Tax Avoidance vs. Tax Evasion
Using Legal Means to Reduce Taxes
If you own a business, you generally have the right to organize it in a way that ensures you pay no more taxes than necessary. This strategy, known as tax avoidance, involves using legal means to reduce taxes.
It is not the same thing as tax evasion, which is the practice of violating your country's laws and paying less than the minimum amount of taxes. Rather, tax avoidance is the practice of setting up your business in a way that ensures it will be taxed fairly by your country's government.
If your offshore business is set up as a controlled foreign corporation, then you may be paying more than you need to in taxes. A controlled foreign corporation, or CFC, is a taxable business structure recognized by many countries.
Typically, your offshore business will be considered a CFC unless a couple of conditions are met:
- a majority of your shareholders may not be citizens of your country, and
- no more than a certain percentage of your company's voting stock may be held by one shareholder.
The exact conditions vary by country; US taxpayers, in particular, must be wary of the distinction between non-taxable income from foreign businesses and taxable income from passive investments.
Although CFC definitions differ between countries, a number of taxpayers across North America, Australasia, and other nations have found that structuring offshore assets around a Panama Private Interest Foundation, or PPIF, is a sound strategy for tax optimization.
Modeled after the Stiftung, a family foundation formed under the laws of Liechtenstein, the PPIF was developed as a way to make Panama a center of offshore investment.
A Panama Foundation offers owners of offshore assets the opportunity to structure those assets so that they will not be defined as a CFC. Under the laws of Panama, the PPIF is an entity completely separate from the business owner.
When the majority of a corporation's shares are subscribed to the PPIF, it no longer meets many nations' criteria for being considered a CFC. Although U.S. residents must contend with additional hurdles posed by IRS regulations, a Panama Foundation is generally an excellent choice when it comes to making sure you pay a fair tax rate on your foreign assets.
Owning a foreign asset can result in a significant tax burden if the asset is classified as a CFC. Fortunately, subscribing some of the shares of a foreign asset to a Panama Foundation can prevent it from being considered a CFC in many countries. The definition of a CFC varies from nation to nation, and the regulations involved can be complicated.
Offshore-Protection.com is here to guide asset owners through the process of structuring their assets so that they will be taxed fairly. Feel free to contact us with questions about taxes on your foreign assets or to set up a tax-optimized structure.