I’ve just returned from a week-long working vacation in Peru. It’s a country with a fascinating history, and as always when I visit a new country, I tried to assess some of the offshore opportunities there and answer for myself any expatriation questions regarding that country.
It seems to be ridiculously hard for a foreigner to obtain permanent legal residence in Peru, unless you marry a Peruvian. (Details to follow in another post.) But if you manage to overcome this hurdle, after a mere two years of full-time residence, you’ll be eligible for Peruvian nationality and passport.
The Peru passport isn’t a great travel document, because it provides visa-free travel to fewer than 80 countries. But it does facilitate travel within Central and South America.
In any event, on to today’s questions, and my take on them…
How Long Does it Take to Expatriate?
Dear Mark,
I’m a U.S.-Canada dual national interested in expatriating in Canada. I tried several times to contact the consulates here (in Canada) to schedule an expatriation appointment. All I got back was a long form letter informing me, with several variations, that expatriation wouldn’t free me from U.S. tax obligations. The letter actually invited me to make an appointment using the State Department’s automated appointment system. But there was no option to make an appointment to expatriate, although there was to—you guessed it—apply for, renew or add pages to my U.S. passport!
Then, I actually got a call back from one of the consulate I called! Right away, the lady that called tried to persuade me not to expatriate, and told me that I should keep my U.S. nationality. She told me that it takes two appointments about a month apart to expatriate. They want you to “reflect” on your “irrevocable” decision for a month between appointments.
Is this reasonable? Or should I expatriate somewhere else?
Sincerely,
B.
Dear B.,
What BS!! Yes, many consular representatives will try to talk you out of expatriation, because they’re trained to toe the homelander line.
Try to avoid dealing with someone like this. Not only with this woman try to talk you out of expatriating, she may also demand additional documentation not legally required by State Department regulations, such as a letter explaining your motives. This is strictly optional although there are circumstances where it’s justified.
Since you’re a client, I can reveal that the consulate that I recommend for expatriation is [name of country deleted]. At this consulate, two visits are reported, but they only need to be one day apart. Also, the person in charge of the process at this consulate is completely non-confrontational.
Hope this helps–
Mark
(Note: The Nestmann Group, Ltd. offers expatriation consultations starting at just $1,300. Contact us for more information at info [at] nestmann.com)
Reporting Obligations for Nevis LLC
Dear Mark,
I have an offshore LLC that I formed in 2012. My accountant is treating it as a Schedule C entity, and so it shows up on my 1040.
In 2012, the LLC purchased its first asset: some precious metals stored in a vault in Switzerland. The way I understand it, I don’t have to report the precious metals to the Treasury Department on Form 90-22.1 because I don't personally own them.
Also, while of course, the IRS knows about the LLC, but how do they know what's inside it? The Schedule C only seems to show cash flow, but not assets.
Can you explain to me the LLC’s assets get reported to Uncle Sam?
Best regards,
S. __________
Dear S,
There are several different issues to consider in your Nevis LLC.
1. If your accountant is treating the LLC as a Schedule C entity, this is possible only after filing Form 8932, and electing it as a disregarded entity. The company that formed your LLC may have done this already but you should check your records to make sure. (By the way, we do this automatically for our clients so they’re always sure how the LLC will be taxed and reported.)
2. Whether the precious metals are reportable or not depends on the nature of the storage arrangement. If you don't have exclusive and direct access to them (e.g., like in a safety deposit box), then I they're probably reportable on Form 90-22.
3. If the arrangement is reportable, and if the LLC is a disregarded entity, both you personally AND the LLC itself must file the FBAR. Yes, this is crazy but it's true.
4. The metals aren't financial assets and thus need not be reported on the IRS’s new Form 8938.
5. Your accountant also needs to file Form 8858 annually, which is the information return for a foreign disregarded entity (assuming it is a disregarded entity). This form will provide an abbreviated balance sheet for the LLC, and the metals will show up as an "other asset."
Hope this helps. It is a bit complex.
Your accountant may find this link useful.
All the best,
Mark
(Note: The Nestmann Group, Ltd., working through its affiliate company Tarsus Corporate Services, Inc., can quickly and efficiently form an offshore IBC or LLC and advise on its optimum taxation for persons resident in the United States, Canada, and other countries. Contact us at info [at] nestmann.com for more information)
How to Turn Offshore Passive Income Into Employment Income
Dear Mark,
Recently you posted a blog entry on tax obligations and tax breaks for U.S. citizens and green card holders living abroad, here.
One of the tax breaks you mentioned was the “foreign earned income exclusion” (FEIE) which allows U.S. taxpayers living abroad to earn up to $97,600 annually tax-free (2013, adjusted annually for inflation).
That sounds like a great tax break, except that you also mentioned that the FEIE applies strictly to earned income, meaning wages, salary, self-employment income, tips, etc. It doesn’t let you exclude passive income, such as dividends, interest, capital gains, and so forth.
That leaves me out. I’m interested in moving offshore and living off my portfolio, which consists of a bit more than $3 million in passive assets.
Is there any way to exclude any of the earnings from this portfolio from U.S. tax?
Sincerely,
M. __________
Dear M. _________,
Surprisingly, you may be able to convert "unearned income" into "earned income" if you follow the IRS rules carefully. Here's what you need to do, step-by-step.
Step 1: Form a foreign corporation (such as an international business company or IBC). Ordinarily, you wouldn't want to form a foreign corporation to hold an investment portfolio, because of unfavorable tax consequences. However, according to the IRS a salary you receive from a corporation is "earned income" if it represents a "reasonable allowance as compensation for work you do for the corporation." This raises the possibility of paying yourself "reasonable compensation" for portfolio management and related tasks relating to the corporation's investments.
Step 2: Transfer the capital that you anticipate generating profits from to the foreign corporation. You may need to report this transfer by filing IRS Form 926.
Step 3: Move abroad for a length of time sufficient to qualify for the FEIE (generally, at least one full year).
Step 4: Pay yourself a reasonable salary from the income the capital generates for the corporation. The salary must be for services you (and your spouse, if applicable) provide to the corporation (e.g., portfolio management). The corporation may also pay for your housing, fringe benefits, etc. All of this compensation may be excluded from U.S. taxation under the FEIE up to applicable limits.
Step 5: File IRS Form 2555 annually with your U.S. tax return to claim the FEIE (and foreign housing exemption/deduction, if applicable). You won't need to make Social Security or Medicare payments, as long as you're living in a country that doesn't have a social security totalization agreement with the United States. The foreign corporation must file IRS Form 5471 each year. You (and possibly the corporation as well) must also file Treasury Form TD F 90-22.1 annually to report foreign "bank, securities, and 'other' financial" accounts. You may also need to file Form 8938 with your tax return annually.
You must demonstrate that the salary the corporation pays for your services is similar to that you'd receive from an "arm's length" employer. For instance, you might be able to justify a higher salary if you are a certified portfolio manager, or the IRS classifies you as a "professional trader." But even if you're not, you can still receive compensation for expending time and services to the corporation, although the "reasonable" salary you receive would likely be lower.
Your attorney should prepare a written agreement between you and the corporation documenting the services you provide. You also need to keep detailed records to document performance of these services. Finally, you'll need to maintain whatever corporate formalities are required in whatever jurisdiction you form your offshore corporation.
(Note: The Nestmann Group, Ltd. offers a package for this service for $6,000 that includes formation of a foreign entity, contracts drawn up, etc. for you to be paid a salary to manage a bona-fide offshore corporation, including one that holds your own personal assets. Contact us at info [at] nestmann.com for more information.)
