It’s a question I get asked nearly every day.
The answer depends on your relationship with America.
If you are a US citizen, green card holder, or resident alien… the answer is NO. Foreign trusts, foundations, and companies will generally NOT provide significant (if any) tax savings. US taxes do NOT work like you see in the movies.
This unfortunate reality comes as a surprise to many.
Be very careful who you listen to about International tax planning. Many foreign advisors and promoters wrongfully assume that Americans can take advantage of certain structures just like everyone else.
But Congress and the IRS have anticipated almost any scheme you can possibly imagine and made laws and regulations to block you from using it.
Here is a brief summary and explanation of rules:
Foreign Trusts – when a US person transfers property to a foreign trust that has or permits US beneficiaries, the transferor is treated as the owner of the transferred assets for tax purposes and is liable for taxes due on income generated by the transferred assets.
The “permits US beneficiaries” criteria is interpreted broadly. A trust instrument may explicitly state that “US beneficiaries are not permitted.” But if the trust is amendable, the IRS will likely treat the trust as having or permitting US beneficiaries because one day you could amend the trust and name a US beneficiary.
Foreign Foundations – for all practical purposes, foreign foundations are treated the same as foreign trusts. They cannot provide significant tax savings for the reasons explained above.
Foreign Corporations – in most circumstances, incorporating in a low or no tax jurisdiction will not significantly alter your tax liability. US tax law has complex and thorough rules for dealing with Controlled Foreign Corporation (CFC). Essentially, profits generated by foreign corporations are attributable to US shareholders; i.e. US shareholders are liable for taxes on the CFC’s income even if they don’t actually receive it.
Profit attribution is achieved through two primary methods – Subpart F income and Global Intangible Low Tax Income (GILTI).
Subpart F income attributes income to US shareholders even if they do not actually receive income from a CFC.
GILTI is designed to capture income that is missed by Subpart F rules.
In very limited circumstances, GILTI can be lower than tax otherwise due. But generally, the GILTI savings are only worth the hassle if your company is a large multinational.
While you might not be able to use foreign trusts, foundations, and corporations to achieve significant tax reduction, there are still other legitimate reasons for using them (such as asset protection, access to foreign markets, banking, etc.).
After learning each client’s specific goals and objectives, it’s my job as an advisor to use my 20+ years of experience to determine the best course of action given my client’s specific situation. If tax reduction is a primary concern and my client is a US citizen or long-term resident, then expatriation might be necessary. Learn more here.