Offshore IBCs - Complex But Useful

Today's comment is by Bob Bauman, Legal Counsel and Senior Writer for The Sovereign Society.

Dear A-Letter Reader,

Some investment experts claim the perfect asset protection tool is a corporation chartered in a foreign nation. These offshore corporations are generally called "international business corporations" or IBCs.

They see greater privacy, less regulation, deductible business expenses, deferred profits and no local taxes. That certainly can be true in the right nations, such as Panama.

But there are serious practical problems with an IBC. For starters, it's difficult to comply with the U.S. tax and reporting laws. There are also penalties for failing to do so.

There is even a little known provision in the U.S. tax code (the per se list) that imposes the worst possible taxes on offshore corporations and their American owners. But you can deal with this provision by proper planning and professional advice.

The Good Old Days

There was a time when U.S. taxpayers (corporate or individual) could defer taxes simply by setting up an offshore corporation, in say The Bahamas.

In those days, your corporation was what we lawyers call "a foreign entity." This means your shareholders had to pay U.S. income tax only on dividends, but not on corporate income. Basically "keep your profits offshore and pay no taxes!" That was the mantra of the time.

But times and laws have changed. The IRS now looks through offshore corporations and directly taxes U.S. citizen owners on the company's annual earnings as if these profits are personal income, even if they are undistributed.

Just as with any domestic U.S. corporation, you must strictly follow legal formalities when you create an offshore IBC. You must pay for establishing, registering and maintaining your IBC. You need experienced U.S. tax and local in-country legal counsel to make this arrangement work. You also must pay annual registration fees, along with record keeping, meetings, minutes and resolutions.

Five IBC Reasons

Vernon Jacobs, CPA, a leading offshore tax specialist, provides what he calls "Five Reasons to Own a Foreign Corporation" as follows:

Reason # 1: If you properly structure it, your foreign corporation will not qualify as the IRS definition of a "controlled foreign corporation." This means your corporation will not subject you as a U.S. owner to U.S. taxes on the current corporate income - unless the foreign corporation is a "passive investment holding company." (Don't worry about some of these unfamiliar terms. They mean something to tax lawyers and the IRS, and your CPA or attorney can explain the details.)

Reason # 2: If you're interested in creating a foreign asset protection trust (APT), your trust will likely need a foreign corporation (IBC) to own the assets. This way you can protect your assets from foreign estate taxes where you locate the asset protection trust.

Reason # 3: If you want to operate an active business based in a tax haven jurisdiction, a foreign limited liability company (LLC) can provide asset protection. An LLC also allows you to defer U.S. taxes on profits from operating a trade or business offshore. That's because the U.S. will tax it as a foreign corporation, unless the owners choose to be taxed as a partnership or as a "disregarded entity" (another IRS tax term that your attorney can explain).

Reason # 4: Because of the cost and complexity of U.S. tax and reporting rules, many foreign banks and investment groups won't open an investment or checking account for an individual U.S. person. But they will open an account for a foreign corporation, even if it is owned by a U.S. person. If you own certain kinds of foreign corporations, you can avoid U.S. tax problems by choosing to be taxed as a foreign partnership or disregarded entity. That provides a better tax rate.

Reason # 5: A lot of U.S. companies are looking to expand with operations in foreign countries. To minimize liability risks, they usually form a foreign LLC or corporation to own the foreign based business operation. Depending on a variety of factors, the U.S. company may pay less taxes as a disregarded entity or as a taxable corporation - which is the default IRS treatment.

Also in some nations, such as Panama, an American owner can escape foreign real estate taxes when you buy an offshore property by placing title in the name of your IBC. Sale of corporate shares is not taxed in Panama, but real estate transfers are.

Need to Know

My point is that, while you may have heard an IBC is just what you need. If you have a serious interest in venturing offshore, you need to know about the advantages and the disadvantages of a foreign corporation and you need to have a complete understanding before you sign papers or make a commitment of any kind.

BOB BAUMAN, Legal Counsel

P.S. If you want to know all about IBCs and lots more about taxes, join us for our Offshore Advantage Academy event on November 7 - 10 in The Bahamas. Our "offshore professors," will give you the basics on IBCs and other offshore entities - so you can choose the one that's best for you. Click here to learn more.

Also, Vern Jacobs is holding his annual "Tax Boot Camp" on Dec. 7, 2007 at the world famous Caesar's Palace in Las Vegas. Click here for registration information.

Wall Street Gets a Kick Out of the Falling Dollar

No matter how you slice it, the U.S. stock market is chugging along. The major averages are seeing more up days than down. That's translated into an awfully solid trend. Equity investors are feeling the flow and loving every minute of it.

And that's exactly why they're loving every second of the U.S. dollar's collapse, too.

Investors in notable large caps are living large. They're buying those companies and making a killing in the United States' newly found export market. Such companies are able to take advantage of the global economic boom, and the weakening dollar is an added kicker.

Many signs I've noticed recently point to a tight negative correlation between the stocks and the dollar, and subsequently foreign currencies.

Have a look ...

Who's doing the leading here? Is confidence in the stock market directly driving the dollar lower than the fundamentals reflect? Or does confidence in the stock market only mirror the lack of confidence in the greenback?

And what about globally - do investors outside the states look to stock market confidence as an indication the dollar will fall and the rest of the currency pack will be affected?

Global investors have certainly justified extensive yen borrowing with this dynamic for the longest time. So you'd have to imagine other correlations exist.

JACK CROOKS, Editor of
World Currency Options

EDITOR'S NOTE: Just this month, over 500 investors test-drove Jack Crooks' research service, World Currency Options. These savvy individuals are cashing in their falling dollars for currency options with double and triple-digit profit potential. Since August, Jack helped his currency options subscribers grab gains of 53%, 58%, 68%, and up to 101%, 113% and 134% with his dynamite currency options. It's easier than you might think to grab gains like these. Click Here to find out how.

Wealth & Investments

Spain is a Great Place to Visit,
But I Wouldn't Invest Here

I've been a regular visitor to Spain since I was barely six months old.

It's always a thrill returning to this great country and visiting my family. And over the years, the economic transformation unleashed across the nation has been nothing short of spectacular.

As a child, I remember Spain was largely a backwater country. It was very underdeveloped and extremely inexpensive. Former dictator, Francisco Franco, ran the country with an iron fist for decades and stifled Spain's development. I vividly remember revolutionary guards patrolling my grandparents' park across the street every night with rifles in hand.

Roll the clock forward from 1975 to 2007, and things are shockingly different.

In 1992, the Barcelona Games set the country on a course towards rapid economic industrialization. The games placed this Catalan capital at the forefront of Spanish tourism and booming foreign direct investment. Once Franco died, the government released the shackles of modern capitalist development. Spain has not looked back ever since.

Spain ranks as the eighth-largest economy in the world. Until recently, Spain was also home to one of the most impressive real estate bull markets in Europe. In Barcelona, property prices have skyrocketed over the last 20 years. If Spain was affordable 25 years ago, it now ranks as one of the greatest real estate bubbles in the world. And real estate is now suffering a bad hangover in this country as supply has finally exceeded demand. Buyers are looking elsewhere in emerging Europe (e.g. Croatia, Romania, Bulgaria) for cheaper real estate deals.

The Spanish real estate market peaked in February. That was after a major contraction of values across the entire spectrum of publicly listed property companies in Madrid. Several of these companies plunged during the first quarter because buyers feared there was an excessive supply and waning demand. That's a logical conclusion following years of incredible development. Many of these companies still trade miles below their all-time high in 2006.

But Spanish cities, including Barcelona, remain largely expensive and for the most part, prices have not declined far enough to attract value investors.

The Madrid Stock Exchange continues to offer poor values with the non-bank sector, trading at more than twice the European average based on relative P/E ratios. And Spanish banks, though bordering lows for the year following a wave of selling since sub-prime surfaced again in mid-July, remain highly vulnerable to further declines over the next 12 months.

It's too early to buy Spanish banks. More pain lies ahead because most of the sector is heavily exposed to real estate. Until the European Central Bank starts cutting lending rates next year, which I expect, strains across this sector will continue.

The best values in Spain lie in the insurance sector, offering low multiples and attractive dividends compared to comparative Spanish bond yields. Insurance carriers in Europe, including reinsurers, are home to some of the best values today because claims have been sparse and premiums continue to rise in 2007.

That said, I'm not bullish on Spain. It's still an amazing tourist destination and that will never change. But real estate prices, like most Western European countries, remain extremely expensive, especially compared to the boom underway in the Balkans where prices are far cheaper than Spain.

For value investors, the best bargain in Spain remains something you can consume - Rioja.

ERIC ROSEMAN, Investment Director

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