The Bahamas is well known as a tax haven and prime location for foreign investors. Today, we'd like to provide an in-depth guide on how US citizens can gain a significant tax benefit by setting up shop along the sunny shores of the Bahamas.
In some instances, US individuals or companies can save up to 35% by setting up international operations using a relatively small investment and expanding using tax-free earnings.
Where do these tax advantages come from?
These special tax advantages are available courtesy of the taxation provisions of the Internal Revenue Code (IRC). These provisions provide the guidelines that allow certain people and businesses tax exemptions or deferments of foreign income by the US government.
To become eligible, these Bahamian business ventures must be operated by a Bahamian company. As long as a company is not engaged in US trade or business, and at least 50% of voting power and value is owned by non-US persons, US tax laws generally don't apply to its foreign income.
None of that foreign income is taxable, until dividends are paid out to US shareholders, or those shares are sold.
What if more than 50% of the business is controlled by US citizens?
If more than a company is more than 50% controlled or more than 50% of its value is owned by US person, each of whom own at least 10% of the voting power, the company is known as a controlled foreign corporation (CFC). US shareholders who own at least 10% of the voting control are deemed taxable each year on their share of certain types of income.
These taxable income types include:
- Income from the insurance or reinsurance of risks
- Passive income, such as: rents, interest, capital gains, royalties, etc.
- Sales income where the goods are either purchased from or sold to related person.
- Income from services if rendered to a related person
- Increases in investments in US property
- Income attributable to international boycotts
- Income attributable to the bribery of foreign government officials
- Income that is foreign oil or gas-related
However, there are numerous exceptions and exclusions to the above. For example, if any of the above income makes up less than 5% of the company's adjusted gross income (less than $1,000,000), none of the income will be taxable by the US.
Bahamian Companies involved is US Business or Trade
Keep in mind if a Bahamian company is engaged in US trade or business, income connected to such trade will be subject to US corporate taxes. In addition a "branch profits tax" can be imposed on US branches deemed to be repatriated to the parent company. Because of this, careful planning is required to avoid or minimize the effects of these associated taxes.
Which US Industries are best suited to offshore operations?
There are some operations better suited to have operations set up in the Bahamas than others. Here are a few of the highlights:
- Manufacturing Production
- Sales of Products & Goods
- Banks & Finance Companies
- Service Companies
- Leasing & Royalties