Tag Archives: UK

How to Stash Your Business Cash Offshore

44Offshore companies around the world are stashing cash offshore. The biggest players in the UK and US have negotiated loopholes in their respective tax codes and are taking full advantage of them. Here are the numbers and how you can join the party.

Tech leads the way in the US while banking is the tax master in the UK. Eight US tech companies increased their offshore cash by $69 billion in 2014 alone. The 20 largest UK companies have over 1,000 offshore corporations in tax havens and moved $200 billion abroad last year.

Microsoft, Apple, Google and 5 others now account for more than one fifth of the $2.1 trillion legally held tax deferred by American companies in offshore structures. Offshore tax planning, and the cash companies hold abroad, increased by 8% in 2014 and 11.5% in 2013. Microsoft has tripled its holdings since 2010.

Making money offshore is relatively easy for a tech company. If your profits can be linked to intellectual property, you to can play the offshore game.

If you transfer a patent offshore, you can accrue income into an offshore entity.  All you need is a patent that generates significant cash and a lawyer to build a compliant structure.

Corporations that rely on intellectual property – trademarks, logos or patents – have an advantage over the rest of us. However, if you can move your sales staff, call center, or other division offshore, then you to can tax plan around Uncle Sam and HM Revenue.

Let’s say you sell a product for $100. If $40 of that price can be allocated to work done abroad, then $40 of the sale price may qualify to be held offshore. Of course, transfer pricing is a complex matter and you should review your situation with an expert.

If this sounds like it’s meant for multinational corporations, you’re right. Most of us don’t have significant intellectual property nor a sales division in a low tax country. What can we do?

The American small business owner needs to move herself and her business offshore to take advantage of these international tax loopholes. More specifically, you need to move you and your business outside of the US and qualify for the Foreign Earned Income Exclusion.

You can qualify for the Exclusion by living abroad for 330 out of 365 days or becoming a resident of a foreign country. Then and only then can you 1) draw a salary from your foreign corporation of up to $100,800 per person (so, $201,600 for a husband and wife), and 2) retain earnings above this amount in your corporation. Note I’m speaking here of active business income. This does not apply to passive or investment income.

For the UK citizen, it’s a bit easier. UK taxes are based on domicile and not citizenship. If you are living outside of the UK for more than 6 months, you can typically shelter your income from UK tax until you bring it home. This is called paying tax on a “remittance basis.”

Let me close with suggestions for high net worth Americans. What if you are a small business owner earning well over the $100,800 FEIE amount? What if you take home $500,000 to $1 million in salary? Or your income is from passive investments rather than an active business? Going offshore won’t make much of a dent.

High salaried employees and passive investors should consider moving to Puerto Rico. This US territory’s unique tax rules allow you to cut your US tax rate to 4% on ordinary income and zero on capital gains. I’ll write more on the benefits of PR in a future posts… if you just can’t wait, check out PR Tax Breaks for Corporations and PR Tax Rules for Investors.