Offshore Investment Tax

invenst 5The U.S. policy on taxation requires all citizens and residents to pay taxes on all domestic and offshore income, although tax exclusions and deductions are given in certain circumstances. Domestic income involves funds earned from within the U.S. while foreign or offshore income is generated outside of the U.S. Taxes on offshore income include tax on offshore investments, pensions, social security, dividends and annuities earned from any foreign country.

Offshore investment tax in the United States is applied on the grounds that funds earned from foreign investments are derived from Passive Foreign Investment Companies or PFICs, which are taxable entities under the Internal Revenue Code (IRC). According to the IRC, any overseas based company that earns at least 75% of its gross income from passive activities or earns passive income from at least 50% of its assets is liable to offshore investment tax as a Passive Foreign Investment Company. What this means is that revenue earned from offshore business activities or on interest accrued on offshore savings and funds all fall under the PFIC rule. Under PFIC offshore investment tax rules, fund shares of a holding company should be treated as shares owned by U.S shareholders if an intermediary offshore holding company owns the fund shares.

Any U.S citizen or resident who forms an offshore company in order to invest in unregistered securities is liable to offshore investment tax which does not treat offshore entities, like Panama companies, formed by residents of the U.S as corporations but as natural persons. As a result, any activity that involves the marketing and sale of unregistered securities inside of the U.S. Is subject to offshore investment tax under the U.S securities law (US SEC).

When developing an international portfolio, due to the regulations set by the U.S. Securities and Exchange Commission for the sale of securities to U.S nationals and the problem of having to pay offshore investment tax on gains, losses and dividends as with the case of purchasing stocks on the domestic market, it is advisable for U.S investors who intend to directly access offshore stocks or bonds to form an offshore corporation as an intermediate entity. Both an international business company and offshore trust will provide benefits, however, where offshore investment tax is concerned and requires meeting onerous reporting requirements, an offshore LLC (limited liability company) can be structured as a proprietorship with a single owner, which is subject to the least investment offshore tax, structural and administrative complexity.

In the United Kingdom, a Self Assessment tax return needs to be filed so that offshore investment tax can be paid on if funds are received from offshore investments and savings. With regard to the U.K, as long as income is generated outside of the Channel Islands, England, Isle of Man, Scotland, Northern Ireland and Scotland, it is considered offshore income and is subject to tax on offshore investment. Offshore investments include interest earned on tax free offshore bank accounts or building society accounts, rent received from properties owned abroad and dividends and interests from shares held in offshore corporations.

Like in the U.S, if investment tax is being levied by both the country of residence and business operations, relief can be claimed from paying investment taxes in both countries. Both the U.S. and U.K, hold double taxation agreements with several countries.

Back to top