INVESTING IN STOCKS TAX FREE

by R-Safe

Tax havens are used by hundreds of thousands of American and foreign businessmen and individuals all over the world. The United States is one of the best tax havens in the world, for foreign investors. That's right, the United States is a tax haven for the foreign investor or company trading shares on any one of the U.S. stock exchanges, because U.S. tax law allows trades by non-resident individuals, foreign corporations, and foreign trusts to be executed, under certain conditions and circumstances, free from U.S. capitol gains and income taxes.

Informed investors can trade directly U.S. corporate and Treasury bonds in any quantity free from all capitol gains and income taxes under the provisions of the law. Congress recently repealed the 30% interest withholding tax on bonds for foreigners, so now, the foreign investor can receive his U.S. bond interest free from U.S. income, withholding, and estate taxes if he lives in a tax haven or organizes a holding company in one. The U.S. and other industrial nations simply cannot advertise the fact that they are a splendid tax haven for foreigners, because it would cause dissent among the local citizenry.

The London Times reports that about half of the world's money now moves around in an offshore environment. It is a simple fact that excessive and penal taxation by a nation of its own people encourages its citizenry to trade in their neighbor's house in order to obtain a more favorable tax rate, or to legally avoid taxation in its entirety where allowed.

The Bahamas, closest tax haven to the United States, and Anguilla are both zero tax havens. The Bahamas adopted its IBC Act in January of 1990 which mimics the British Virgin Islands International Business Companies Ordinance of 1984. Anguilla adopted its IBC Ordinances in 1994 and we are a registered "Overseas Agent" of Anguilla.  The Bahamas have one of the largest volumes of tax haven business in the world. In both the Bahamas and Anguilla, there is no personal or corporate income tax, no capitol gains tax, no withholding tax, no business tax, no estate tax, no gift tax, no inheritance tax, no death tax, no employment taxes, no sales taxes and no probate fees. Corporations, individuals, partnerships, trusts and estates, including nonresident controlled Bahamian corporations all enjoy this complete immunity from taxation. Resident individuals and companies doing business within the Bahamas are not liable for any income or capitol gains taxes what-so-ever. In size and proximity to the U.S., the Bahamas are over 5,300 square miles, which is approximately 500 times larger than the Cayman Islands, 1000 times larger than the British Virgin Islands, and 2,500 times larger than Bermuda, and the Bahamas are the closest tax haven to the United States, just 50 miles from the coast of Florida, with direct flights from New York and a number of cities in Florida on a daily basis. Round trip air fare (from Florida) is around $125 and flight time is only 1 hour. Over 3.5 million Americans, Canadians, Asians, Europeans, and South Americans visit the Bahamas every year.

The Bahamas and Anguilla have a well tested Bank Secrecy Code protecting the foreign investor against unauthorized disclosure of financial information to outsiders, including foreign governments and their agencies and agents.

The Bahamas and Anguilla have Trust laws, designed to safeguard trusts from attack from other jurisdictions, and that extend the life of a trust to 80-100 years after the death of the named beneficiary.

Non-resident foreign companies, trusts, and individuals can trade stocks, bonds, commodities, and options, 100% tax free; free from all U.S. capitol gains and income taxes. Under the U.S. Tax Code (Title 26 U.S.C.) only when a foreign company, foreign trust, or nonresident alien individual takes up permanent residence within the United States will he be subject to U.S. capitol gains taxes in the same way as domestic taxpayers. For a corporation, permanent residence would be a U.S. office or warehouse. In the United States, capitol gains realized by foreign corporations and other nonresidents "not engaged in a trade or business within the United States" are exempted from tax under IRC § 871 and IRC § 881 and IRC § 897(c)(3).

Moreover U.S. Treasury regulations § 864-2(C)(1)&(2) provides an exception for what embodies being "engaged in a trade or business within the United States". Under U.S. regulations, a nonresident's stock market transactions, carried out through a U.S. stockbroker, independent agent, or an employee, are not considered to cause the nonresident to be "engaged in a trade or business within the United States". The foreign corporation "not engaged in a trade or business within the United States", and not controlled by "U.S. Shareholder(s)", may also trade securities on the U.S. securities markets without tax consequences.

I.B.Cs. must be owned or controlled by nonresidents of the U.S., and generally cannot carry on any local business or invest in local securities in the nation under whose laws they have been formed. In the Bahamas, an IBC is a company which is restricted from carrying on business with persons resident in the Bahamas, and cannot invest in real property situated in the Bahamas. An IBC operates internationally, investing in stocks and bonds, trading oil, gas commodities, what have you. An IBC is not taxed in the Bahamas or Anguilla. An IBC can open bank accounts, retain local professional services, and hold its own directors and shareholders meetings. This is not considered carrying on business in the Bahamas under the law. An IBC may hold the shares or debt obligations of other companies, and an IBC's shares may be held by residents of the Bahamas or Anguilla. There is no fixed authorized capitol requirements, nor is there a maximum limit on authorized capitol.

An IBC is formed by filing a Memorandum and Articles of Association with the Registrar's Office. An IBC may be incorporated in 24 hours. The IBC may issue shares with or without par value, in the form of bearer shares, or shares registered in someone's name. The annual registration fee is around $1,050. At least one director must be elected to manage the IBC, but the director can be a corporation, an individual, or a trust, and that director need not be a resident of the Bahamas. The company records are not open to public inspection (or inspection by other governments), and even the right of inspection by other shareholders is statutorily limited in scope to: "only in the furtherance of a proper purpose". You will be able to open bank and security accounts for your IBC, in both the offshore jurisdiction and the United States if you wish, where only you will have signature authority over the accounts. An IRS Form W-8 is presented for financial accounts in the United States in order to establish the exemption from tax (and tax withholding) provided by U.S. law for nonresident entities "not engaged in a trade or business within the United States".

The five arms of the pentapus of the IR Code regarding foreign investment are:

A U.S. person is deemed to be a "U.S. Shareholder" if he owns or controls 10% or more of the voting stock of the foreign corporation. A "Controlled Foreign Corporation" is one where more than 50% of its value or voting stock is owned by "U.S. Shareholder(s)".

For purposes of determining the 50% limit, U.S. persons who own less than 10% of the voting stock (and therefore are not "U.S. Shareholders") will not be considered.

The distinction between a "U.S. person" and a "U.S. Shareholder" is an important one. Only U.S. Shareholders are restricted from electing, appointing, or replacing foreign directors, and then only a majority of those directors. The Treasury Regulations at

§ 951(g)(2) provide the factors to be considered in determining whether a U.S. person is in fact a U.S. Shareholder. The law also says that when a foreign corporation has more than one class of stock issued and outstanding, and one or more U.S. persons OWN shares of any class of stock which possesses the power to elect, appoint or replace a person or persons of the foreign corporation that exercises the powers ordinarily exercised by a member of the board of directors of a domestic corporation, then such U.S. person would be a U.S. Shareholder too.

But, if a U.S. Founder (F), on the same day that he incorporates his foreign business corporation (I.B.C.), also distributes all 100% of the "voting" stock of the IBC to a wholly owned (grantor) trust set up by the corporation (in compliance with the terms of 26 USC § 679 (c)(2)(A)), while retaining the "value" stock of the I.B.C. within the family holdings, and, at the same time, the Trust agreement appoints (F) as one of three Trustees of the Trust (two foreign), and delegates to (F) the power to vote the voting stock of the IBC, held and owned by the Trust, at shareholder meetings, then (F) will be able to indirectly elect the directors of the company. Treasury regulation § 957-1(b)(1) only prohibits U.S. Shareholders from electing, appointing or replacing the directors of a foreign corporation (and (F) is not a U.S. Shareholder because he owns not a share of the IBC voting stock). Since a foreign trust (set up by a nonresident alien grantor - the IBC)) now controls the voting shares of the foreign company, the IRS pentapus is legally avoided entirely, for the U.S. Founder (F).

Treasury Regulations under §§ 958-1 & 2 provide several examples of how stock can be owned constructively and indirectly, by and through foreign entities (i.e.: foreign trusts, corporations, and partnerships). These regulations speak repeatedly and often of the usage of one and two classes of stock having voting and non-voting powers.

Capitalization of the IBC is effected by exchanging cash or money for shares in the company, and current U.S. policy does nothing to inhibit you from displacing any amount as paid-in capitol, at any time. You do not need government approval, regardless of the place of incorporation or the purpose of the company. There is a tax of 35% levied (on the stock's current value minus the basis cost (as provided under 26 USC § 1011)) under 26 USC § 1491 if a U.S. person transfers appreciated assets (stock, bonds, etc.) to a foreign company. Since this tax rate is higher than the top capitol gains tax rate of 28% (and is not deductible under 26 USC § 164), it is advisable to sell your securities beforehand, and transfer the proceeds in cash to the offshore (holding) company.

Under current U.S. tax law, a trust entity is not subject to U.S. income tax as a foreign trust if it is (1) classified as a trust, and (2) if its contacts with a foreign situs are sufficient, and (3) its contacts with the U.S. so insubstantial, as to render it a foreign entity. Title 26 USC 7701(a)(31) says that a foreign trust is one "the income of which from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includable in gross income under Subpart A." In effect, to avoid U.S. income tax liability, the trust must take the appearance of a nonresident alien.

Since a trust is a separate legal entity, it can be used in estate planning to hold assets in suspense, in capitol gains tax planning to avoid time apportionment, in income tax planning to reduce the effective rate of tax, and by changing the residence to defer income tax and capitol gains tax, often for long periods of time. When the trust's grantor trust status makes the beneficiary's income tax free, retaining that status for as long as possible becomes important. To solve the problem of the grantor predeceasing the beneficiaries, thus inconsiderately ending the trust's favorable tax status, use of a corporate grantor is recommended.

It is clear that a corporation may be the grantor and the owner of a trust. Thus, a foreign grantor could create a corporation which in turn would create a grantor trust. The death of the creating shareholder would terminate neither the corporation's separate existence nor the trust's grantor status.

The IRS uses 6 factors to determine the situs and nationality of a trust:

 

IRS Revenue Ruling 69-70, issued in 1969, states: "An individual beneficiary who is a resident of the United States is not taxable on a distribution from a foreign trust considered to be owned by a nonresident alien grantor under subpart E of subchapter J of the Code."

U.S. beneficiaries should answer item 11(a) (YES) and item 12 (NO) on Schedule B, Part III which appears on the back of Form 1040. Checking (YES) (to 11) means the U.S. beneficiary may have to file Form T.D.F. 90-22-1 (but not with a Form 1040). If the beneficiaries have a signature authority (which they can have) over the trust, but no "financial interest", defined as "a trust in which the U.S. person either has a present beneficial interest in more than 50% of the assets, or receives more than 50% of the current income" of the trust, then they will merely be required to tell the Treasury their name and U.S. address. No disclosure regarding the amount of income received is mandatory. To avoid beneficiaries having a "financial interest", the trust creator could limit the beneficial enjoyment of all beneficiaries to 50% or less.

Transfers of property to a foreign trust by a foreign corporation triggers no U.S. income or gift tax liability, because tax havens typically have no gift or income taxes. Such transfers can be made routinely, without any income or gift tax liability what-so-ever. The U.S. Internal Revenue Code recognizes and states that those transfers are outside the scope of the U.S. tax laws and its authorities, just as the business of the IBC (conducted outside of the United States) is recognized by the IRS and IR Code as not being taxable to the United States government.

Additionally, properly arranged foreign trusts do not have to be registered with either the U.S. government or the tax haven government, thus names of beneficiaries, trustees and grantor(s) are not a matter of public record, and are not subject to disclosure on IRS forms 3520 or 3520-A.

A foreign corporation (or trust) that does not carry on a trade or business within the United States does not have to file a Federal Income Tax Return.

"The legal right of an individual to decrease ... or ALTOGETHER AVOID his/her taxes by means which the law permits cannot be doubted" Gregory v. Helvering, 293 U.S. 465

This powerful offshore investing technique and method, of utilizing an IBC coupled with an offshore trust, is recognized by the IRS as being legitimate and legal, and can be used to legally minimize tax consequences to an individual resultant from securities transactions, This is known as legal "tax avoidance", and does not constitute "tax evasion" of any form.

Guarantees against future taxes are provided by these governments for periods of up to 50 years. Exempt trusts can receive guarantees of up to 100 years.

My associates in this program include an Bahamian/Anguillian IBC/Trust specialist in the Bahamas, a mid-size Law firm with an office in downtown Nassau, and a U.S. tax consultant. These lawyers have over 40 years of business experience here in the Bahamas, and the IBC/Trust specialist has been working with the IBC laws since their creation.

We use two trusts in the business plan with a non U.S. person (the IR code refers to them as non-resident aliens) to act as trustees. The IBC and Trusts will legally have no income tax returns to file with the IRS. They will not be CFC's (Controlled Foreign Corporations). Neither you nor the offshore managers have to file Forms 3520, 3520-A , 5471 or any other information regarding the IBC to the IRS.

Investors will be able to open a bank and security account for their IBCs so they alone have signature authority over the accounts - and that's the way most clients want it. We have arrangements with several of Nassau's Major banks. We can provide you with the bank's application form, signature cards, bank brochures etc., so you can open your account without physically flying into the Bahamas. You can obtain a VISA and/or debit card from the Bahamas largest bank, too. You will need a reference letter from your local U.S. banker, but these are easy to obtain

The Bahamian banks we deal with have been in operation here in Nassau for over 30 years. These banks have subsidiaries in all the other tax havens, including the Caymans', Hong Kong, Monaco, Zurich, Gibraltar, The British Virgin Islands and Jersey in the Channel Islands. One is a giant British bank with more than 2000 offices worldwide. One of the banks has no offices in the United States.

You can choose which ever bank you want. With either of these banks, clients can open brokers accounts anywhere in the world and trade under the guise of the Bank's name. The clients IBC does not appear on the stock certificates, and his anonymity is totally preserved.

There are few restrictions as to what an IBC can invest in. U.S. stocks, bonds and mutual funds are frequently bought through offshore companies because they are not liable to U.S. capital gains taxes. Treasury bonds, bank CD's, options, futures and commodities are also purchased through offshore companies. No U.S. withholding taxes are payable on such incomes as long as the IBC does not open an office or carry on other business in the United States .

Using these Bahamian (or Anguillian) Banks you will be able to trade on any stock exchange in the world at a cost equivalent to to those incurred using a discount broker such as Charles Schwab. You can of course, call your own shots on what stocks and bonds or mutual funds the IBC purchases. You will pay only the brokers commission (=3c, per share), plus a nominal fee for having the stock certificates put in the offshore Bank's name instead of the IBC's, if you wish to "mask" your stock transactions.

Masking a clients stock market trades is a traditional way of doing business  in tax havens. It is done by most all the major bank and trust companies. Banks in the Bahamas and Anguilla do not have to file tax returns with the IRS .

The Bahamian Bank Secrecy Code forbids any bank executive or advisor from giving information to any outside tax collector, attorney or foreign court.  Similar protections are afforded in Anguilla.

Business people from around the globe use offshore tax havens. There are currently over $190 billion dollars on deposit in Bahamian Banks

A secondary reason people bank in the Bahamas and the other tax havens is for increased asset and estate protection. The IRS cannot seize, levy or lien property, nor can they investigate bank records here. The governments of Anguilla and the Bahamas have very strict bank secrecy codes. All the largest banks in the world have offices here and in Cayman. U.S. judgments have to go through the local courts. I've never witnessed an IRS court proceeding of any type in this country - ridiculous. U.S. lawyers have a problem too - only citizens of the the Bahamas can practice law here. U.S. lawyers need to hire a foreign law firm to pursue judgments, etc. Generally speaking, foreign generated judgments are frowned upon by the authorities.

Costs to setup and annually maintain an Anguillian IBC, coupled with a Anguillian corporate grantor Trust, are:

INITIAL SET-UP FEES

Gov't. and other formation fees

$1,200

Registered Agent, P.O. Box, and telephone

$600

Trust instruments & Trustees

$600

Consultation & Managerial Assistance

$600

TOTAL:

$3,000

 

ANNUAL MAINTENANCE FEES
(due every 12 months thereafter):

Agent/Office/P.O. Box & telephone

$600

Government fees

$250

Our advice on an annual basis

$200

TOTAL:

$1,050

Send only the $3,000 initial set-up fees (with the order form) to:

R SAFE Offshore
P.O. Box 7720
Arlington, VA 22207

web site: www.tax-freedom.com/offshore

Review the Slide Show on Offshore IBC investing

You will receive in the U.S. mail your I.B.C. and Foreign Trust documents, and information on opening an offshore bank account, in about two weeks (three weeks if you paid with a non-certified check).