Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

To IBC or not to IBC?

© Copyright 2015 Wealth International, Ltd.

The internet is rife with promotions and claims regarding the offshore planning benefits available from International Business Companies (IBCs). This surge in popularity may well stem in part from changes in U.S. offshore trust laws (see Appendix 1 of Introduction to International Asset Protection) which have the effect (wholly intentional, we believe) of discouraging the creation and use of offshore trusts by U.S. persons.

We are proponents of using IBCs where they are appropriate, in particular when an operation involves doing business in a country which does not recognize trusts, as is discussed in this section of Introduction to International Asset Protection. IBCs, however, have important, frequently overlooked tax considerations.

Before going into specifics there, we would remonstrate against the general inclination of people to get hynotized by what amounts to a piece of paper – here the offshore legal entity – at the expense of the substance of the contemplated arrangement. There is no magic in any particular structure, such as an IBC, no matter what the structure’s jurisdiction. There are no “loopholes.” In the event of a controversy the IRS or other national tax authority will examine what is actually happening, and ignore the nominal legal form of the schema ... if that will mean more money in the state’s pockets and less in yours.

What follows is a summary of the U.S. rules relevant to Controlled Foreign Corporations.

Controlled Foreign Corporations:

A “Controlled Foreign Corporation” (CFC) is any foreign corporation of which more than 50% of its value or voting stock is owned by U.S. shareholders on any day during the taxable year of the foreign corporation, and in which:

  1. The U.S. shareholders have the ability to elect, appoint, or replace a person or majority of the body of persons exercising the powers ordinarily exercised by the board of directors of a domestic corporation.
  2. Any person or persons elected or designated by such shareholders have the power to elect exactly one-half of the members of such governing body, either to cast a vote deciding an evenly divided vote of such body or for the duration of any deadlock that may arise, to exercise the powers ordinarily exercised by such governing body.

A “U.S. shareholder” is a U.S. person (corporation, individual, estate or trust) who owns 10% or more of the voting power of a CFC. An individual is considered as owning stock whether owned directly or indirectly, by or for his spouse, his children, his grandchildren, or his parents. Moreover, stock owned directly or indirectly by or for a partnership or estate is considered as owned proportionately by its partners or beneficiaries. Stock owned by a trust is considered as owned proportionately by its beneficiaries in proportion to the actual interest of such beneficiaries in such trust. Stock owned by a trust for any person who is the owner or grantor is considered as owned by that person. In addition, if 10% or more of the value of the stock in a corporation is owned directly or indirectly, by or for any person, such person is considered as owning the stock in the proportion of the value which such bears to the value of all the stock in such corporation.

Stock owned directly or indirectly, by or for a foreign corporation, foreign partnership, foreign trust or foreign estate is considered as owned proportionately by its shareholders, partners or beneficiaries.

Any arrangements to shift the formal voting power away from a U.S. shareholder of a foreign corporation are not given effect if in reality the voting power is retained.

As remarked above and discussed on this website, substance is given more legal weight than is form. If a U.S. Shareholder retains substantive control over a foreign corporation, then the corporation will be considered to be a controlled foreign corporation in the eyes of the law, period. There are no “loopholes.”

Consequences of Being a Shareholder of a Controlled Foreign Corporation:

U.S shareholders must report their pro rata income to the IRS, including dividends, interest, annuities, capital gains, gains from commodities and foreign currency as well as rents and royalties from related entities. Income from manufacturing, trading or selling to unrelated parties, drilling and mining, insurance or reinsurance of foreign risks and certain offshore banking profits are not currently included.

So, to IBC or not to IBC?

What does all this mean in practical terms? Ultimately, it means that using an IBC as a vehicle to own passive income generating assets confers no substantive tax benefits, at least not to U.S. citizens/residents. There are advantages available from the standpoint of asset protection; none, however, that are not just as easily (and often better) accomplished using other vehicles.

In general, prospective clients with relatively simple offshore financial planning goals are well served by utilizing a legal vehicle specifically suited for holding passive investment assets, such as an international foundation or trust.

However, some clients will have more elaborate requirements, including, but not limited to:

(1) Actual operation of an international business, (2) Investments in international real estate holdings, (3) Ownership of patents and royalties, or (4) Organization of investment groups and societies.

For such clients, setup of an IBC might be advantageous. W.I.L. has the ability to set up IBCs in various jurisdictions, and perhaps more importantly, the expertise necessary to assist in the contractual structuring necessary to integrate the IBC into one’s financial planning system in the most effective way possible.

Contact Wealth International, Ltd. for information if you have additional questions that were not answered by this general information.

NOTE: This report is presented with the understanding that the publisher is not engaged in rendering legal or accounting services. Questions relevant to the specific tax, legal, and accounting needs of the reader should be addressed to practicing members of those professions. This information was gathered from sources believed to be reliable but it cannot be guaranteed insofar as it applies to any particular taxpayer. Wealth International, Limited specifically disclaims any liability, loss, or risk, personal or otherwise, incurred as a consequence directly or indirectly of the use and application of any of the techniques or contents of this report. No copies of this material may be made or redistributed without the express written consent of Wealth International, Ltd.