Legal Framework to Invest Offshore

18 Aug
Offshore legal framework - ducks in a row

Ducks in a row

A Clean Nominee Bank Account structure is not an off-the-shelf product and can be tailor-made legal framework, in compliance to a statutory tax law mechanism and the clients financial situation.
This structure is available to anyone, living anywhere, working in any occupation

How To Extend The Tax Holiday On Carried Interest

Both changes to participation exemption and carried interest give reason for a specific type of IRC 402(b) solution for:

  1. Private Equity because they could be caught by the carried interest definition and three year tax holiday; which means they could suffer to pay tax on money not yet received
  2. Captive Insurance Passive income solution
  3. Hedge Fund specific solution to continue deferral of carried interest.

Private Equity caught by the carried interest definition; which means they could pay tax on money not yet received.

This structure extends the tax holiday indefinitely.

This structure makes overseas passive income rules irrelevant.

That means the top marginal tax rate applies to overseas passive income because the general tax rate deductions and the new participation exemption rules reductions do not extend to Passive income and gains. (See 4501 and 1297)

The 2018 ”participation exemption” in tax law changes makes the way an American Company financed their business no longer tax neutral.

This structure makes overseas financing tax free.

Carried Interest

  • The Tax Reform Act did not eliminate the tax advantages of carried interest but instead adjusted the holding period for private equity funds and real estate partnerships.
  • The Act treats carried interest gains on partnership assets held for three years or less as short-term capital gain and as long-term capital gain if held more than three years. The three year timeline limitation begins at the start of the Fund.

The non-contentious part of that limitation is repatriation of carried interest for Corporations and Funds. Funds will suffer a ”double whammy” of taxation and loss of yield. Which means funds not only kiss investor money away and suffer a huge tax bill.

Alternatively they trade the carried interest for a 402(b)

Summary of 402(b) solutions for the 2018 overseas tax problem.

  1. Extend the tax holiday on private equity, hedge funds and stock options.
  2. There are no time limits to a tax holiday

The key to 457A (see IRS Ruling 2014-14 attached)

  • Removal of a promise by a US tax indifferent entity to pay a carried interest and replacement with a possibility of later payment
  • In exchange, the certainty of taxation in 2018 is replaced by the certainty of taxation sometime later: in other words, deferral

The economics

  • Tax deferred is always tax saved
  • The return on deferred tax is always better that the return on the 457A after-tax residue

The legal framework

  • Use of a 402(b) compliant non-qualifying unvested deferred compensation plan organized under Hong Kong law with existing hedge fund clearer’s as asset-holder of the plan
  • Transfer of existing carried interest assets to the plan by the existing US tax indifferent entity as plan sponsor
  • Vesting schedule by means of a generic award plan by which plan administrator decides on allocation to plan members, which is a tax event.

Additional benefits

  • By-passes probate, useful for business succession planning
  • Creditor-proofing
  • Not a discretionary trust and 409A and 83 compliant

Request Case Study: Capital Deductible That Is Pre-Tax Capital Raising

Ducks-in-a-row Photo credit: Rafael Peñaloza on VisualHunt / CC BY-NC-SA

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