Typically when the term “offshore haven” is used, it is used to describe financial arrangements where money is flowing outside of America into various low tax jurisdictions around the world.
Such “havens” include the Cayman Islands, British Virgin Islands, Panama, Bahamas, Anguilla, and other countries that either do not impose income tax or have low rates. These jurisdictions have garnered a lot of criticism and scrutiny from the tax authorities of all major countries worldwide.
What may be most surprising is the fact that the US is considered to be “a haven” in its own right for international investors who want to minimize their tax bills and, most importantly, retain their privacy.
This may come as a surprise given the strong stance US politicians and lawmakers have taken against foreign “tax haven” jurisdictions.
Here are five reasons why America has become an attractive “offshore haven” for foreign individuals and companies alike:
- Tax Savings on Investments
- The US is an effective tax haven for the foreign investor who wants to trade shares on any one of the U.S. stock exchanges.
- Nonresident aliens who generate capital gain income from trading on US stock exchanges pay 0% US income tax. This income is sourced to their country of residence and is exempt from US tax under IRC IRC § 871 and IRC § 881 and IRC § 897(c) as long as the non-resident aliens are not “engaged in a trade or business” within the US.
- Tax Savings on Financing
- Generally, a 30 percent tax is imposed on U.S.-source Fixed or Determinable Annual or Periodic (FDAP) income not effectively connected with A U.S. trade or business (e.g., interest, dividends, and royalties) paid to nonresident aliens and corporations.
- However, IRC Sections 871(h) and 881(c) provide for an exception to this general rule in case of U.S.-sourced interest income which qualifies as “portfolio interest” interest income.
- As a general matter, if (i) a non-U.S. lender (which is unrelated to the U.S. borrower, is not a bank, is not a CFC, and is not engaged in the conduct of a U.S. trade or business), (ii) lends money to a U.S. borrower pursuant to (iii) a registered debt instrument, (iv) which pays a fixed rate of interest, and (v) the non-U.S. lender provides adequate documentation as to its non-U.S. status, then the interest payable pursuant to the loan should qualify for the portfolio interest exemption and, in such a case, no U.S. tax would arise with respect to such interest
- Plenty of law abiding foreign individuals and companies value their privacy. A business might want to conceal the launch of their new product in order to keep competition at bay. An individual may absolutely require secrecy in order to protect herself and her family.
- Since the release of the Panama Papers, states like South Dakota have involuntarily been thrown into the spotlight, drawing attention to the anonymity that is available in the U.S. Despite the unwelcome attention, states such as Delaware, Nevada, South Dakota and Wyoming are competing with each other to provide foreigners with the privacy they desire.
- South Dakota has guaranteed secrecy for family trusts, imposes no tax on assets in trust, and allows the entire court file to be seal permanently with a simple petition. Nevada makes it easy to incorporate secretly and charges only a $500 annual business license fee for corporations and $200 for other businesses.
- Tapping the American Consumer
- Foreign companies looking to gain access to a fertile consumer market could do no better than the U.S. In an attempt to bring back jobs to the country, the U.S has created cost cutting incentives that may make it worthwhile for foreign companies.
- Infrastructure grants, revenue bonds, and tax credits (at all levels of government) are available to foreign companies who are willing to invest in economically depressed areas.
- Something else to consider are the trade agreements between the U.S. and other low-cost countries that provide the added incentive of keeping shipping and logistical costs low. Tapping the American consumer could be well worth the effort for foreign investors.
- Relative Political and Economic Stability
- Having access to political and economic stability in an increasingly unstable world is an asset by itself. On a relative metric, the U.S. seems to become more desirable as the global landscape become more volatile.
- As geopolitical tensions in the Middle East ensue and global economic growth forecasts continue to show signs of deflationary pressures (coupled with excessively loose monetary policies), foreigners will continue to seek refuge in the U.S.
As counterintuitive as it may sound, to view America as an offshore haven, it comes down to a matter of perspective. From that of the foreign company or individual, America offers a robust array of options that are hard to ignore.
Do you have questions about investing or establishing business interests in the U.S.? Contact Yana Weaver at 714-569-1000 or email her at [email protected] today.
With over twenty years of experience in private and public accounting, Yana has extensive knowledge in many areas of taxation. She is serving clients in manufacturing, healthcare and real estate industries providing them with entity planning support, transaction structuring, practice entry and exit strategies, cross-border transactions and other important financial matters.
You can reach Yana at 714-569-1000