is therefore concerned
with providing investment structures which are
fiscally transparent, so that the gains from higher-yielding
international or offshore investments can be taxed
in the investor's hands on the same basis as domestic
investments. This usually means employing limited
partnership or limited liability company structures,
which are provided by many offshore jurisdictions,
which are usually un-taxed in the offshore jurisdiction,
and which are treated as fiscally transparent
by the IRS.
Straightforward
investments into public offshore investment funds,
which may offer superior returns to domestic funds,
will be caught by the Passive Foreign Investment
Company legislation, and it will often be correct
to make a QEF election in order to pay tax year-by-year
on the fund's increase in asset value (excluding
unrealised capital gains).
Individuals
who have significant 'active' business income
may be able to make use of offshore corporate
tax shelters, although the foreign sales corporation
(outlawed by the WTO) has now been abolished.
www.lowtax.net
contains details of the corporate and partnership
legal structures available in the 35 most prominent
offshore jurisdictions, together with descriptions
of the most important business sectors in each
jurisdiction, local tax regimes, and the international
treaties entered into by each jurisdiction.
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