Tag Archives: controlled foreign corporation

Court Explains Offshore Company International Tax Plan

tax planning, saving taxes, how to save taxes, tax court

Tax Court explains great tax planning in this case.

This blog is about “Offshore Company International Tax Plan” approved by the the U.S. Tax Court.   The court’s  blueprint on offshore tax planning with a tax haven corporation will cut your tax burden in half.  

 In this Tax Court case, a private annuity was used to fund the foreign corporation.   The   corporation invested in publically traded stocks. 

A private annuity with a foreign corporation is a popular tax plan for the very rich.

What I like about the case, is that the IRS is the victor.  This means the IRS is not likely to disagree with its court victory

Offshore Company International Tax Plan with a Private Annuity

It works like this.  I form a BVI company with $10,000 as capital.    Then I fund my BVI corporation with an additional $90,000.  However, this time my corporation signs an agreement promising me an annual payment of $8,000 a year for the rest of my life or until I dissolve my corporation.    This arrangement is called a “private annuity.”

My BVI company earns $8,000 a year on its $100,000 (the $10,000 for the capital and the $90,000 for the private annuity).  It also deducts the $8,000 it pays me on the annuity,  leaving the corporation with no taxable income.   However, the annuity income tax rules, section 72, allocates $4,000 a year to my cost.  Of the $8,000 I received on the annuity, only $4,000 is taxable ($8,000 minus my allocated cost of $4,000).

I cast my tax planning is stone by filing IRS Form 5471.  Of course, I reference the IRS Tax Court case victory on the Form 5471. It is in this form that I report the activity of my offshore tax haven corporation.  As you may know, Congress enacted new laws to improve offshore corporations.  Here is a link with the basic.

Listen to our internet radio show, Tax Talk,  below (the show is about 15 minutes) to learn how to save taxes on your investment income with your controlled foreign corporation funded by your private annuity.  The term “private annuity”  means that no insurance company is involved.  Only you and your corporation are involved.  

Too busy to listen now? Ok.. then download the episode from our free Itunes page on this link.

Seemingly innocent but deadly to the IRS, private annuities have saved taxes since the beginning of the 1900’s.   But, now they are better.  The U.S. Tax Court agreed that private annuities paid by a tax haven corporation avoid all of nasty the anti-tax haven laws.

It gets better.  The IRS private  annuity interest rates are at an all-time low (about two percent).  This allows for income shifting to your offshore company.

Something as simple as your controlled foreign corporation funded with your money provides tax savings and asset protection beyond your wildest dreams (tax dreams that is).

The trick?   The trick, as you will learn on our internet radio show, Tax Talk (below), is the IRS’s information return, regulations and a recent Tax Court victory in  Dante and Sandi Perano, Petitioners vs. Commissioner of Internal Revenue.

Need Help with your Offshore Company International Tax Plan

If you need advice for your office company international tax plan, then contact me, Brian Dooley, CPA, MBT, at [email protected]

Foreign Passive Investment Funds (PFIC) Tax Plan with a Controlled Foreign Corporation

The foreign passive investment funds (PFIC) controlled foreign corporation uses a little known law.  It is called the “overlap rule”.

Seems almost impossible when two anti-taxpayers international tax laws can save you taxes. This is what happens with the Congress does not understand basic accounting.    For every debit (which in accounting is a plus “+”) there is a credit (which is minus “-“),

This axiom is the foundation of all income tax loopholes because this tax is a tax on accounting income.

When a holding company owns investment funds,  U.S. tax law collapses.  A few years ago, Congress could leave well enough alone.  Instead, they enacted a vague law requiring the income under the passive foreign investment company (“PFIC”) tax law to be reported by the U.S. shareholder of a foreign holding company.

The most popular foreign investment funds have been the Vanguard Investment funds managed from Dublin, Ireland.   These funds fit the definition of a PFIC.

From “reporting” the tax law vaguely implies that the shareholder pays tax on the PFIC’s income (if any and this if any has it’s on tax planning on this link).

The U.S. shareholder has to IRS Forms to file.  They are Form 5471 and Form 8621.  These two forms don’t integrate with each other.

I talked to the IRS International attorney in charge of form 8621 and PFIC taxation regarding this.  He knew of the problem but had no plans to fix this.   And why?  My guess is that it can’t be fixed because the two tax laws do not integrate.

Thus, your international tax accountant has many options in your tax planning when he prepares your Form 5471 and Form 8621.  Too many for me to fit them all into a blog.  One option allows you to convert ordinary income (called Subpart F income) into long term capital gain income.

However, a video will help your the tax preparer of your Form 8621.  I used this video for my international tax class for the California Society of CPAs.  This means that unless you are an international tax  CPA, you will find it boring and while debit and credits are boring. they are the focal point of tax loopholes.

If you need help in preparing your Form 5471 or Form 8621, then contact  me Brian Dooley, CPA, MBT at [email protected]

U.S. International Tax Law for the Privately Owned Business

If you own your own business, understanding United States international tax law is difficult.  The internet has stories about firms such as Google and Apple.   U.S. international tax law for the privately owned business is different from the international tax laws for publically traded corporations.

Publically traded companies are taxed as corporations.   Their profits are taxed twice.  First, as a corporation.  When the profits are paid to the owners, the owners pay tax again.

Privately held businesses avoid double taxes by using LLC’s, sole proprietorships and subchapter S corporations.     U.S. international tax law provides a choice of tax deferral or current taxation but with a dollar for dollar credit of   taxes paid to a foreign country.  This credit is called the “foreign tax credit”.

The use of tax treaties to for international tax planning does not work for a privately held business.  The tax treaties that you read about on the internet are to avoid European taxes and not U.S. taxes.    Setting up and maintaining a tax treaty structure is expensive and complex.

And as I said, the privately owned business gets a foreign tax credit.  Thus, avoiding European taxes does not make sense.

Usually, the privately owned business controls the foreign corporation.  U.S. international tax law provides for generous tax benefits as long as the income is active and is not from a related party (while the related party rules does have some good exceptions).

U.S. International Tax Law for the Privately Owned Business – Tax Challenges and Choices for the Privately Owned Business

If you choose not to pay tax on the income of the foreign corporation, you will never get the foreign tax credit.   You must make the choice as soon as your start the foreign business.  Making the choice in a few years will most likely cause you to pay a tax.

So,  please get together with your international tax accountant before you start your foreign business.

If you would discuss your future tax plans, then email, Brian Dooley, CPA, MBT, at [email protected]

Learn more about international tax planning on this link.

IRS International Wish List of Updated Foreign Income Tax Planning Laws

Domestication of a foreign trust

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

With little money to spend on attorneys to draft new regulations and rulings,  (because of the Republican Party’s cut in IRS funding), the international tax division has a short wish list. Here is the list:

1. Guidance under section 954(c), including regarding foreign currency gains.
2. Guidance under section 954, including regarding foreign base company sales and services income. [See T.D. 9733.]
3. Regulations under section 956 regarding the treatment of loans to foreign partnerships and related issues. [See T.D. 9733; REG-155164-09.] This is a hot topic to the IRS. This loophole has existed for fifty years, but the IRS learned about it just recently.
4. Final regulations on the treatment of upfront payments on swaps under section 956. Temporary and proposed regulations were published on May 8, 2015. This is a sophisticated tax saving strategy. If you have a controlled foreign corporation, this method is worth exploring.
5. Final regulations under section 959 on previously taxed earnings and profits. Proposed regulations were published on August 29, 2006. Please note, the IRS started this project a decade ago.
6. Final regulations under section 964 on accounting method elections. Proposed regulations were published on November 3, 2011. This is a KEY international tax planning law. If your CPA has not helped you, then you can contact me.
7. Guidance under sections 1295, 1297, and 1298 on passive foreign investment companies. Proposed regulations regarding foreign insurance companies were published on April 24, 2015. Temporary and proposed regulations regarding reporting requirements were published on December 31, 2013. Another major loophole that the IRS just recently discovered. It has been around for decades.

Some of these topics have been on the IRS wish list for almost a decade.  As you read this list, you can see tax strategies that continue to save you money. 

International Tax Strategy with the Preparation of Form 5471 for your Controlled Foreign Corporation

The most important part of Form 5471 is not on the Form.  The Form is merely the tip of an iceberg.

You maximize your tax savings by knowing the loopholes found in the IRS regulations.  Let me say that again.  The income tax regulations contain the complex rules of Subpart F income (which is the income that you do not want if you own a small business) that will save you money.

You will find a summary of these tax breaks on the overlooked IRS worksheet (I have it below).  This worksheet ties into the IRS regulations.

The worksheet has a section for each type of subpart F income.  As you study the international income tax regulations, you will see that most active foreign income is not subpart F.   However if your foreign corporation has related party transactions, then it may have subpart F income.   The IRS has many exceptions to this general rule in their regulations.  Related party transaction includes related party purchases of inventory or services and related party sales of inventory or services.

As you will see on the image of the worksheet, you need to complete page one and two.

On the worksheet, you enter the total of each category of your subpart F income.   The worksheet then guides your arithmetic in computing the total subpart F income.

But here is the problem.  You must compute the total gross subpart F income yourself.  Next, you allocate your overall expenses related to each category.

For example,  your foreign corporation manufactures and sells products worldwide.   Some of the sales are to a related corporation.  Related party sales are often subpart F income (see an exception for contract manufacturing on this link).    You compute your gross income (this is the sale price minus the cost of the good sold).

You enter this amount on the form on line 3 (regarding foreign base company sales income).  Next, you get some special tax breaks on line 15.  On page 2 of the worksheet, you complete line 19 by including the amount from line 15.

 And there are more tax savings to come on page 2 of the Form 5471 worksheet.

Form 5471 tax planning

Form 5471’s worksheet is full of tax savings.

Lines 26, 27, 28 and 29 involve heavy duty tax planning.  They include the concept of  “earnings and profits“.     U.S. corporate taxation (for both a domestic corporation and a foreign corporation) focuses on earnings and profits.

To save taxes, you need to be an expert in this concept.   You want your CPA to know this concept like the back of his hand.  You can test your CPA by asking him about this.  If the answer is vague, this means you need someone else to prepare the Form 5471.

Lastly, you take the amount from page two line 38(b) to line 1 of Form 5471 Schedule I.

Smart tax planners use this worksheet to monitor their taxable subpart F income.  This means you should be preparing a proforma worksheet after the six months of your year.    As you read the worksheet, your will see other IRS tax saving ideas such as related party interest expense.