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Navigating Offshore Domiciling

Published: Dec 20, 2023

The current business landscape remains fraught with challenges, including the Federal Reserve's upward adjustment of borrowing rates, the escalating threat of cyber-attacks, and the ever-elusive stability in the U.S. political arena. In the face of these issues and several others, offshore domiciling has garnered increasing attention. This practice entails establishing a legal entity in a foreign jurisdiction, outside of the United States, with the primary goals of achieving tax optimization, enhancing privacy, and safeguarding assets.

Since the 1970s there has been continued interest in offshore domiciling, which involves businesses transfer or create entities in countries outside their ownership's residence. Foreign or offshore domiciles are frequently associated with advantages such as less strict regulations, particularly in capitalization and surplus requirements, along with cost savings such as lower operating expenses, employee wages, and government fees.

One of the compelling reasons businesses explore offshore domiciling are these potential strategic advantages, and domiciling their 831(b) Plan is just one example. 

Where Are These Offshore Domiciles?

Bermuda is one of the top offshore domiciles, along with the British Virgin Islands, Cayman Islands, Barbados, and other smaller locations. 

Risks of Offshore Domiciling 

While offshore domiciling can be attractive for certain benefits, it has potential risks that must factor into the decision process.

Reputation Risk:
Offshore domiciling can be perceived as an attempt to evade taxes or regulations, harming a business's reputation. 

Legal Risks:
When dealing with entities formed in foreign jurisdictions, it's essential to remember that their recognition might not be universal. Legal proceedings can become more complicated with the differences in laws between the country of residence of the owner(s) and the offshore domicile. Complicated equates to expensive.

Operational Risks:
Managing and communicating from a distance can be challenging when a business is domiciled offshore. For example, time differences can make scheduling meetings and coordinating work difficult. Communication can be especially problematic if cultural differences exist between the two locations. 

Economic Risks:
These can include disparity in currency values, political instability in the offshore jurisdiction, and potential seizure of assets. As noted above, many of the offshore jurisdictions are Island countries. Long-term business interruptions from hurricanes or earthquakes are a very real threat. 

IRS Scrutiny:
The IRS maintains an aggressive audit stance towards offshore activities. Quoting from an IRS news release IR-2019-43, March 15, 2019:

“While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.”

No one wants to get sideways with the IRS so when they refer to reporting requirements what does this entail? Disclosure forms such as; Report of Foreign Bank and Financial Accounts (FBAR), Form 1116 (foreign tax credit), Form 8938 (specified foreign financial assets), Form 5471 (foreign corporations), Form 8865 (foreign partnerships), Forms 3520 and 3520-A (foreign trusts).

Offshore domiciling may seem appealing because of the potential benefits of reduced taxes and regulatory requirements, but it also comes with inherent risks and challenges that must be addressed during the decision-making process. 

If you are considering implementing an 831(b) Plan and any of these offshore domiciling questions give you pause, you may be interested to know that many of the same benefits can be enjoyed with domestic domiciling combined with third-party administration. 

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