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Roth IRA's let people avoid capital gains tax completely and defer a collateralized income tax for decades.

Bundling some investments and property in offshore entities in jurisdictions that democratically decided not to fund their own governments from a passive tax appears to achieve the same result as a Roth retirement account in a more liquid way.

I still get confused by PFIC and CFC regulations. This is a personal finance question because these are all things an individual can do, onshore, without registering an entity, onshore.

So the following scenario doesn't use a Roth account.

Lets say Joe has a patent, and has licensees lined up. If Joe gets payment from the licensees he will have to pay income tax that year, simple.

If Joe assigns the patent to a entity registered in the Bahamas, for example, which does not raise revenues from corporate income tax, corporate capital gains, and then closes the deals with the licensees, then the Bahamas entity earns all the income tax free, allowing it to grow and invest.

But this introduces the complications of the PFIC and CFC regulations. With PFIC, it seems trivial to simply elect to defer tax for the US person that is a shareholder. For the CFC, I don't understand Subpart F as it relates to intellectual property at all! Secondly, it seems both of those regulations, in this scenario, also have stipulations about whether the source of the income is a US person or non-US person.

So assuming Joe has a US patent most practically only enforced in the US, Joe would also have US licensees, would it be completely useless for Joe consider deferring income tax in this way?

Would it merely introduce another step in the planning process, where Joe's licensors are multinational corporations that are encouraged to only pay license fees from their non-US entities?

Would an advance pricing agreement with the IRS be necessary here, since the patent would be assigned upon being granted by the US and have no market value to begin with?

Assume this is all in the interest of compliance, so Joe will be reporting the existence of the Bahamas corporation where necessary, probably on the FBAR.

It seems the worst case scenarios include a deterrent tax that is still lower than US income taxes, as well as the possibility of passing through all earnings back to Joe in which case he would be taxed on the income annually as if he did nothing, nullifying the point completely. Best case scenario, it seems much better than a Roth IRA as it grows at an accelerated rate, can be borrowed against, can in some cases be exempt from creditors if Joe faced financial hardship, doesn't have contribution restrictions, etc. But obviously the comparisons are limited to taxed versus untaxed growth.

Any insight appreciated, even if I rope the big accounting firms into this conversation I want to be able to have an intelligent conversation

  • Tax questions, as you should know, require a country tag ;) – Chris W. Rea Sep 14 '16 at 23:58
  • @ChrisW.Rea ha ok sure thanks. I had mentioned so many US specific things I must have thought it sufficed. But the tag will make it easier to index – CQM Sep 15 '16 at 0:09
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One can have a self-directed IRA. This is not like a Schwab, eTrade, etc IRA. It has a special type of custodian that knows how to manage it.

I became aware of such an account as a way to purchase a rental property. There were two issues. The type of property I looked at wasn't anything a bank was willing to finance. And the rules regarding self dealing added a potential layer of expense as I technically could not perform the simplest of things for the property.

For you, the obstacle looks like self-dealing. Any IRA can only be funded with cash or transfer/conversion from another IRA/401(k). I don't know how you would get the intelligent property into the IRA in the first place. Once you own a patent, or anything else, you can't sell it into the IRA.

It's at times like this that member littleadv would suggest this is the time to talk to a pro before you do anything hazardous to your wealth.

  • Pretty cool, regarding pro talk I wrote "Any insight appreciated, even if I rope the big accounting firms into this conversation I want to be able to have an intelligent conversation" almost as if I had precognition of the responses I would get from this site. Ideally we'll get useful answers that help others in their Google-Fu. – CQM Sep 14 '16 at 21:11
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    This answer is entirely devoted to the IRA aspects whereas, if I understand correctly, in lieu of a Roth IRA, the OP wants to assign his patent to an offshore company in a jurisdiction that levies no taxes on passive income. The company licenses the patent, collects royalties, and invests the money till the OP is ready to collect the money. So, no issues about self-dealing in an IRA etc; just a very active stockholder in the Bahaman company. But I don't see any tax savings either. – Dilip Sarwate Sep 14 '16 at 21:34
  • I have self directed retirement accounts w/ no administrator fees, but they are still brokerage accounts, can you details about your more exotic custodian? – CQM Sep 14 '16 at 21:44
  • @DilipSarwate precisely the outcome I would like more insight into yes – CQM Sep 14 '16 at 21:44
  • I'd look up real estate IRA . They are capable of handing other business entities. – JTP - Apologise to Monica Sep 14 '16 at 21:54

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