Offshore investments are an indispensable component of a globally balanced portfolio. But unfortunately, Congress has placed numerous obstacles in the way of Americans who venture offshore.
Probably the most obscene tax traps relate to U.S. taxpayers who invest in offshore mutual funds. When you sell—or are deemed to sell—your interest in most offshore funds, all income and gains are taxed at the highest ordinary income rate bracket that applies (presently 35%), not your actual tax bracket. What’s more, an interest charge (currently around 8%/year) applies for each year tax was deferred on these gains. And if you lose money on your offshore fund investments, you can’t deduct these losses.
In some cases, it’s possible to avoid these tax traps, but you have to make sure the offshore funds you purchase qualify for the statutory exemptions to these draconian rules. That’s a job for an offshore tax expert. For most U.S. investors, the safest course is to only purchase offshore funds through a tax-sheltered vehicle—an offshore variable annuity or life insurance policy, for instance—or through a retirement plan.
There are additional tax traps in the reporting rules for offshore investments. Penalties for failing to file a form with the IRS or the U.S. Treasury on or before the due date are typically US$10,000 for each late form. These penalties may be imposed even if you haven’t made any profit and there is thus no "tax loss" to the U.S. Treasury.
A failure to file a timely return for a foreign trust can cost you a staggering 35% of the assets in the trust. Let’s say you have a foreign trust containing about US$10 million in assets. You’re a single day late in mailing a required reporting form. In this situation, the IRS has the statutory right to impose a US$3.5 million penalty. I know of numerous examples where the IRS has sought to impose this penalty. While it can be removed for good cause, it may take numerous letters from your tax advisor to the IRS to resolve the problem—if it can be resolved at all.
There are many other examples….my point isn’t to scare you away from offshore investments. It’s to help insure that when you go offshore, that you do it right.
The Sovereign Society can provide significant assistance in this regard. In fact, we’re sponsoring a four-day "Offshore Advantage Academy seminar" November 6-10 in The Bahamas that will focus on the "nuts and bolts" of offshore investment. I’m one of the "professors" at this event, and you won’t want to miss my presentation on how to legally avoid taxes offshore, while fully complying with IRS tax and reporting rules.
For more information, just click on the "Offshore Advantage Academy" link on the right side of this page.
Hope to see you there!
Copyright © 2007 by Mark Nestmann
