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Get Outta Here

For tax breaks and investment opportunities, sometimes you just have to leave the country.
July 1, 2000
URL: http://www.entrepreneur.com/article/29726

Twenty years ago, very few offshore financial centers existed, and those that did were surrounded by myths of drug money and illicit activities. Quite a bit has changed since then: Today, the offshore industry has developed into a major business that spans the globe. It even involves, in one way or another, half the world's financial transactions by value. In fact, $2 trillion flows through offshore centers every day.

Fact is, going offshore could very well be a viable financial strategy for many entrepreneurs-assuming you understand the ins and outs of the offshore world. You're not alone, however, if you're unsure about traversing the complicated waters to tax havens like the Cayman Islands, the Bahamas and Switzerland. The ride can get pretty murky out there, and the last thing you want to do is find yourself-not to mention your business-in a legal quagmire.

First things first: Don't take this journey solo. Enlist the help of a qualified professional, preferably an experienced consultant who understands the pertinent IRS codes and knows which traps to avoid. There are a number of qualified international tax attorneys skilled in the offshore arena. For a referral, call (604) 684-2622 (Canada), (503) 647-7730 (Oregon) or (869) 466-3794 (Caribbean). But in the end, finding the right help can reap substantial rewards-think guaranteed privacy, premiere asset protection, various tax-shelter options, and higher and safer investment returns-and certainly prove well worth the risk and effort it takes to get there.


Terry L. Neal, author, financial consultant and entrepreneur, is an expert on the offshore industry with 25 years of multijurisdictional experience. His most recent book, The Offshore Advantage (MasterMedia Publishing), can be ordered by calling (800) 334-8232.

The Basics

The professional name increasingly used to identify a legal tax haven is an International Financial Center (IFC). An IFC is a nation or independent legal jurisdiction that has passed important legislation to protect and attract international clients. To date, there are about 69 jurisdictions throughout the world that have taken steps to be known as IFCs.

Sophisticated global money managers consider the use of IFCs to be a safe and reasonable way to conduct business. And every single day, more Americans discover the benefits that come with taking at least portions of their assets offshore. In fact, according to Arnold Goldstein, a widely published expert in offshore matters and the president of Arnold S. Goldstein & Associates PA in Deerfield Beach, Florida, "about one in four Americans who earn over $100,000 a year now enjoy use of one or more safe-haven jurisdictions."

A recent issue of the American Institute of Certified Public Accountants (AICPA) newsletter unequivocally endorsed offshore planning. The publication printed a bulletin last year that stated the following: "To prepare for the 21st century, CPAs must be aware of the hottest, most important tax-savings and asset-protection devices. Once thought of as reserved for the very rich, offshore planning is available for virtually all clients and should be part of overall planning."

Aaron Young, an entrepreneurial consultant in Portland, Oregon, says, "Americans move money to offshore jurisdictions in order to better protect their assets, improve their privacy, increase rates of return, and reduce risks, taxes and costs." And he should know-he's personally worked with hundreds of business owners who've made the step offshore.

Clearly, offshore tax havens can legally net entrepreneurs substantial fiscal savings. Case in point: In the United States, the death tax can consume as much as 55 percent of an estate. But enter offshore havens into the picture: "Today's fortunes are [often] made through family businesses, and the value is in the equity of these enterprises," says Quinn Sutton, a small-business consultant in Alpine, Utah. "But with confiscatory taxes, these generators of wealth are pried out of the hands of families and sold to big corporations in order to satisfy inheritance taxes. Such inequity has spawned the Kill the Death Tax Coalition and other groups that oppose inheritance taxes by lobbying for legislative reform. But until you really can fight city hall, there are alternatives to losing family-built enterprises to the taxman. And these alternatives often involve using offshore investment vehicles for privacy, asset protection and legal tax avoidance."

Why Go Offshore?

Asset protection is certainly one of the leading benefits offered by these kinds of tax havens, since assets held offshore are essentially immune from seizure and hostile litigation. A quick look at the growing predatory litigation phenomena, ever-present throughout the United States, pretty much tells the story of why business owners and professionals are worried about the need for asset protection: 5 percent or less of the world's population resides in the United States; about 20 percent of the world's economy is in the United States; 70 percent of the world's lawyers reside in the United States; and a staggering 94 percent of all the world's lawsuits are made in the United States. And lawsuits on a commission basis-referred to by the U.S. legal system as "contingency litigation"-are against the law in just about every other country in the world.

Money that's held offshore is immune from almost all forms of judicial proceedings from the United States. There are literally millions of Americans who maintain offshore accounts in safe-harbor jurisdictions-and they sleep better at night for it, too.

Another benefit offshore accounts offer entrepreneurs is privacy. Why is this privacy important? Because privacy and risk planning go hand in hand. Offshore clients seeking confidentiality in their affairs can protect their business strategies.

While keeping financial transactions private in some countries is against the law, in other countries it's a violation of the law to reveal anything about a person's banking or financial activities. The largest and most recent source of personal privacy violation in the free world has become the United States. A pertinent example of this country's rapidly expanding citizen-control laws is that financial institutions are now required to automatically report to the government most of the banking, bartering and securities business of its private citizens.

In an increasingly hostile environment, privacy is essential to risk planning. The clientele of offshore trust companies typically seek confidentiality in their affairs to protect assets from disasters, unwarranted third-party interferences and an ever-growing burden of unnecessary disclosure. It's a trust company's business to provide legal structures and, in some cases, private banking services to protect client assets, ensure privacy, and reduce risk, taxes and costs.

And if investing in global securities, including top-performing mutual funds not available to U.S. citizens, interests you, an offshore company allows you that option. Standard & Poor's Guide to Offshore Investment Funds reports on 6,800 offshore funds and includes an in-depth survey of the top 350 performing investments. Some of these funds have achieved five-year returns of 800 to 900 percent. Standard & Poor's guide also reports that the one thing these 6,800 funds share in common is their tendency to refuse U.S. investors. Their reasoning is simple: They want to avoid pestering from taxing and regulatory authorities in the United States.

In order to access offshore funds, entrepreneurs who are citizens of the United States are able to use an offshore company as the "investor." Assuming that the investing company is appropriately structured, its returns may actually compound-without taxation-until that income is paid out to the entrepreneur.

Qualities Of A Good Offshore Location

What constitutes a favorable offshore jurisdiction, you may ask? A desirable jurisdiction is one that's politically neutral, that follows a policy of free trade and that does not interfere with the commercial activities of corporations established there. A good offshore location provides legal assurances of personal and corporate privacy and is language-compatible. Other factors include telecommunications, time zones and the availability of pro-fessional infrastructure. Characteristics of popular jurisdictions include being democratic and also English-speaking, having a legal system derived from British Common Law, and greatly favoring corporations that are nonresident in nature. The beautiful island of Nevis, located in the eastern Caribbean, represents the idyllic view of a tropical island paradise. The climate is nearly perfect for both people and the lush, tropical vegetation that grows there.

There are other ways to trim your tax bill besides going offshore. Try reading "Extra Credit" to get clued in on a few tax tricks.

The British, who colonized Nevis in 1624, considered it to be "the jewel of the Caribbean." English is spoken there, and it's one of the 10 freest places in the world. The literacy rate is higher than in the United States, and, compared to the States, Nevis is essentially crime-free. The legal system is based on English common law, served by a high court of justice and court of appeals.

A Nevis offshore company is known as an International Business Corporation (IBC), and although formed in a British Commonwealth country, the corporate structure is based on the states of Delaware and Nevada. The Nevis IBC is widely reported as having the best asset-protection features of any corporate structure anywhere in the world. Nevis offshore companies are exempt from all taxes.

Nevis has excellent communication facilities, and Americans are able to direct-dial the area code and phone number exactly as if they are placing a call in the United States. The time zone is similar to Eastern Standard Time, and Nevis banks and trust companies are bound under Crown Privacy Statutes, meaning financial transactions are absolutely private.

Generally speaking, offshore banks have a much better safety record than domestic banks. One reason people know so little about offshore banks is that they are prohibited from advertising in the United States-unless they're willing to comply to all the same regulations U.S. banks have to follow. Which, of course, would destroy the whole point of going offshore and all of the advantages in doing so.

Anti-avoidance legislation has recently been enacted in the United States to reduce the use of tax-haven countries strictly for tax-avoidance purposes. However, the very existence of many safe-harbor jurisdictions came about as an effect of American, British and Canadian efforts to reduce aid to specific smaller developing nations. Instead of providing direct foreign aid to these countries, legislation was passed to grant tax incentives for multinational corporations to invest in target offshore locales. And, once entrepreneurs spotted these attractive options, the game was afoot.

If the only reason you have for going offshore is tax avoidance, you should seek the assistance of a qualified tax attorney and explore the myriad opportunities available for domestic tax deferral before deciding to move your money into an offshore account. The IRS has taken the position that if the primary reason an offshore option is invoked is taxation-based, this motivation is sufficient grounds to deny tax benefits. It's important, therefore, that anyone considering an offshore business opportunity do so for reasons other than tax issues alone, or risk the consequences.

Making A Final Decision

The offshore world is surrounded by its own mystique and language, and for some, this aura can be disconcerting. It's worth remembering, however, that the real differences between an offshore jurisdiction and one considered to be "onshore" are few. Any entrepreneur who has at least a reasonable grasp of his or her domestic business practices is ready to begin navigating the world of international financial centers-provided they're based within the jurisdiciction of British Commonwealth.

Forming a corporation offshore and properly structuring all of its activities will assure an individual increas-ed privacy and greatly improved asset protection. And, assuming you're able to implement one simple tax benefit, it might easily pay for the entire process and will likely put you on the trail of huge savings in the future. Once you have your offshore business in place, there are countless other options to not only increase your asset base, but earn even greater returns, enjoy tax-deductible offshore travel, and more. The decision to utilize a licensed trust company to form and operate an offshore corporation is easy to implement, and the costs are generally very reasonable. However, keep in mind that if tax avoidance is the only-or primary-motivation for going offshore, expect to run into some obstacles. But if your goals are to access new markets, take advantage of business and investment opportunities that are unavailable at home, regain your privacy and protect your assets from frivolous and predatory litigation, use of an offshore corporation can reap extraordinary benefits. If you're truly entrepreneurial at heart, this option may be the right one for you.

Next Step

Tax Havens

To date, the following 66 jurisdictions worldwide have taken steps to be known as an International Financial Center, or IFC:


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