When most people hear the term “tax haven”, they immediately think of a remote island where the wealthy go to evade taxes and live a life of luxury.
Many people are not aware that it's not just the Caribbean that has tax-free legislation for non-resident entities as these same benefits can be found in many developed "Western" nations. The media attention is often wrapped up in the tax haven islands that they have forgotten that the United States is actually one of the worlds' most popular offshore destinations.
In this article, we will help to clarify why the US is considered to be a tax haven, the top reasons for choosing it, and how to go about structuring an offshore LLC to make use of the tax benefits available for non-residents.
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To answer the question as to whether the US is a genuine tax haven, we first need to clarify what exactly a tax haven is. Generally, the term “tax haven” refers to any jurisdiction which allows foreigners or non-residents to pay very little or no tax. Usually, the foreign individual will have to use some type of corporate vehicle such as an LLC that allows them the ability to reap the benefits of little or no taxes. Popular offshore tax havens include Cayman Islands, Belize, Panama, and British Virgin Islands, the distinction between these economies are that they are primarily made up of offshore financial services whereas places like the US, Ireland, UK, Nederlands, though they have similar tax policies they have a more dynamic economy that does not rely on offshore wealth accumulation.
The US and the international organizations that support it and its interests together with the OECD and EU have in the last 10 years begun cracking down on offshore tax haven and their corporate legislation. The somewhat paradoxical nature of the whole situation is that these same countries are tax havens in their own right. The US offers much of the same attractive tax benefits to foreigners with a US-based LLC in numerous states, including some of the most popular Delaware.
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There are many factors that make the United States an ideal tax haven for foreigners. Some of the top reasons include:
Foreign-owned US LLCs which are not engaged in a trade or business in the United States (ETOB) are not liable to pay US federal income taxes on their income, even if it is generated whilst being based in the US (note that this is different to actively engaging in business in the US).
Foreign nationals are eligible for certain capital gains tax exemptions. For example, foreign nationals who make capital gains and/or income from trading shares on a US stock exchange are exempt from paying US income tax.
Believe it or not, establishing an LLC in one of several favourable US states offers a high degree of financial privacy. Some of the top states for establishing an offshore LLC in the US include Delaware, Nevada, South Dakota, and Wyoming. All of them offer significant tax benefits and privacy to the owners. The names of the beneficial owners of an LLC are not available in any public records in these states, and the laws are designed to protect the identities of offshore LLC owners.
Another benefit of incorporating an offshore LLC in one of the aforementioned states for tax savings is that the incorporation process is both fast and affordable. For example, the annual business licence fee for corporations in South Dakota is only $500. The others are comparable.
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One of the major downsides of many popular offshore tax havens is that they are in countries that have negative associations due to the media's constant portrayal of these countries as being places where the wealthy illegally store their hoards of wealth. The benefit of the United States as a tax haven is that it offers an offshore tax haven environment in onshore financial enviroment.
Having your business registered in the US is a massive advantage when it comes to reputability. Many offshore tax havens now recieve more scrutiny which can bring about difficulties when it comes to applying for loans, as well as working with clients, banks and customers. Having your business registered in a top-tier nation like the US can add a great deal of credibility to your companys' name.
The best way to take advantage of the tax benefits offered to foreigners by the US is to establish a Limited Liability Company (LLC) in one of several States which offer favourable incorporation requirements for foreigners. LLCs are “pass-through” tax bodies, which means that they are not taxed directly at the corporate level, but rather at the personal level of the owners.
Foreigners who own an LLC based in the US are only required to pay US federal tax if the company is engaged in a trade or business in the United States (ETOB). This means that in order to qualify for tax exemptions on your LLC, it must conduct all its business activities outside of the US. Furthermore, the foreign individual must reside in their own country, and should not be a resident of the US.
A business is deemed to be ETOB if:
Granted the above criteria do not apply to your business, you will be exempt from paying all US income tax. Depending on the tax laws in your home country, you may still be liable to pay tax on a personal basis. However, if you live in a country with its own favourable tax laws or live in a low tax country, or a territorial tax system, then you will also be exempt from paying taxes on income generated outside of your country.
Although the US is not typically considered a tax haven, it is actually one of the best tax neutral jurisdictions for foreigners to use to reduce their tax burden. Not only does it offer many of the tax advantages which are on par with typical tax havens such as Cayman Islands and BVI, but you have the added benefit of establishing an offshore business in a safe, established, and stable first-world nation. In addition, forming an offshore company in a corporate-friendly state like Delaware or Wyoming is easy, efficient, and affordable. It offers some of the best tax and privacy benefits you can find.
If you are interested in incorporating an offshore LLC in the US so as to reduce your taxes and secure greater financial freedom, it is worth consulting with an expert who can help advise you on the steps to take and practicalities involved.
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
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