I’m often asked, “which is the best country to setup my offshore business?” This is a multifaceted question and I don’t think the answer has ever been precisely the same for any two clients.
Here’s a brief overview of an analysis I use to help my clients select the best country for their offshore business.
Where to Incorporate Your Offshore Business
For maximum asset protection, it should be in a country different from where you’re operating the business.
The incorporation will focus on privacy, asset protection and banking. Your country of operation will focus on cost of labor, availability of IT, and other factors.
In some cases, where asset protection is the key, we might incorporate the business in Belize, Cook Islands, Nevis, or Panama.
Two Major Caveats to the Above for Certain Offshore Businesses
First, some clients look to the world image or marketability of their country of incorporation. In that situation, we might go with the far more expensive Cayman Islands, Switzerland, BVI, Singapore or Hong Kong.
Singapore and Hong Kong are countries of last resort because they require annual audits and it has become very difficult to operate a remote business from the island unless there is a specific reason to do so.
Second, the U.S. tax laws might affect your country of incorporation.
For example, an offshore company that’s owned by a U.S. person or persons, which provides a technical service of some kind, must incorporate in the country where it does business.
If a service business is resident in one country and incorporated in another, U.S. Subpart F rules can cause all kinds of tax problems as well as eliminate legal tax deferral.
Here’s the bottom line: Selecting the best country of incorporation for an offshore business is a detailed process with no one size fits all solution. Careful planning with an eye to U.S. tax implications should be done from day one.
The Country of Operation
This is a more detailed analysis which includes a review of each country's tax laws and how they interact with the laws of the United States.
From a tax perspective, you want a country that has a treaty with the U.S. and doesn’t tax foreign sourced profits. That is, a country that taxes local sourced income but not foreign sourced income.
Local source income is earned by selling products or services to locals. If you operate a restaurant in Panama, you’ll pay taxes in Panama.
Foreign sourced income in an offshore business is earned by selling products or services to people outside of your country of operation. If you’re an internet marketing firm operating from Panama and selling to U.S. prospects, you’ll pay no business tax in Panama.
For a list of countries that don’t tax foreign sourced profits, see: International Tax By Country.
Now, we get to the non-tax reasons for operating your offshore business from a particular country. Those include:
1. Time zone - I always suggest you operate from the same time zone as your primary customer base.
2. Regulation - Select a country that’s business friendly with minimal regulation and oversight (which is why Hong Kong has become a jurisdiction of last resort).
3. Labor - If you’ll hire employees, which countries offer quality English speakers at the best rate?
4. Personal preference - Finally we get into where you prefer to live, what culture you fit into and what climate you want to put up with. For example, Panama has two seasons, it’s hot, humid and rainy.
Really, this List Can Go on Forever
Part of the engagement is for us to spend time together. I need to understand what motivates you and where your priorities are.
- Do you want low cost and zero tax or do you want great weather and a higher quality of life?
- Do you want to live in a big city or a little town?
- Are you a one man or woman operation or do you want to grow the staff quickly?
I’ll end with a comment on one person portable businesses. If all you need is a laptop and a Wi-Fi connection to run your empire, you might not have a home base.
If you’re a perpetual traveler, never spending 183 days a year in any one place, then special U.S. tax laws will apply to your offshore business.
How to Qualify for the Foreign Earned Income Exclusion
When operating an offshore business, you want to qualify for the Foreign Earned Income Exclusion (FEIE). This allows you to take a salary of up to $102,100 in 2017 from your offshore corporation tax free.
There are two ways to qualify for the Exclusion. You can be out of the US for 330 days over a 12-month period or you can be a resident of a foreign country for a calendar year.
If you don’t put down roots, you’re classified as a perpetual traveler by the IRS. Those without residency in a foreign country must qualify for the FEIE using the 330-day test.
If you want to spend more time in the United States, then consider getting residency in a foreign country.
For example, Panama has a very easy program that gives you residency with an investment of only $20,000. And for you perpetual travelers, Panama doesn’t require you to spend a certain number of days in the country to maintain that residency. You can spend as little time as one day every other year and your residency will be maintained. Portugal as a very flexible visa for those of retirement age which allows you to spend 35 days on Portugal over a five year period to maintain your residency.
I hope you’ve found this article on setting up an offshore business to be helpful. For more information, please contact us or call (412) 749-0500. All consultations are free and confidential.
Joel Nagel is a U.S. attorney and international tax and business expert based in Pittsburgh. He has been providing guidance to high net worth individuals and multinationals for over 20 years and is one of the most respected lawyers in the offshore industry. Joel is the former Ambassador of Belize to Austria.