Americans Connected with Offshore Foundations
Foreign entities have their advantages and can be very beneficial if structured and deployed thoughtfully. If not, be prepared for problems. Especially if you’re not compliant with all relevant US laws.
Among the various options for foreign entities, launching a foreign foundation company is a complex undertaking that requires consideration of legal issues that potentially subject the foundation to government scrutiny by regulatory agencies such as –
- the Department of Justice (DOJ),
- the Securities and Exchange Commission (SEC), and of course
- the Internal Revenue Service (IRS).
The foundations are entities that are technically not owned by anyone, and are separate legal persons in law. Generally, foundations are founded by a founder, controlled by a foundation council, and may have beneficiaries. In civil law countries foundations are often used in place of trusts because generally speaking, many civil law countries have challenges understanding trusts. Various foreign jurisdictions of course have their own complexities. The 2017 Cayman Islands Foundation Companies Law (Foundation Law) for example, introduced a corporate vehicle that plays dual roles: the foundation can exist as a separate legal personality and limited liability company, or it can function like a trust.
Let’s take a deeper dive into this?
What is it?
Under certain circumstances, the Foreign foundation should be reported as a trust and under other circumstances, it may be reported as a foreign company. It depends on the fact pattern
Cayman Foundation Law is said to “exclude the creation of any inadvertent common law trust rights and limits the beneficiary’s rights to those expressly stated by the foundation company,” yet this is not what is actually occurring in practice.
If a United States person sets up an offshore foundation that is deemed to be operating as an incorporated trust, then the foreign trust is subject to U.S. tax filing requirements.
These requirements include either Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts and/or Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
Additionally, U.S. taxpayers with an ownership interest in a foreign corporation may be required to file a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Establishing an offshore foundation may shift ownership into the hands of another legal entity and away from the actual beneficial owner.
The Foundation Law actually requires both a secretary (a person licensed to provide company management services in the Cayman Islands) and a supervisor (a person, other than a member, who has a right to attend and vote at general meetings).
Lack of Transparency and Concealment of Beneficial Ownership:
Foundation companies are often not required to report beneficial ownership, allowing for the potential to evade other legal requirements.
Further, taxpayers with offshore financial accounts often transfer funds from their offshore accounts through the use of prepaid debit cards issued by offshore banks.
The IRS has gone after tax evasion in Swiss and other offshore accounts, and has collected a staggering $10 billion. Then, the IRS turned to virtual currencies like Bitcoin, after a court allowed an IRS John Doe summons for bitcoin and other virtual currencies. Now, the IRS is going after some debit card use, too.
How does the IRS get on to you, you might wonder? If the IRS knows who you are, it can audit or investigate you. But increasingly, one important technique is the John Doe Summons. In 2008, the lid came off the hushed world of Swiss banking when a judge allowed the IRS to issue a John Doe summons to UBS for information on U.S. taxpayers using Swiss accounts. Now, the IRS has turned to certain debit cards.
For example, Sovereign Management & Legal LTD (SML) offered ATM/debit cards called “Sovereign Gold Cards” and engaged in the formation of anonymous foundations in offshore locations such as Panama (See Forbes magazine – https://www.forbes.com/sites/robertwood/2017/01/25/irs-hunts-debit-cards-for-tax-evasion-as-court-approves-john-doe-summons/?sh=3d94aec0738b). The structure of these offshore foundations offers anonymous corporations with an account “plus nominee director and shareholder service for complete anonymity.”
In the case of Privatbank IHAG Zürich AG (IHAG), the bank assisted clients in establishing foundations used to hold their assets at IHAG.
The beneficial owners of the foundation accounts were properly identified as beneficial owners of the foundations on certain forms pursuant to Swiss laws; however, on IRS Forms W-8BEN, the foundations were identified as the beneficial owner indicating intentional concealment of true beneficial ownership.
For example, in 2006, an account held in the name of a Panama company was opened. In connection with the opening of the account, bank documents identified a U.S. person as the beneficial owner of the assets.
However, a Form W-8BEN signed by two Swiss citizens and a citizen of Liechtenstein falsely declared that the Panama company was the beneficial owner. The U.S. person instructed IHAG not to communicate with him by phone and insisted on using code names when communicating with IHAG.
Ultimately, the DOJ deemed the acts of IHAG to constitute criminal activity subject to federal penalties.
Similarly, in United States v. Hough, 803 F.3d 1181, 1183 (11th Cir. 2015), the defendant and coconspirator owned two medical schools generating millions of dollars in the Caribbean.
Instead of reporting the income, the couple established entities (including a foundation) to hide it in multiple offshore accounts. The court supported the defendant’s convictions for attempting to defraud the IRS because she failed to disclose her financial interest in foreign bank accounts.
Are you US exposed and involved in foreign foundations? Get advice.