Why Facebook and Google use offshore companies (and you can, too)

Written by Andrew Henderson

Dateline: Macau

Cities like Macau have always been drivers of economic growth. From humble origins as a fishing outpost, this special administrative region of China has grown to be far and away the #1 gambling jurisdiction on earth.

While growth in Macau has slipped, it is not nearly as bad as the mainstream media suggests. While the Wynn isn’t as packed, most of the Chinese-focused casinos are nearly impossible to walk around in this weekend.

Macau isn’t too far away from outpacing Las Vegas revenues by 10-to-1, and US gaming companies have long taken notice. In fact, Steve Wynn once told CNBC that he trusts the Chinese government far more than the Obama administration and its IRS.

In short, Macau is just another place where US companies are diverting their capital to invest in. Companies in the gambling industry and many others realize that investment opportunities in growing markets are the best place to get a return on their money.

Think about it: if you were in the casino business, would you be building new casinos for a country that has a cultural love of gambling, and of whom only 1 in 20 people have been to your city…

…or would you keep building in a market with too much supply, in a country with a dwindling economy, high taxes, labor unions, and where one of your big competitors just went bankrupt?

Easy decision, right?

Smart businesses today are structuring their companies to reflect the fact that some countries roll out the welcome mat for business while others make life difficult for them.

It’s the corporate version of “go where you’re treated best”.

In the Land of the Free, US companies like Google and Facebook are earning money overseas and keeping it there in order to avoid paying US corporate taxes, which still boast just about the highest headline tax rate on earth.

Here’s how it works: a US company doesn’t have to pay US corporate income tax on profits generated offshore if those profits remain offshore.

Just as claiming a “bona fide residence” overseas for tax reduction purposes requires a US citizen to have no intention of returning to the country, the IRS requires US companies to tick a box stating its foreign profits will stay overseas forever as well.

While companies like Google use various tricks to move money around, they also invest a lot of money offshore. Foreign cash is used to acquire foreign companies and develop new projects outside of the United States.

As a result, that money can stay outside of the US tax system where it is treated more fairly and can potentially earn superior returns to investing back in highly regulated California.

The reality is that US small businesses and location independent entrepreneurs can use the same “tricks” that has earned the ire of Big Governments for companies like Starbucks, Microsoft, and Apple.

Before we discuss these ideas, remember that I am not an accountant or other tax professional, and you should seek out a professional of your choice before taking any action to ensure you stay 100% legal.

Now…

For example, the US tax system involves two types of corporate structures: first, those that retain earnings and are double-taxed, and second, those that are so-called “pass-through entities” that kick all profits up to the shareholders.

C corporations are often avoided by US entrepreneurs because of the double taxation issue; these entrepreneurs prefer structures such as limited liability companies or S corporations that make taxation easier.

However, using the foreign equivalent of a C corporation allows you to retain earnings in your offshore company. So long as you use the monies in the company for approved purposes (ie: NOT buying a speed boat for your personal use), you can retain these earnings in your company.

US citizen entrepreneurs who live overseas use their ability to pay themselves a reasonable salary from their foreign company as a way to limit taxation under the Foreign Earned Income Exemption.

While a US citizen business owner living in the United States might prefer an LLC for simplicity, a US citizen who meets the standards for exempting his or her first (approximately) $100,000 in income each year would use a foreign C corporation equivalent to prevent all earnings from passing up to them personally.

In doing this, the foreign company should remain totally overseas; no US resident employees, offices, etc. Tax professionals call these things contributors to a “US nexus”, which is something to be avoided.

In many circumstances, however, you can sell to US customers so long as you meet a few simple tests.

There’s always someone in the US government calling for a way to eliminate these loopholes and force money earned selling to US businesses to be taxed. Guys in the communist wing of US politics argue that all money earned by companies based on US soil should be taxed, even if that money is legitimately earned in Ireland selling to Irish businesses.

Heaven forbid Google sell outside of the tax farm.

Slightly more reasonable politicians have suggested that the US implement a territorial tax system, which means income earned from US activities is taxed in the US rather than being shuffled around offshore. It would also mean that non-US income would not be taxed in the United States.

I don’t suspect that any kind of territorial tax will be implemented in the United States because it is the ability to tax worldwide income that the US thrives on. Politicians there have little concept that greener pastures exist and choose to punish so-called “tax havens” rather than be more competitive in spite of them.

While that is bad tax policy, it is good news if you have legitimate ways to re-invest your company’s profits overseas. By hiring non-US resident employees and keeping your offices offshore, you can benefit from some of the same loopholes that companies like Google use to pay relatively tiny amounts of tax.

You can learn more about how to implement these offshore strategies in your own business on our Offshore Company information page.

Andrew Henderson
Last updated: May 21, 2020 at 3:23PM

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2 Comments

  1. dave laqua

    Andrew, nice stuff! one thing your readers will hopefully realize is that any off shore structure becomes much stronger with the use of off shore attorneys- they have the ability to open accounts under their law firm name and allow clients to use the “trust fund” account. This does nothing to stop your FACTA reporting requirements however when and how much you report is done 1000% at your discretion. Additionally if you are lucky enough to have foreign family members in your business- it opens many doors! We are expanding in Panama thanks to these benefits!

    Reply
    • Irina Loncar

      Thank you for your comment Dave.

      Reply

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