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Don’t Set Up An Offshore Entity Unless You Can Answer This

26 May
Don't Setting Up An Offshore Entity

Think What Before Where

One question lands in my email inbox more than any other:

Where is the best place to set up an offshore entity?

The quick and simple answer can include: Belize, Panama, Nevis, and the BVIs.

These are my preferred jurisdictions. You have dozens of other options.

However, where to establish an offshore entity isn’t the question you should be asking.

The question you should be asking is:

What Kind Of Entity Is Called For?

Using the wrong type of entity can create tax and administrative issues that can be costly to remedy… especially for Americans.

If an American uses an S.A. (Sociedad Anonima) from Panama to hold passive-income-producing investments, for example, he can create a U.S. tax liability for himself.

Use a Belizean IBC to hold property in Belize, and you can have a tax problem on the Belize side.

Generally speaking, Americans want to use a pass-through entity (or one that can be elected to be a pass-through entity) to hold assets that produce passive income.

For an active business, you want an entity that isn’t pass-through. A corporation or its equivalent in most countries can’t be used for pass-through activity even if you wanted to, which is why corporations are generally ideal for active businesses.

Where Is The Best Place To Set Up An Offshore Entity?

Once you’ve answered the “what” question, then you can move on to the “where.”

The right where depends on many things, including where your attorney likes to do business. Offshore attorneys have favorite jurisdictions, depending on the needs of the client and the attorney’s knowledge of local laws.

Some people like the idea of using a jurisdiction far from where they live. If you’re an American, an entity in the Seychelles can seem attractive simply because you figure no U.S. attorney trying to locate your assets in connection with a lawsuit is going to be able to find the country on a map let alone your entity and assets based there.

For the most part, distance isn’t important. Jurisdictions closer to home or where your investment activity is located probably make more sense.

The most important thing is to use the right entity for the right purpose. Don’t get talked into setting up an entity just because some attorney in a country where you’re considering investing says you need an entity in that country.

My Experience

I’ve told a story that makes this point so many times that the lady who features in it wrote to ask if she should be getting a royalty every time I publish the tale.

The story goes like this…

Lady came to Panama on a real estate scouting trip. She didn’t end up buying any real estate but left with a Panamanian corporation.

I met the lady years later at a conference where she approached me to ask what she should do with her Panamanian corporation.

She’d been carrying it for years… paying the associated fees… but had never known what to use it for. She formed it because the attorney she met with during her years-ago property scouting trip in Panama had told her she needed it.

Unfortunately, that lady isn’t the only one I can tell the same story about.

Panamanian attorneys sell Panamanian entities. Specifically, they sell Panamanian corporations.

Every Panamanian with any money puts his real estate in a Panamanian corporation. It’s an effective strategy for Panamanians on many levels. It provides asset protection should someone sue them personally in Panama, and it can save on transfer and property taxes.

However, a Panamanian corporation can have negative tax implications in the United States for an American.

Foreign Entity Registration

Alternative entities are available for holding property in Panama that don’t create a potential U.S. downside, including, for example, an SRL (Sociedad de Responsabilidad Limitada).

Many countries have SRLs. It’s the civil law equivalent of an LLC. However, the requirements to set up an SRL in Panama mean they rarely make sense.

You can, though, use a non-Panamanian entity to hold property in Panama. It’s legal and doesn’t present a problem unless your Panamanian attorney doesn’t understand Panamanian law. You don’t need to register your non-Panamanian entity in this country… though some Panamanian attorneys will insist you do, either out of ignorance or a desire to get some extra cash out of you.

Some countries do require a foreign entity to be registered to do business, but many (in fact, most) don’t require you to register your foreign entity if you’re using it only to hold property.

Some foreign attorneys may counsel you that you can’t hold property in their countries with a foreign entity… registered or not. They’ll tell you that you need to set up a local entity to hold title to a property in that country and that the local entity can then be owned by your foreign entity.

It’s true that your foreign entity can own your local entity. However, in most cases you don’t need that extra layer. It’s just another way for your local attorney to get more money out of you.

Start by asking what you need an entity for… but also ask why. Always question why someone is telling you that you need a specific entity.

The lady who was told she should have a Panamanian corporation when she was scouting for property years ago did ask why. The answer she got was, “because everyone in Panama has one.”

That kind of answer should make you wonder about who you are working with.

In the end, the lady in my story let her Panamanian corporation fall off the register.

She never did buy any real estate in Panama. If she had, that corporation wasn’t the entity she needed anyway…

Lief Simon