The Best International Tax Advice You’ll Ever Get
“A partner and I built an Internet business, then sold it about a year ago. Suddenly, I had some real money, and I thought I should get serious about what to do with it…where to put it.”
The young man went on to explain that he attended an international money conference, where he met an attorney specialized in offshore structures for tax management and asset protection.
“Great, I thought. This is just what I need.
“Only, I’ve now spent US$80,000 with the guy. I guess I have what I need. I’m not sure. And, at this point, I’m reluctant to ask more questions, because every question leads to a response written by an ‘associate’ and then forwarded to the attorney for his review. I pay for the associate’s time…and then for the attorney’s time!”
Years ago, a friend–a smart guy…a guy who’d been around the block…done business all over the world–engaged an attorney to help him structure his holdings to mitigate his global tax liability.
Similar story. My friend spent more than US$100,000…didn’t understand the structure he ended up with…didn’t want to ask more questions, because they led to more answers he didn’t understand and more billable hours…and, then, a few years later, found he was in violation of some French tax code he’d never heard of. Certainly, he didn’t mean to run afoul of the French tax authorities. And, even when presented with the facts, he didn’t understand exactly what he’d done that he shouldn’t have done.
In the end, he had no choice but to pay the resulting US$50,000 fine…and, then, to hope no further surprises awaited him down the line.
I joke now and then in these dispatches about how mind-numbingly complicated, as I like to say, this international tax and structure stuff can be.
It is. And it doesn’t have to be.
At first, when you’re starting out, making your first foreign real estate purchase or setting up your first offshore corporation, it’s intimidating. You don’t know what you don’t know. You fear you’ll end up like my friend, breaking some tax law you didn’t know existed.
I’ve been lucky on this front, twice. First, I married an accountant, who, since we’ve been living outside the States, has made it his business to understand the ins and outs of U.S. tax code as it relates to the non-resident American. Lief can quote IRS rules, regs, form numbers, and exemptions by heart.
And he’s taken the time to research and to understand the relevant tax issues in every jurisdiction where we’ve invested money, done business, or held an asset.
I’m not sure he enjoys the side-line, but, when we left the States, Lief felt he had no choice. It was either figure it out himself or pay some “expert” tens of thousands of dollars to figure it out for us.
Lief’s investment of time and energy has paid off, not only because it has saved us considerable money over the past decade…but also because it means we understand (well, at least he does) how we’re structured. He’s made all the decisions and choices himself. And we’ve erred on the side of disclosing and reporting even when we’re not certain it’s required…and paying the tax even when we’re not sure it’s due.
This way, we sleep better.
And, even within the context of our ultra-conservative approach, Lief has been able to control our overall tax burden. Using the foreign-earned income exemption and other straightforward exclusions, exemptions, and deductions, our overall net effective rate of tax is considerably less than it would be if we were full-time U.S. residents.
None of this does you any good, I realize, for Lief’s ambitions lie not with international tax planning but with land development. Lief’s busy with his current project out in Azuero and, unfortunately, doesn’t have time for tax consulting.
I have learned a few things. Here you go: Six things I wish someone had told me before I bought my first piece of foreign property or opened my first offshore company:
- Maybe you don’t need to do anything. Asset protection isn’t an issue until you’ve got assets enough to warrant the investment of time and money to figure out how to protect them. In some jurisdictions, yes, you’re wise to hold property in a local or an offshore corporation…but not all. Before you do anything, make sure you understand why you’re doing it and the real benefit.
- Whatever you do, it shouldn’t cost you tens of thousands of dollars. OK, maybe if you’re Bill Gates or Warren Buffet, a big investment in managing your tax and asset issues is warranted. For you and me, it’s not.
- The foreign-earned income exclusion may be the beginning and the end of the tax planning you require. My young marketing manager Harry, for example, is sitting pretty from a tax point of view…and he got to this point without spending a single dollar on tax advice. As a non-resident American, his first US$87,600 in earned income is tax-free in the States, which means that, for the foreseeable future, Harry’s annual tax bill to Uncle Sam will be exactly zero.
- When it comes to purchasing and holding real estate overseas, remember these two things: First, the jurisdiction is the key; second, as a result, no attorney in your home country is going to be able to help you figure out what to do. You need a local attorney, experienced at working with foreign buyers, to help you determine how to purchase and how to hold (in a local corporation, in a foreign corporation, in your own name, in a trust, etc.).
- When it comes to dealing with the tax issues in any new jurisdiction where you take up residence, the key is to research, plan, and take action before taking up residence. Certain options for mitigating your local tax bill can be taken off the table once you’ve taken a local address. Again, you need local legal advice.
- You can avoid any local tax issues by being only part-time resident. The particulars differ jurisdiction to jurisdiction, but, generally, spend fewer than six months in a place, and you can’t be considered full-time resident for tax purposes. There are exceptions, so, again, get advice.