How To Operate Your Business Overseas Tax-Free
The key advantage of going offshore is diversification. The good news is that you have the opportunity to diversify not only your investments in this way, but your life, too—both your personal life and your professional one.
That is, in today’s world, you can realize many benefits by taking your business offshore along with your investments and yourself—either your existing business or one you would like to start to fund your new life overseas.
Most important among these can be the tax benefits. Whether you have (or are considering building) a factory or an Internet business…whether you’re earning your income as a consultant or a laptop entrepreneur…
taking your business offshore, especially if you’re a U.S. person, can result in significant tax advantages.
One young lady I met at our conference last year made bead jewelry. She sold her jewelry in the United States and was looking to expand her production capacity. She was in Belize (among other reasons) to take a look at the country’s Export Processing Zones (EPZ). Setting up shop in one of these zones (or starting your own EPZ specifically for your own business, which is possible in Belize) allows you to import your materials, process them, and then re-export the finished product without paying taxes in Belize.
For this lady’s business, Belize made great sense. The country is English-speaking and close to the United States. She could import beads from China to Belize, where the final product could be made in her “factory.” Then her U.S. company could buy the finished products from her Belize company. She’d benefit from a lower cost of labor in Belize and also realize tax savings in the United States by shifting some profits (those associated with creating the final product) offshore. Meantime, her non-U.S. company could retain its profits, deferring any U.S. tax on those profits until they were paid out.
If the young lady took the additional step of moving herself to Belize along with her business, she could also avail of the Foreign Earned Income Exclusion (FEIE). If she paid herself an annual salary up to the amount of the FEIE each year, she could eliminate any U.S. tax burden altogether.
Belize isn’t the only country with Export Processing Zones. Many countries offer these, or something similar, especially in Central America. This kind of set-up is the attraction for many multinational companies that base themselves in this part of the world, but smaller companies can benefit from structuring themselves this way, too.
In addition to the cost and tax benefits, establishing her jewelry business in Belize could also provide this lady with both asset diversification and asset protection (by the very fact of having part of her business operation in another country).
This lady’s is a bricks-and-mortar kind of enterprise. Even easier to relocate overseas would be a portable business, such as a website or a consulting practice. In this case, though, to gain the tax advantages, you definitely would have to move offshore along with your laptop-based business.
A consultant could move to a jurisdictional tax-based country (one that taxes you only on income earned in the country) and arrange his corporate structures so that he’d pay no tax in his country of residence and no tax (or deferred tax, in the case of a U.S. person) in his country of citizenship.
I knew a German guy years ago who lived in Malaysia and made his living as an engineering consultant working with clients in the Middle East. As a German not living in Germany, he had no tax liability there. Malaysia taxes residents only on income earned inside the country, so he had no tax liability in Malaysia either.
For a U.S. person, that structure would not be tax free, but it could still be tax efficient. The difference would be that the U.S. person would still have a potential tax liability in the United States. Again, though, the U.S. person could avail of the Foreign Earned Income Exclusion to be exempt of U.S. tax at least on that amount each year. And, for many laptop-based entrepreneurs, the amount of the FEIE (US$99,200 for 2016) would be greater than their actual income earned in any given year.
Improving your tax situation (that is, reducing your tax burden) is one significant advantage of taking your business offshore, but it’s not the only one. The would-be entrepreneur can find more and better opportunities in other countries, especially in emerging markets. Anyone who has grown up in a First World country has a big leg up on the local competition in much of the world. We’ve watched so many products and services launched, tested, and perfected. All of these are businesses that could be transported to a less developed country where you could be first in the market with the idea.
A classic example of this is the messenger service set up in Bucharest, Romania, by a colleague just after that country opened up to the West. This entrepreneur landed in Bucharest from the UK with nothing more than the expectation of opportunity. One of the first opportunities he identified was the lack of an efficient messenger service. Businesses were expanding and many new ones were being launched. Every businessperson he spoke with bemoaned the lack of an efficient way to get documents or samples or materials from one point in the city to another reliably and quickly. This guy thought of the messenger service that had operated so effectively in the UK town where he was from…and his new business idea was conceived.
You could also simply take your current skill set and offer it in an underserved market. A retiree in Panama who had been a mechanic his entire professional career back in the States found himself asked again and again for help by fellow foreign (non-Spanish-speaking) retirees needing work done on their cars. He obliged and obliged until, organically, he found himself in the auto-repair business. He hadn’t intended this and didn’t need the income but has found that he enjoys being kept busy and the chance his new business venture allows him to get to know his neighbors.
Lief Simon
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