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I would like to consider the tax deferral provisions afforded to US Citizens. If my corporation formed in a jurisdiction outside of the United States and held US Treasury Bonds (for example) gaining 5% a year, then it would be taxed in that jurisdiction at the corporate entity level and then I would be taxed at the individual level in the United States.

Lets assume that the jurisdiction of formation does not levy a tax on corporations, and also lets assume that there are no additional favorable tax treaties between the United States and other jurisdiction.

Lets assume that everything will be subject to the top tax brackets.

Since I am the manager I would receive distributions at the self-employed rate, which is currently around 13% at the Federal level (more like 6% after favorable deductions), only on the first $100,000 or so of taxable income.

This is much more favorable than having a tax deferred 401k or IRA, where any distributions would be taxed at the 38% federal income tax bracket. Which is not usable till I am 59 or 67 years old, or else I would incur a penalty and THEN tax.

Am I understanding this correctly? Properly reported offshore corporation with investments is better than pre-tax time-deferred funds with investments - if you can afford it

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No, it will cause you to pay more taxes than a 401k. The suggested method of deferral is a bad idea.

A Passive Foreign Investment Company is a foreign corporation with one or more US shareholders, such corporation earning a certain percentage (I think it is 50%) or more of its income from passive investments.

There are some fairly nasty tax consequences of such a structure. The shareholder can ask the company to do annual mark-to-market accounting, then the shareholder pays US taxes on their pro-rata share of passive income -- OR the shareholder can 'elect' deferral and pay at the maximum rate backdated to when the income was deemed by the IRS to occur (with interest backdated too).

  • thanks for breaking that down for me! It looks like the whole point of PFIC and CFC was to make sure my above structure didn't happen! – RD. Jul 17 '11 at 23:04
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You need a skilled tax attorney/accountant to make an arrangement like this work. Note the attorney/accountant should be the same individual.

Taxation authorities have broad discretion to interpret tax shelters to their benefit. Not giving Caesar his due comes with lots of risks and costs.

  • Yes, I'm actually wondering about the federal forms for reporting the existence of the accounts are. I have no interest in the common banking secrecy provisions that many countries offer. But I do have interest in the tax deferral provisions that the United States offers. – RD. Jul 17 '11 at 21:09

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