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Thank you for joining us once again, HTJ. Tax. We’re going to talk about US taxes for international entrepreneurs and expats. Yes. Thank you for joining us on Zoom. We also have people viewing on Facebook, On LinkedIn, on Twitter and on YouTube. For those in zoom, feel free to type your questions. We’ve received a lot of questions in advance. So, thanks for sending those in. If you have additional questions, once we’ve run through the questions that have already been submitted, we will go through the questions that are being submitted live right now.
So, we’ll just basically going to take them in the order in which we received them. And yes, John. Yes. We got your question. So, we will add that to the queue as well. For those viewing on Facebook and on the other platforms, feel free to type under the screen, under the image or under the video, on the live stream. Just type your question and we will get to it in new order in which it has arrived. So once again, thank you for joining us in htj.tax. We’re going to be talking about US taxes. Because I’m US qualified, I need to tell you, you know how it goes, nothing I see here should be construed as advice, considered an educational session, or if you want an entertainment and entertainment session.
We are tax advisors, but we are not yet your tax advisers, which means we do not know your situation and set up. Therefore, it would be professionally irresponsible for us or anybody else to give advice without being properly, legally engaged and knowing what the client situation is and set-up. So, I’m going to ask you to please mute yourself, right? So, I’m going to have someone just unmute it. Please remain on mute. When we finish the questions that have already been submitted, and you need to ask a question, just raise your hand and we will approach them in this order – you know, I’ll call on you and you’ll be able to ask your question.
I’m going to start with the first question we got. I have a question. So, someone says, hello, Derren, hello, Hannah. I have a question that I hope you can provide some information about perhaps during this event or in a future event. It is my understanding that US citizens living abroad, who pay taxes on their full income to their country of residence, in my case Canada, can treat all their income as points sourced on the U S tax return. Yet often, various tax experts and experts like in quotes on internet forums, state, that many things must be US sourced and point to various USA sourcing rules.
For example, they stayed at dividends received from US Companies must be US sourced, etcetera etcetera. I’m wondering if you can provide some clarity, specifically three points. One, for US citizens living abroad and fully taxed abroad, can all the income be sourced to their country of residence? Would this include US dividends, RA withdrawals, US annuities, et cetera? Two, if one sources such items to their country of residence, should one include a form 88 83, which is a treaty-based disclosure form. And three, is this general sourcing concept explained somewhere in the tax code? Thank you very much for your information in advance.
Okay. So, let’s provide context. Let’s just get the general picture. And then, we’ll talk about the specifics. For those who are US exposed and they’re residents abroad, I have this acronym that I use that I think is, I think it’s kind of cool. It helps you remember what your responsibilities are. I tell you to do your BEST. B E S T. What does that stand for? B stands for bank accounts, but I want to expand that definition. And I say financial accounts. Basically, that’s the first of you four responsibilities. You need to disclose your financial accounts held outside of the United States.
So financial accounts could be credit unions, banks, brokerage accounts, unitrust pension funds, any sort of structured investment fund, anything like that. It needs to be disclosed. It does not necessarily mean that it creates a tax liability, but it is a reporting requirement. That’s number one. E. You need to do your estimated taxes. You need to figure out in consult with your chosen tax professional, whether you have a US report of U S tax liability for the year, and you cannot wait until the end of the year or the following April to settle that. You need to pay it in at least four quarterly installments.
Failure to do so lead to standard payment penalties. So estimated taxes, pay attention to that. Third point S – state taxes. Even though you’re not resident in whatever your state is, most states in the union are domicile states, which means under certain circumstances, even though you’re not physically present there for an entire year, you may still be deemed to be domicile in that state. We tend to coach our clients on taking certain deliberate steps to shift their domicile from one of the states that does have a state income tax to one of the nine states that does not have an income tax.
So that there’s no confusion. So, like in Nevada, Texas, Florida, you know, Wyoming, Alaska, whatever. The point is that you may think if you’re not there, you’re not supposed to pay taxes, but we’ve seen time after time, after time, people are in for a huge surprise when they do return to the U S at some point in time, and the state is welcoming you with a huge tax bill. So, pay attention to your state. Last but not the least, transfer taxes. You have a requirement to report when you transfer any asset above a certain threshold, of course, to a friend or a relative or whatever the case may be.
And conversely if you do receive a gift. So, if you give or if you offer a gift to or if you receive a gift, there’ll be a reporting requirement behind that. Again, most times, once you’re within the lifelong gift exemption, you don’t have an actual liability, but you certainly have a reporting requirement. So, I’m speaking generally now. So now let’s talk about the specifics. When you are doing a consult with whoever your chosen tax professional, you’re doing your expat tax returns for the US typically, depending on the number of jurisdictions you’re exposed to.
So, let’s say you’re exposed to two jurisdictions, let’s say it’s the U S and Canada. Both tax on you on your worldwide income. Both the US and Canada tax you on your worldwide income. So then, the question becomes, really, who gets first bite of the cherry. If the income arises in the United States, most times it will be taxable in the US first. If it arises in Canada, then most times, it’ll be taxable in Canada first. Then people begin to panic and say, wait, wait, hold on. That means I’m going to be double taxed. No. No, that’s not true. Even without invoking the tax treaty between the US and Canada, it’s unlikely that you will ever be double taxed.
It can happen, but it’s unlikely. Why? Because both jurisdictions recognize the concept of a foreign tax credit. So, if it is, you receive rental income from your rental property back in the US, it’s taxable in the US first and foremost, and the CRA will obviously love your tax on that. And then you get to offset that liability with what has already been paid to the IRS. Similarly, if you have shares in Tesla or Microsoft or whatever, you know, it arises from the US so it will be taxable in the US first. But you got to offset that. Similarly, you have income because presumably you’re in Canada and you’re working, yes, you will have to pay taxes on that to Canada, right?
But whatever you paid to the CRA can be used to offset whatever the liability, if any, to the internal revenue service in the US. So, that’s in principle, how it works. Now, of course, there are some nuances given the uniqueness of the relationship between the US and Canada. And the treaty that’s in play. So, for example, there are financial instruments or structures that are relatively tax-free on the Canada law but are taxable in the US law. For example, registered retirement savings plans, tax-free savings accounts, registered educational savings plan and certain Canadian based mutual funds.
And under certain circumstances, like when you sell your home, your primary residence, it can be tax-free by the CRA, but is still taxable in the US. Similarly, the opposite may apply as well. Under certain circumstances, you may be receiving social security from the US which under certain circumstances, may be tax-free in the US, but Canada is going to tax it. So, it can go both ways where something is taxed in one jurisdiction, but not in the other. So that’s where you pay specific attention. And that’s where it’s worth getting the advice of a tax team so qualified to give it. What I also liked though, is you, you put experts in quotes.
What I’ve seen done, and I think this is, this is really amusing. In one Facebook group, someone drew my attention to it. Someone asked for advice, right? Which is okay, that’s what you’re in the group for. But they very specifically said, if you are not licensed in the jurisdictions, and I’m talking about one and two, if you do not have professional liability insurance to cover any advice you give, please remain silent. We understand that your heart is in the right place. You want to be helpful, but if you are not qualified, you should not be giving advice. You may think that your situation is similar to this situation that I’ve just described, but it may not be, you’d only understand the nuances if you were so qualified.
And even if you qualify, if you do not have the professional liability insurance to back it up, please. Again, remain silent. I smiled when somebody showed me that and I looked at it because that’s the right thing to do, because so often we see people being misled by others who may be very well-intentioned. Their heart is in the right place, but they put themselves and others in trouble. And conversely, you know, to it, to offer your financial security and your financial well-being and put it in the hands of someone who’s not qualified, basically putting your future in somebody else’s hands.
That is not often such a good idea. So, I think you were right in asking your question to use your real air quotes, to point to advisors. We do have an all-website institute on tax, thousands of videos and articles on tax. You know, for the available, you can have a look there, but more importantly, you may want to, at least for the first year seek counsel from someone qualified to give it. I hope that helps. Next question. Just scrolling through Australia. So, from Canada to Australia.
Hi, I know the US Australia tax agreement doesn’t include anything about Australian supers.
For those who don’t know super stands for superannuation, which is kind of like the most popular tax-free retirement slash seeming vehicle available to people who are exposed to the Australian tax system. So, so that’s what it is. It’s kind of like an IRA, but much more. Anyway. So, okay. I know that the tax agreement doesn’t include Australian supers, which is correct. But one, since we already pay tax on the way in, and I include that in my income on my US taxes, how can we avoid double taxation on the contributions?
Two, read the gains on the account. This super already takes 15% in taxes out of the capital gains before they include it in my account. While I haven’t included the capital gains and income in each year, it has already been taxed once. How can I avoid double taxation here? And… Sorry. And three, would separating the contributions from the gains when you claim a pension super distribution help? Maybe agree to pay tax on the capital gains. So, this person, whoever asked this, obviously did a lot of research and they ask the right questions.
And they’re thinking about it in the right way. It kind of mirrors what we were discussing when we were speaking about Canada, and that there would be some vehicles that are tax preferred or tax advantaged in one jurisdiction but may not be so in the other. So, you’re right in the double tax treaty between the U S and Australia. It does not specifically mention supers or superannuation plans. Some people point to, to article 18 too. But our opinion is that it does not apply to supers, but I just want to use that opportunity to say that the whole idea of superannuation when it comes to a US, someone who is exposed to both the US and Australia is quite contentious.
Different tax professionals at TIG tend to take different positions, which is fine. Once of course, they’re prepared to, you know, defend it just in case the challenge by the IRS so that you don’t get in trouble. That that’s fine. And once they’re qualified to do so. Contributions to the superannuation, you’re correct, they do not receive the same tax, deferred treatment as the word under other treaties. So, it’s pre-tax income in Australia when you’re doing the Australian tax returns, but it’s apt to tax income when you’re doing your US tax returns. So, it does not reduce your taxable income.
The second part is the growth in the fund taxable to the US? Okay. It really depends. In general, the growth is not taxable, unless distributions are being taken. Unless the person is a highly compensated employee. It’s a special carve out for those who may be HCEs. If it is that you’re a highly compensated employee, that’s a separate conversation. As well if you are running a self-managed super. If you know, just like with the US you have the opportunity to manage your IRA on your own. If it is self-managed, it becomes transparent according to US tax rules, which means the growth will be taxable.
So, when you speak to your tax advisors, generally speaking, you want you would expect to hear that growth in the fund is not taxable, unless you bring in some sort of distribution, unless of course you are a highly compensated employee, or it’s a self-managed super. So, the growth and fund are not taxable. Yes, distributions are taxable. And yes, you may be thinking, well, hold on, you’re going to make me pay tax. I paid tax, US tax on the way in, do you want me to pay tax on the way out? Then you have a conversation with your tax professionals about bifurcating the income that you’re getting, the distribution, that by forgetting distribution between what was, what we call Corpus or the principal, what was originally invested and the return on it.
So the original investment, you’re correct, is a non-taxable. Otherwise, that I’ll be silly, that’s double taxed, right? But the gain, so you need to be able to identify and you consider the tax team and get that done. The gains will be subject to tax, the US tax on the way out. So that’s why it’s important to sit and do the right calculations to make sure you can separate the original investment from the return. The return will be taxable. Hope that answers your question. Moving on. And again, we have articles on this in htj.tax. If you want to have a look. Next question. Hello. How are you?
I’m fine. Thank you. Here are some questions. One, if I own rental properties in an entity that pays me a salary, what will be the tax rate for my W2 or 10 99 incomes? Or would the tax be based on the income of the entity? Hmm, next question. If I sell a property while living in Spain, so I guess they’re living in Spain. If I sell a property while living in Spain, I understand the game will be taxes. Is that correct? And three, if my income is around a 100K, am I really being taxed at a 45% rate? Okay. So, let’s start at the beginning.
If I own rental properties in an entity that pays you a salary. So, I guess, you own what you’re paying you. You know, you’re being paid a salary. Are you a real estate professional? Basically, your tax professional would need to get more information as to what your relationship with the structure is. But let’s, let’s just, let’s make some assumptions to simplify it. You’re asking whether the be paid on the tax rate for a W2 or 10 99. It really depends. So, the 10 99 would be, if it is, you are deemed to be self-employed.
So therefore, self-employment tax will kick in. W2 is if you are an employee of this entity. So, in order for anyone to make that determination, and again, this is probably outside of tax, we’d need to understand whether you have a contract for services or an employment contract. If it is that you have an employment contract with that entity, then you’re correct. They’ll be paid like a W2. And if you don’t have an employment contract, if you have some sort of a contract for services, you’re a freelancer, you’re an independent agent, in your relationship with that entity, then you would be subject to self-employment tax.
And again, as in the rates of tax, it really depends on your situation. Are you married, filing jointly? Are you head of household? Are you filing single from a US perspective? As you were, the marginal tax rate could be as low as 10%. If you’re single it’d be 10%, if you’re earning up to just under $10,000. Then it jumps to 12%, 22 and it tops off at 37%. If you’re earning 500 K or more like 523 K or more. So, it really depends on your situation. So that’s a marginal tax rate.
The marginal tax rate will be the same, whether you’re on the 10 99 or the W2 IE, whether you’re an independent contractor or you’re an employee. The difference between the two from a tax perspective is that a 10 99 would attract the additional self-employment tax. However, if you reside in Spain and you are declaring and you’re paying your social charges in Spain, then I believe there’s a totalization agreement between Spain and the U.S, which means once you’re paying, once you can prove you have some sort of document to prove that you are paying the equivalent of a social security in Spain, then you relieve the pain, the 15.3% self-employment tax to the U S.
So, I hope that helps. You’re asking if your income is around 100K are you really taxed 45%? Definitely not, on the US side. Perhaps on the Spain side. But we would need to, again, one size doesn’t fit all. We need to understand your situation in Spain, inside out, because obviously there’s some things that are deductible, some things that are not, and that will determine what tax bracket you fall into. I’m actually doing a webinar on that tomorrow. But otherwise, you can shoot me an email and either myself or my colleague in Barcelona, Ricky can get into that. Otherwise, you can join us on the webinar tomorrow, where we talk about Spain.
So, hope that helps. Next question. Someone is asking about a section 9, 6, 2 elections for reducing guilty taxes. Okay so let’s, let’s for those who may not be familiar with. So, for those who among you, who are investors, and aside from the person who asked this question, if it is that you have invested using an entity in a lower tax jurisdiction, not necessarily a tax Haven, but just a lower tax jurisdiction. So that could be like a Singapore at 17%, Hong Kong, 16 and a half Malaysia lab, one, 3% or BVI Cayman zero, right?
So, let’s assume that you’ve invested using, oh, you’re doing business using an offshore structure, or you’ve invested using somehow into an offshore company that is a low tax and a low tax jurisdiction. It may be, and it’s a control foreign Corp. I E more than 50% of the value of votes. So, 10 10 that tends to suggest that more than 50% of the shareholding is in the hands of US persons, then you may be subject to what is called guilty. Guilty came in at the end of 2017, under the tax cut and jobs act under President Trump. What that means is that it provides, what, I guess the intent of the law was incentivize money that is being held in companies outside to come back into the U S and incentivize people to invest using US structures.
Right? So, what it means is that you may be subject to tax on income that sits on the balance sheet. So, before this tax cut and jobs act, if it is that the company made a profit, you as a shareholder are only subject to U S taxes. If you receive the distribution in the form of a bonus or salary, or a dividend as a shareholder, right? No longer. If it isn’t a low tax jurisdiction, it may be subject to this guilty tax. So, it’s basically a tax on Phantom income. It’s a tax on income you did not yet receive, but they believe that you will eventually receive it. So, yeah, a lot of people hate it.
We’re just the bearer of the news. We’re not responsible for it. So, I’m sorry about that. One way around it, was making a section 9 62 election, right? So, what that meant is that you remember the law was intended to provide an advantage to those who were investing through investing in these offshore companies through US structures. So, let’s say through a USC Corp. If you’re investing through a USC Corp, and that’s at a time where this act also reduced the, the corporate tax rate from 35 to 21%, the guilty tax rate would be, it wouldn’t be eliminated, but it would be dramatically reduced by making these 9 62 elections.
So even though you may be, you may have invested it in your own name, you can elect, and it sounds weird, but that’s the way it works. You can elect through section 9 62 to treat the investment as if it didn’t come from you as the US person, but it came from your C Corp. So, imagine you had a C Corp, you get to imagine you had a C Corp and you invest it through that C Corp, and you got a reduction in the tax rate. So that’s how it would work. What this person is saying, well, you know, Hey, we all do it for guilty, but what if it has nothing to do with guilty. And I’m not in treaty, and my company’s not in a treaty jurisdiction. Can I just elect, ah, make a section 9 62 election when it’s not for guilty, just so, I can receive dividends at a lower tax rate so I can get them with like a qualified dividend tax rate.
So, I can get them at like a 23.8% rather than my marginal tax rates, which might be 35, 37%. Can I do that? The answer is I’ve heard of people doing it, but we don’t recommend it. And, you know, before to the tax cut and jobs act in 2017, no one is really talking about 9 62, but a 9, 6 2 had been around since the 1960s under Subpart F. So, some it’s, it’s an old law, but it really became popular post 2017. We believe that it may be pushing it a bit to use it outside of the guilty contest, and it’d be pushing it a bit to use it.
And when you have investments in a non-treaty company in an, an, a company in a non-treaty jurisdiction, and to substantiate that, we refer to case because of course the U S is a common law jurisdiction. So, you kind of look at just tax code. You need to look at case law as well. So, there was a case of Smith, the commissioner, and you can have, you can Google it. You can have a look at it. And so well, we don’t need to get into the obscurities of the case, but we basically took the position that because of Smith, the commissioner, that’s not a good idea. If the IRS would have a closer look at it, they’ll throw it out. So, no, we don’t do it.
We only tend to use a 9 62 election for guilty, not just for any dividend coming out of a company that you’ve invested in, in a non-treaty jurisdiction. Hope that helps. Next question. Right. Crypto. Wondering when the crypto guys was done asking, you know, we always get crypto questions. Okay. I’m a crypto investor. Isn’t everyone. And I heard talk about crypto transactions over 10 K being reportable. Can you talk to that please? Okay. And in a way, okay.
It’s not, it’s not new. You’re right. It is. It has been contemplated. And I, I don’t know if it’s been acted yet, but it is being considered by treasury department and treasury understand that the IRS, the internal revenue service is a part of the treasury department. So, treasury department has a number of divisions, the most popular, which are the most unpopular, which is internal revenue service. There’s another division called FinCEN financial crimes enforcement network. They already have rules around regular currency transactions. If you were a business in the U S and you receive under certain circumstances, of course, if you receive a payment of $10,000 or more in cash from any customer, you’re under a legal obligation to report that to FinCEN, you need to fill out some forms and fill that in.
That law already exists. It’s already a thing. And you know that like when you’re passing through the airport, like, well, before you start to fill out the cards, when you’re entering the U S right, this kind of like these blue forms or whatever, no, you do it on the screen, right. I, one of the questions they ask you is, do you have currency or instruments of $10,000 or more? So, it’s always been a question. So, what they’ve done is simply extended it to crypto. If it is that you are involved in one of a business or whatever it is you’re doing, and you receive a crypto asset with a fair market value of more than $10,000 equivalent, then a report you need to be filed.
Again, I’m unsure whether this, this regulation has been finalized, whether it’s enacted as yet, but that is the intent. And I have no doubt that it would be soon. So, you’re correct, but that kind of brings it aligned with existing currency, which is a kind of, which is I know kind of hypocritical because the government maintains that crypto is not a currency ish yet. By doing this, it’s kind of treating it like a currency, but anyway, it’s a contentious base.
Let’s move on. Okay. Somebody wants to go back to guilty. Another investor, like many of us have a company in a low tax jurisdiction, and I am subject to guilty. I heard guilty may be changing. How would it change? Now, a lot of changes are being contemplated by the Biden administration. And, that could be a whole webinar on its own, the changes being contemplated by the Biden administration. And remember, these are just plans. Nothing has been enacted yet. And even though the white house has a specific agenda, they have a perspective. You know, we still live in a democracy. It’s separation of powers.
The, the legislature is separate from, from the judiciary and, and is separate from the executive, right? So we have those separation of policies. So the executive can have the best idea in the world, but it needs to go through the legislature. Right? So naturally, and usually when that happens, it’s subject to compromise and discussion. So, I mean, President Biden’s plan has been around for a while since the campaign. So we know what it is, but there’s no guarantee that it’s going to happen. So I wouldn’t obsess with it too much, but it is worth considering as you revise your structures and plan for the future.
So we spoke about guilty previously, the ones with the 9 62 election and the, the, the tax that you have to pay on the Phantom income. So the money that was retained, you retained earnings basically for your foreign CFC in a low tax jurisdiction. It was around 10 and a half percent. So it was like half of the corporate tax rates, which is 21%. One of the changes being contemplated is first of all, the corporate tax rate is expected to move up. The white house wants it to move up to 28%. So from 21 to 28% and the guilty to be moved up from 50% of the value of the corporate tax rate to 75% of the volume.
So in other words, they’ll go up to about 21%, but again, this is just a plan. It’s not set in stone, but, generally speaking, if you are a higher income earner, you may want to start having that exploratory conversation with your tax advisors, because if you are earning like 400 K or more, you have offshore structures, chances are, what passes through Congress may impact you. So you may want to plan ahead. So yes.
Do keep that in mind. Next question. Going back to crypto. Yeah. You know, we always, we don’t get as many crypto questions as before, but we still do get some, so this question is which crypto trades are reportable? Yeah. So the guidance on crypto transaction from the IRS has been less than adequate, and it has a lab, many tax professionals and crypto investors like yourself guessing, right? The two main guideline we have or notices or rulings that we have from the internal revenue service will be 2014, 21 and 2019 24.
So this tells us that you incur a taxable event from your crypto investing when you, and when one of the, let’s say four transactions occur. So you have you, when you’re doing a trade that converts crypto to Fiat, for example, the US dollar doesn’t have to be the U S dollar. It could be euros, it could be yen, whatever, but when you are engaged in some sort of transaction that converts crypto to Fiat, that may trigger a reporting requirement and therefore trigger a tax liability as well.
When you are trading from crypto – from one cryptocurrency to the other. So before, you know, there was uncertainty around that, but it’s been confirmed. If you’re trading crypto to crypto, that may be taxable, may be reportable. When you spend in crypto to purchase goods and services and when you’re earning crypto as income. So you’re performing a service for someone, and they pay you in Bitcoin, they pay you in crypto. So those four situations may be a taxable event. You need to speak to your advisors as to how it will be treated. So keep that in mind. And it may also be worth considering the differences between those who are crypto investors and crypto traders.
We get into that later because I see someone else has asked questions about that. But, but just to keep it simple at this point, you’re trading crypto to Fiat, you’re trading one crypto to another, you’re spending crypto to buy something, or you’re earning money in crypto. Talk to your tax advisor as to whether you have a reportable transaction from, from an IRS perspective. Okay, moving on. I know this talk is about US taxes, but I do business in the EU.
So could you please talk about DSE six? Okay. I allowed this one, but it’s a bit off topic, right? But I’ll include it anyway, but I’ll, but I’ll include it to make a specific point. So the, as, as you are an international, as you work internationally, as you invest internationally, it does make sense to be cognizant, not just in the us tax rules, but other, international tax rules as well, because they will impact your business. And if you’re not conscious, if you’re not compliant with those rules, you can get into trouble. Right? So within the EU, a piece of legislation, I think it was passed like in 2018, but it actually came into force this year, across the EU.
And to a less extent in the UK as well. I think because UK has left the EU, they have like a watered-down version of it. But essentially what it involves is that anyone who is exposed to more than one jurisdiction or doing a deal in more than one jurisdiction, within EU, or between, you know, just more than one jurisdiction, let’s keep it like that. The niche. And they were, they’d been advised by an attorney or an accountant. The nature of that transaction needs to be disclosed. So I’m not saying that there’s a tax liability automatically, but what they want, the EU wants a registered HMRC. In the UK, you want to create a registrar of every cross-border transaction.
It sounds really wide, but you know, it’s brand new. And right now it’s being interpreted as very, very broad. So anything that may import an impact on it may mean if it could be completely legit, but it may mean that you are able to lower your tax liability by taking a bunch of certain structures. It may mean that you, it may not be reportable under the automatic exchange information, whatever the case may be. It’s still reportable in this, I guess, to creating some sort of registry. So it’s reportable in the jurisdiction in which it happened, whichever EU jurisdiction happened or HMRC in the UK.
Now, why am I mentioning this? I’m mentioning this because it signifies a wider trend. So we spoke about, and so I’m sure you guys are sophisticated enough. You’re aware of factor the financial contracts compliance act, which came in into President Obama around 2010, 2011. And it’s not a tax. It’s a free move for information exchange. So countries across the world like Spain, like China, like Israel, everywhere, they are going, they are bypassing the domestic bank, secrecy rules. They’re putting them aside and obligating all domestic financial institutions to go through their books and flag anyone that they suspect to being a US person.
Even if they open. Even if you open your account at TD in Toronto using a Canadian passport, if that bank officer suspects that you may still be a US person, you’re US exposed, even though you deny it, they’re legally required to report this under factor. So it started with that and followed up, would the automatic exchange of information, which is like FATCA, but everyone is exchanging information back and forth. And then would this doc six, it takes it to the next level. And what you would find is that a lot of the unlicensed unregulated tax advisors, they’re kind of aware of this.
So they won’t, they, they run their websites, they run their YouTube channels or whatever from outside of any regulated jurisdiction. So they wouldn’t do it in Western Europe. They’ll choose an Eastern European country that wouldn’t do it in Singapore. They might do it in Malaysia or Thailand. They won’t do it in the US they’ll sit in Mexico, and they’ll do it. So what I, the point I want to let you know, is that doing that for a reason because of the stricter and stricter regulations being put into force. So, you know, caveat emptor buyer beware the route, the did the times and the, the era of being able to hide that’s long-gone transparency is everywhere.
Secrecy is dead, and you are better off doing the right thing. Working with advisors who are qualified and regulated to help you stay on the right side of the law. Because if you ever get caught out, you can’t. Point your fingers at them, all eyes on you. You’re ultimately responsible. So hope that helps. Moving on. Yeah. This is interesting question. Is it true that all wealthy investors live a nomadic lifestyle like James Bond and this sort of international man of mystery?
Yeah, well that is of course very subjective, but fortunately, you know, fortunately there has been some research that has been conducted and what I encourage anyone to do, and it’s, I, it’s a guy that I discovered quite recently, his name is Dr. Christabel Young, and then he was a tenured professor, at Cornell and Stanford. So he kind of knows what he’s talking about and what he, what he’s known for at least what he’s been quoted in the New York times and stuff is that he has gone through years of tax returns, like federal tax returns, anonymized, of course. So you don’t know who it is.
So, because IRS does publish data on, you know, what people in different wealth brackets are doing. Trends, just so that it helps government policy. So what he did is he tracked the returns for those making a million plus for like over 10-year period or something. You can just Google them and check them out. And what he found? And it’s been substantiated by research by other academics as well. So it’s not just a one-off. And I’ve also seen anecdotal evidence, you know, like interviews with international law firms in New York or whatever. They all come to the same point. There’s a correlation between wealth and mobility.
So generally speaking, the wealthier someone is, the less likely they are to move. So all the publicity about, you know, billionaires or millionaires leaving Connecticut, or California or Jersey or New York to go down to Texas or Florida, they may be a bit exaggerated because when you look over time, according to the data that these guys had access to it, that’s not the way it is. Internationally, I think what they did is they reviewed data from Forbes magazine, because you know, Forbes publishes lists of high net worth people around the world.
Now out of certain emerging markets, that is correct. They do move, they do relocate. So I guess, for example, in Southeast Asia, you know, high net worth people from Indonesia or Malaysia may relocate to Singapore, for example. Or from certain parts of Africa, North Africa, to Dubai. But generally speaking, when it comes to the US, the richer someone is the more they stay put. Why? Then you may think, well, what about all of the stuff that we read about saving taxes or saving money on taxes? When someone is wealthy enough, they can afford to hire teams of accountants and lawyers to exploit – legally exploit opportunities to save themselves on taxes.
They don’t need to go through the inconvenience of moving around. And don’t get me wrong, that doesn’t mean that they don’t have like a second residency or a second passport, or they don’t travel. They don’t have a nice yacht. They sail around Mediterranean or whatever, but their primary residence tends to remain the same, the higher the income. Now there’s been also some research that shows they hire someone’s education. So the more educated someone is, the more likely they are to move. So I don’t know how to reconcile those two, but, you know, have a look at Christabel Young and the research that he’s done.
So I do encourage, and I do see the value in terms of quality of life, of getting a second residence, getting second passports and seeing the world and taking advantage of investment opportunities all over. But there’s no need to move country to reduce your taxable income. Once you can afford the right advice, there’s absolutely no need to do that. And, you know, I have dumbfounded and confounded clients all the time, you know, up to yesterday and last week, because they’ve been bombarded by social media saying that that’s exactly what you have to do.
And when I prove, and I demonstrate with all the examples that you can probably save more than by staying put, and it’s less inconvenient. Travel. Yes. But you can, there’s no need to move to save on taxes then, you know, it’s, it does seem counterintuitive to them, but you know, it is what it is. So that’s that. And again, I have an article on that on HTJ.TAX quoting Dr. Christopher Young. Next question. Right. Someone is asking the, going back to PFIC. So I guess we have a lot of investors, people who are investing abroad, which is good. That’s the right thing to do.
Could you talk about value and Goodwill to mitigate PFIC status based on the asset test? Right. Let’s talk about what a P FIC is. So we spoke about guilty as a means that the IRS, one of the mechanisms of the internal revenue service has to tax people who invest overseas in structures that may put them at an advantage over someone who is investing domestically in the US right? So there’s some, the, the three main pieces of legislation you’re going to hear about as an investor would be Subpart F, which is from the 1960s, PFIC – Passive Foreign Investment Companies from the 1980s and guilty from 2017.
There are those, but those are the main ones you’re going to hear about as an investor. Now, basically your investment would qualify as a PFIC, if it’s captured under one of two tests, if more than 50% of the assets of the company that you’ve invested in is being held for two, for generating passive income, like capital gains dividends and interest. It’s a PFIC. Or, if more than seventy-five percent of the income, when you look at the income statement, whatever, if more than 75% of the income is passive in nature, then it’s a PFIC.
So basically, you’re looking at like foreign mutual funds. That’s essentially what it’s trying to capture because domestic US domestic financial institutions were complaining that Hey, people were able to invest abroad and, and there were tax advantages in so doing. So, that’s where th PFIC regs came up. So that, that provides context as to what it is. There is under certain circumstances, I’ve seen it done where, where if someone is trapped, the investment is being categorized as a PFIC because of the asset test. They can under certain circumstances, I’ve seen it done when they value Goodwill, it may help with a threshold, keep them below that 50% threshold.
But again, we did that in consult with US tax attorneys, as well as qualified valuators – so valuation firms. So basically law firms that specialize in company valuation. So you don’t just make stuff up. Every step has to be documented. Every step has to be properly evidenced. So, yes, it’s possible. Once you have the right advice. And sorry, before I go into the next one, I’m just going to switch around to see what else people are talking about. Hold on. Because I am seeing some chats in some of the boxes, right?
Someone is asking, what is your recommended business structure if an American plans to starting a multi-million revenue business outside of the US, not a US company, nor operating in the U S. I’ve been told LLCs are treated as personal income versus company income, but the advised corporate structure is very complicated. What is the threshold of profit that is worth doing a foreign corporate structure instead of an LLC? It really depends. It really depends. So it depends on the shareholders. For someone to advise on something like this, they need to talk to you about who are the shareholders? Is it just yourself as an American, or are there any other nationalities involved?
Where you’re going to be based and where the decision is going to be? The management team, whether they are set, because there’s an international tax rule called place of effective management, right? So even if you incorporate a company in, let’s say, let’s make up a popular one BVI or Caveman or the UAE like Dubai. Just because it’s incorporated in a different jurisdiction doesn’t mean it’s taxable there. If the decision makers are sitting in Portugal or Canada, or they’re sitting in France, even though that company is incorporated somewhere else, the point is it’s being run from Canada, from Portugal or from France, and it’s taxable there.
So we need to know where do the decision makers sit, where do the customers sit, where do the staff sit and whether there are any. What is the nature of the product or service being offered for sale and all of those go into the mix to decide what the right structure is? So, it really depends. So you need to take a deeper dive into it with a tax advisor or an advisory team, because it’s unusual for one person to know everything. And then when if one person claims to know everything, I get super nervous, right?
I’m not a one person show. I have a great team who, you know, we rely on each other to get stuff done. So, well, we need to understand all of those factors in order to advise that there is no monetary threshold over which one structure is preferred over another. It really depends on the facts and circumstance. Is it a case? Okay. Flipping back now. Hm. Okay. I’m a serious crypto investor. Yeah, of course. Lots of serious crypto investors. Some guys have done amazingly well, and some have not. But I think I should be categorized as a crypto trader. What is the difference? And what’s in it for me if I am a trader.
Okay. So there are rules around trading, but unfortunately in the US tax code, it’s not very clear. These rules are driven and are understanding of how the IRS views it as driven by case law. And, case law is subjective. So, you know, it’s a detailed conversation, but anyway, some leading tax minds have interpreted case law to show like a Tupac test to quantify for what is called attacks, trader status. Right? Hmm. The first thing you’re looking at is the trading activity needs to be substantial, regular, frequent, and continuous.
And then the second thing is the taxpayer must demonstrate that they intend to cat swings and daily market movements and profit from these short-term changes rather than buy and hold. It’s not a long-term thing that every day they are on top of this, right? So sometimes IRS agents, when you’re dealing with the IRS, they, they look at IRS publication 5 5 0. So that’s something that you could look at all together with your tax advisor. Chapter 4, IRS publication, 5 5 0. The special rules for traders. So there, they look at what are the holding periods for the securities, in this case, the crypto. How long are you holding it for between buying and selling, the frequency, and the quantum, how much are you changing over?
You know, how dependent on you, are you on this? Is crypto the only way in which you earn a livelihood, or is it like something you do on the side? Is that your main source of income? Does take up most of your time? How much time do you devote to this daily? So again, substantial, regular frequent and continuous. So that’s what, IRS is going to look for. And that’s therefore what you and your tax team need to be conscious of. Of course, if you do qualify as a trader, as opposed to an investor, you might me be subject to more preferential tax rates, which is why you need to be very, very careful, make sure chocolate boxes speak to the right people before you qualify and categorize yourself like that.
Because yes, I know it’s attractive, because I know what you’re chasing. But, bear in mind that the rules are pretty strict and they’re very nuanced. So hope that helps. And another question, what if I have an offshore company, again, someone else who considers he or she, and to them seems to have more of an investor. So basically, you are asking the same thing as the previous person, but whereas the previous person was asking about a US structure, you are asking about a foreign structure. Sure. Okay. The difference between a trader and investor is its nuance and it’s unique to every jurisdiction.
So what I gave you, just what I gave just now for the US is not applicable to every jurisdiction. Everyone has their own way of defining that. So in the UK, for example, HMRC her Majesty’s revenue and customs, they look at what called badges of trade and then nine badges of trade. And you’d find I’m using the UK because for a lot of former UK colonies. So for example, Canada, Australia, New Zealand, Singapore, Hong Kong, Malaysia, Caribbean parts of Africa, they want to follow these badges of trades. So it’s a useful guide if you because those are the more common English speaking officer jurisdictions that you use as part of your structure.
So the nine badges of trade, you must have profit seeking motives, the number of transactions and look at the number of transactions that’s like in the US, the nature of the assets, the existence of similar trading transactions or interests changes to the asset, the way in which the sale was Cato, the source of the finance method of acquisition. And again, the time period between purchase and sales. So you need to sit with your tax team and make sure that, you know, according to the badges of trade, as exists in whichever jurisdiction, you have your structure, that you do qualify as a trader, and you’re structured accordingly to enjoy the benefit.
Because again, it is attractive because it’s tax deferred as opposed to just being an investor. Right. So. Okay. I’m just going to flip to some other screens to see what other questions have been raised. Aha. Okay. Okay. That’s good. Okay. Any other questions? I’m back on Zoom now. Any questions from those of you on it? Zoom. Okay. I’m glad we were able to answer the questions that you pose.
Again, stepping back summarizing as a U S exposed person, whether it is you have a US passport, you have a green card, so, or you have what is called substantial presence. So you’ve spent enough time in the US which has happened a lot for people who were stranded because of travel restrictions, because of the pandemic. You are being taxed in your role, that income, it is what it is. Those who promise that you are able to live tax-free by just jumping in a plane and going somewhere else, very unlikely. You will always be taxable in your worldwide income once you’re a US citizen or green card holder.
You do have certain advantages like you do have section 9 11 foreign earned income exclusion, which allows you to exclude up to, well, it moves, each year with inflation. I think so. I think last year it was like $107,600. It moves up. Plus you get to exclude, you get to you get a housing deduction, stuff like that. But generally speaking aside from a few opportunities, your worldwide income remains taxable. I tell you to do your best. The four things, remember? Financial accounts are bank accounts B. You need to report them. The penalties would internationally tax to the EU. The IRS is counter intuitive.
You may think they’re about collecting revenue. No. Most important thing to you as government is information. They want to know what you’re up to. So the penalties for not paying taxes, interest, whatever, but if you don’t report one of your foreign accounts, it could be up to 50% of the unreported balance per year. It can be pretty draconian. We’ve seen cases where people have levy, been levying penalties that are in excess of the amount in the account. So there’s an account in Switzerland with a million dollars in it. And they’ve got penalties of 1.5 million dollars because they are as deemed that they didn’t report it over three years. So it’s 50% per year, over three years.
So 1.5. Information is super important. So B, report those bank accounts. E, pay attention to estimated tax payments. S, keep in mind that you may still have state reporting or tax liabilities because of state sourced income, or you’re still domicile there. And T, transfer taxes. If you’ve been gifting or you’ve been receiving gifts or investing, that stuff is reportable as well. And failure to report that could be pretty aggressive in terms of the penalties, civil penalties and potentially criminal, depending on how it’s structured. So, thank you for joining us.
This live stream would be yep. Thanks, John. So this live stream will be edited a little bit. And, we post it on wherever you get your favorite podcasts. So, iTundes, sound cloud, YouTube. We would also put it on Facebook. It’s also going to be on Facebook as well. So feel free to listen to it. And, at HTJ.TAX, you will see what our upcoming webinar topics are. Feel free to join us next time. If you have any specific questions, you can reach out to me on LinkedIn.
Like some of you have, we can just shoot us an email at email@example.com That’s firstname.lastname@example.org. Thank you for coming. See you next time. Bye-bye
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