What A Tax Haven Expert Says The Richest Investors and Traders Are Doing

Each day we meet interesting people talking about financial markets. Traders, investors, and even London black cab drivers. But the other day we met someone who really caught our attention.

This is @CaptainSolo – a tax haven expert who has been living in the Bahamas since 1990. Here’s what he had to say about tax havens and how they are used. (Note: while it’s a very complicated subject, it’s fascinating to get an inside look at the industry and why it even exists – it’s legal under current US law).

1. How did you get started?

“I’ve been offshore in the Bahamas since 1990. I wrote a book – Tax Havens of the World – and it’s at Amazon.com. But it’s outdated so don’t order it.

In the 1990’s I formed over 100 Bahamian companies every year on average – for ten years in a row.

I moved from the US because of loopholes in the tax code – but these are mostly for people with $1 million net assets and cash over $300,000 in my opinion. Also used for asset protection from legal suits (including wife).

I’ve spent 35 years reading the US tax code – mostly international tax and tax havens. I was calculus and math major at Ohio State. Physics and Chemistry (three hour labs – twice a week at OSU) too. I’m from Long Island, New York originally.”


2. To the retail investors and traders out there – what offshore tax tips could they actually use?

“If you have over $200,000 in the stock market you could probably use a tax haven company to avoid the long term and short term capital gains tax. Wall Street banking firms have 1000s of clients in Cayman and Bermuda (Here’s a story on that from the New York Times). Goldman Sachs in Cayman has a 2nd holding company in Cayman that own the shares in the other company. They would both meet the IRS standard for PFIC/QEF (Here’s a link that shows this).

You have to file some forms with the IRS or you could get nailed for taxes. Here’s a link to study – especially the Passive Foreign Investment Companies provisions. The PFIC and QEF laws have been around since 1986.”

3. Is there something most investors don’t know about taxes that they should?

“Yes. If you are an American and have offshore accounts, you better file the IRS FBAR as it can cause big problems.

The IRS is a shifty intelligent agency. Their current attacks on UBS was a “dragnet” – using the FBAR to win 100% of their tax cases. UBS gave IRS 4,450 names. That’s what got UBS, Credit Suisse and others fined big time.

File the FBAR. It isn’t a tax return.

There are no capital gains taxes on US stock market trades for foreign companies (even if incorporated in a tax haven). The US Treasury writes the tax law – the IRS enforces it. Wall Street has big law firms keeping them out of trouble. You just have to file the right compliance forms and there is low or no taxes.

4. What is the most clever way people avoid taxes but still “legal”?

Silver Lake – a private venture capital firm with $28 billion in assets under management and based in San – used the Cayman Islands to avoid over $2 billion in federal taxes when they bought and sold Skype to Microsoft. Do you think Bill Gates knew this was a tax dodge? Of course he did (read more about this here).

5. You have to tell us more about Qualified Electing Fund. Can you explain? This sounds like something everyone should know about.

It’s called QEF by the IRS. Here’s a link to the US Treasury definition of a PFIC or QEF.  Qualified Electing Fund is part of the tax code. Here are the IRS forms for PFICs and QEFs:

https://www.irs.gov/pub/irs-pdf/i8938.pdf

https://www.irs.gov/pub/irs-pdf/f8938.pdf

You need two offshore companies to make it work in my opinion. US Shareholder ownership should be kept very low. US Shareholders can run the offshore company and be the directors. The IRS knows all about this. They wrote the instructions for Form 8621.

6. Any thoughts on the Panama Papers?

Nothing to worry about except non-compliant US taxpayers with signature authority over foreign accounts that didn’t file their FBAR.

 


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