We’ve all seen The Firm with Tom Cruise stuffing duffle bags full of cash in the Cayman Islands. But is it really like that? An IBC is an international business company domiciled in a tax-free jurisdiction. As an American, can you avoid taxes with one? What are the benefits? Should a wealthy American take advantage of an IBC in some exotic location?
First of all, these companies are usually set up in an offshore jurisdiction that is free from taxation. The only stipulation is that the business cannot conduct business within the jurisdiction where it is domiciled. The business is free to conduct business anywhere else in the world. There is usually a lax requirement for the board of directors, and there typically are agents appointed to go through the motions of running the company. In short, it’s a shell company for the benefit of the underlying owner. It’s not uncommon to see buildings in Cayman or elsewhere with hundreds of company listings on the door, all run by the same agents.
What can this type of structure do for a wealthy individual or business? Confidentiality, for one. Money can be place and managed offshore under the name of the IBC versus the beneficial owner. In this fashion, investment decisions and the movement of capital can be accomplished in private. The only entity that is entitled to know what is going on underneath is, of course, the federal government.
Americans have to notify the IRS if they own such a company. Americans are the only citizens in the world who have to pay taxes on their earnings no matter where they are located. An IBC is no different. You cannot use one to evade taxes. You can, however, set up an IBC to assist in avoiding taxes under legal tax-avoidance schemes. I’m sorry, you can’t take duffle bags full of cash to the Caymans and hide them either. Due to anti-money-laundering laws globally, using cash only is strictly forbidden (although I’m sure it happens from time to time.)
The other big plus for an IBC is asset-protection. Let’s say you are a physician and concerned about malpractice lawsuits and want to protect the wealth you have accumulated for decades. An offshore IBC can accomplish that task, with a resourceful and knowledgeable attorney. (There are plenty of those offshore!) The selection of jurisdiction is important in this effort. The legislation enacted by the local government is key. Some islands are better than others. The Bahamas and St. Kitts & Nevis are known for their strong asset-protection laws.
Another booming business offshore is the captive insurance trade. This is where a corporation, individual, or other legal entity can self-insure to protect from losses and have more control over their insurance program. You can avoid taxes, have discretion over investment decisions, retain premiums, and build up assets within the company. In short, you can save a lot of money if you have large insurance needs (or even relatively small for that matter.) But I will go into this business in-depth in another column.
The one thing you need to know about the offshore business is that there are a LOT of landmines. If you are considering this route, please find a good advisor in the space. It is not cheap; all of the steps to set-up and monitor an IBC take money. And interestingly enough, a tax-haven jurisdiction does not have to be set up outside the United States. Many states such as Nevada have enacted this type of legislation. Again, find a good advisor before making any decisions. The good thing about having your IBC in Cayman or some other exotic local, however, is the annual board of directors meeting. Typically, they are scheduled in the thick of winter for some reason.
Happy tax avoidance!
Photo credit: Nathan Gibbs (Flickr)