US Company tax loopholes for Non-Residents, Non-Citizens, doing business in the US

• Tax havens are defined as allowing secrecy and having low or zero tax rates; for nonresident aliens, the United States offers both.
• This situation is beginning to change because of the Corporate Transparency Act, but the law has been challenged as unconstitutional. Even this would only apply for U.S. government nontax purposes.
• A nonresident alien who uses a U.S. limited liability company to shield income from taxation in their home country would be able to rely on the secrecy provided by U.S. state law.
• The Foreign Account Tax Compliance Act allows the United States to collect information from foreign countries about U.S. taxpayers under intergovernmental agreements

While some IGAs are nominally “reciprocal,” in practice, they leave a lot of information about non-U.S. taxpayers unaccounted for (see table). For example, reciprocal IGAs do not require the United States to share information regarding the controlling persons of entities used to hold passive investments. As a result, non-U.S. persons can avoid FATCA reporting by holding accounts with U.S. financial institutions through U.S. or foreign entities, like a Delaware or Cayman Islands LLC

• CRS means that non US financial institutions cannot offer financial secrecy to their clients.
• The U.S. financial industry opposes reciprocal reporting requirements. They assert that such requirements, if adopted, could increase compliance costs for U.S. financial institutions and might cause non-U.S. persons
• The President of the Florida Bankers Association testified before Congress that there are hundreds of billions of dollars of foreign-held deposits in U.S. banks because “for more than 90 years the U.S. government has encouraged foreigners to put their money in U.S. banks by exempting these deposits from taxes and reporting
• The second element defining a tax haven is a low or zero tax rate. The U.S. offers abundant opportunities to earn U.S.-source income without imposing any withholding tax. In theory, fixed or determinable annual or periodic (FDAP) income from sources within the United States is subject to 30 percent withholding, but numerous exceptions swallow the rule.
• The first (and perhaps most important) exception is for capital gains. Capital gains are not FDAP, and their source is the residence of the seller, so they are generally not U.S.-source if the seller is foreign
• Also, the United States does not impose tax on stock buybacks by U.S. corporations, a typical way to distribute earnings
• To what extent are U.S. treaties immune from treaty shopping? The problem is that the United States rejects the primary purpose test that has been adopted by the rest of the world, instead relying on the limitations on benefits article that is found in most U.S. treaties.  But there are still four treaties (with Greece, Pakistan, the Philippines, and Romania) that lack the LOB article. Even where there is one, the LOB is typically not difficult to plan around.
• For example, an individual from a non-treaty country can set up a corporation in a treaty country and have it listed on a foreign exchange while retaining control. That corporation can enjoy zero withholding under the treaty because publicly traded corporations are exempt from the LOB
• The IRS has been unsuccessful in arguing that when a foreign corporation in a tax haven licenses intellectual property to a holding corporation in a treaty country which, in turn, sublicenses it into the United States, the royalties from the holding corporation to the tax haven corporation are U.S.-source and subject to withholding
• This leaves dividends as the last major category of FDAP subject to withholding. But because buybacks are not FDAP, there is no reason for a U.S. corporation to ever pay dividends to foreign portfolio shareholders since they can participate in buybacks without paying any tax. The lack of withholding can be seen in the IRS data from 2021. That year, total U.S.-source FDAP was $946 billion. Out of that, $816 billion (86 percent) was exempt, and only $129 billion (14 percent) was subject to withholding. 

But please be careful as

1. Pasquantino v. United States, 544 U.S. 349 (2005), is a United States Supreme Court case in which the Court held that a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute. – Prior to 1996, Canada raised the excise tax on liquors such that Canadian excise taxes greatly exceeded comparable United States taxes.   From 1996-2000, Carl and David Pasquantino purchased large amounts of liquor over the phone from discount stores in Maryland.   In order to avoid paying Canadian excise tax on imported alcohol, they hired individuals to smuggle the liquor over the border by automobile. The Federal Bureau of Alcohol, Tobacco, Firearms, and Explosives learned about the smuggling operation and investigated, leading to the arrest of the Pasquantinos and their associates.
2. In 2015, United States federal prosecutors disclosed cases of corruption by officials and associates connected with the Swiss based Fédération internationale de Football Association (FIFA), the governing body of association football, futsal and beach soccer.  Near the end of May 2015, fourteen people were indicted in connection with an investigation by the United States Federal Bureau of Investigation (FBI) and the Internal Revenue Service Criminal Investigation Division (IRS-CI) into wire fraud, racketeering, and money laundering. The United States Attorney General simultaneously announced the unsealing of the indictments and the prior guilty pleas by four football executives and two corporations.
3. US Corporate Transparency Act The Corporate Transparency Act requires that beneficial owner information is reported to FinCEN, a federal level department.Trusts can be impacted by the CTA if the trustee owns or controls at least 25% of the ownership interests of a reporting company in its fiduciary capacity as trustee of the trust, or if the trustee has substantial control over a reporting company.Foreign requestors can obtain the BOI, namely foreign law enforcement agencies, judges, prosecutors, central authorities and competent authorities..Foreign Requesters do not have open-ended query access to the database and must request access to BOI through intermediary US federal agencies. In requesting access, the Foreign Requesters must show that i) the request is for assistance in a law enforcement investigation or prosecution, or for a national security or intelligence activity, that is authorized under the laws of the foreign country and ii) either (a) the request is made under an international treaty, agreement or convention or (b) the request is being made by law enforcement, judicial or prosecutorial authorities in a “trusted” foreign country. Notably, no tax agreement with US need not exist. The Access Rule does not define “trusted” foreign country. However, it can be deduced that trusted foreign countries are listed in rev procedure listing the countries regarded as safe to receive FATCA reciprocal reporting. This is currently a list of 51 countries
4. John Doe Summons
   Three countries have to date requested the IRS to issue John Doe summonses on their residents with financial accounts at certain financial institutions, namely Finland, Norway and the Netherlands
5. Up to 40% estate tax with minimal exemption for non-US persons
   Non-US persons with assets in situ of the US will be subject to a marginal estate tax rate of 40%, with only a $60,000 threshold exemption