Wednesday, May 22nd 2019
Introduction to an Offshore Tax Structure for Online Businesses for US Citizens
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INTRODUCTION TO AN OFFSHORE TAX STRUCTURE FOR ONLINE BUSINESSES FOR US CITIZENS:
Glossary of Terms:
- IBC: International Business Company; a form of non-US corporation that is used in our offshore tax structure
- Incorporation: The process by which you form your IBC
- Shareholder: For all intents and purposes for this tax structure, the sole shareholder is the owner of the IBC
- Director: For all intents and purposes for this tax structure, the sole director is the operator of the IBC
- LLC: A Limited Liability Company that is your US-based entity
- Member: The sole member of the LLC is basically the owner, which for this tax structure is the IBC
- Manager: The sole manager of the operator of the LLC, which for this tax structure is you
- Manager-Managed LLC: A state law term for the type of LLC this tax structure requires
- Organize: The LLC is organized when it is formed
- Single-Member LLC: A tax term for the type of LLC this tax structure requires
It’s possible to operate your business in your own name without any legal structure. However, you would miss out on a myriad of US tax benefits. Also, operating through a legal entity instead of in your own name has its own benefits, such as the type of liability protection that the legal entity provides. For example, if someone were to sue you then they can go after all your personal assets instead of just the assets that are related to the business.
A legal entity also gives you a more professional appearance and it makes it easier to operate with other people relating to your business, such as selling platforms, banks, and payment processors. Therefore, if you’re going to need a legal structure, then you might as well pick the legal structure that has the most US tax benefits for your particular circumstances.
As many people know, if you are a US citizen living abroad, you qualify for the foreign earned income exclusion on your first $100,000 or so in income for the year. However, if you run an online business from the US, you are subject to a 15% tax withholding for self-employment taxes.
One possible legal structure that may work for your online businesses, is that you would own a non-US corporation and then become an employee of the corporation. At this point, you are no longer self-employed so you will be able to claim the full FEIE and not pay self-employment taxes. Many people also choose to have this corporation own an American LLC.
Having an American LLC makes it easier for you to run your business by conducting business with US bank accounts. It’s not typical that US banks open accounts for non-US corporation, therefore having this LLC can facilitate business better. Also when signing contracts with US clients or companies, many like to deal with other US companies.
Every online business is unique, and you may not benefit directly from this structure due to the nature of your business. The corporation should be able to function without its owner being there 100% of the time. If you are an online developer without any employees, for example, this structure is not for you, as you are doing all the work for the business.
We will explore further how to form these entities—and their multitude of benefits—but right now this is just an overview. For now, the important pieces to gather are that a non-US corporation can save you on US taxes.
The type of non-US corporation that you want to form is called an IBC or International Business Company. These are the types of companies that are formed in certain locations where the aforementioned location doesn’t tax a company simply for being in that location. You incorporate an IBC, making you the sole director and the sole shareholder of the company.
As we explore this legal structure further, the IBC is the sole member of the Limited Liability Company—or just called an “LLC” for short. The owner of an LLC is called a member. Then, the person that operates the business is going to be the manager of the LLC. For the purposes of this article, we will need a manager-managed LLC as opposed to a member-managed LLC. “Manager-managed LLC” simply means that the IBC is the member and that you are the manager.
HOW TO SET UP YOUR ONLINE BUSINESS ABROAD:
We want to preface this tutorial by saying that it is always best to get an international tax attorney to help you with your unique situation. Everything stated here is from personal experience of one of our employees, and they are not a tax attorney. Tax laws do change, we are simply writing this article for you to learn more about this structure that many people abroad do not know about. Here is the email of a recommended US international tax attorney if you would like to discuss your own unique situation.
Stewart Patton – firstname.lastname@example.org
To recap, we have two legal entities for our system: the United-States-based LLC and a non-US IBC. And the US-based LLC will have an American bank account so it can conduct business with the backing of the US banking system. Therefore, there are 3 steps to create this system: form an IBC, form an LLC, and open a bank account under the name of the LLC.
The order in which these three steps are conducted can vary depending on where you are in your business, but we’ll cover more on that in a later section. For now, we’ll cover these steps in order.
Step 1 – How to Form Your IBC:
The first decision that you have to make is in which country will you base the IBC. For the purposes of this article, we have chosen the country of Belize. This is because:
- Belize has a stable democracy.
- English is the official language.
- Belize has easy administration.
- Belize has no audited financials.
- Belize has no presence is required.
- Belize has no local tax.
- Belize has no virtual office requirement.
However, you should do some research to see if a different country is right for your particular circumstances. Other common countries are Hong Kong, Singapore, Panama, Grand Cayman Islands, etc. The list can go on, there are many countries in the world with more favorable tax treatments.
– Filling Out Your IBC Application for Belize –
You will first have to fill out the IBC application for Belize.
*Click here for more information.
In addition, you’ll need 2 other related documents and due diligence forms and send them to a registered agent in Belize. A registered agent is simply a person who is qualified to form and maintain an IBC in Belize.
The application is only 2 pages. When you fill out the application choose three different possible names for your IBC period this is because other companies could have already taken the name that you have chosen. You can name your IBC something more general or you can name is something directly related to the LLC, however, customers won’t really see the name of the IBC so it doesn’t matter too much.
You’ll also have to add an address for your application. This is usually the same address that you use when banking in the US. Then you will have to include a short segment about what your company actually does. It doesn’t have to be a lot, just a rough outline of the type of business that you plan on operating through this legal structure.
After this, you will have to provide some basic information about each shareholder and director of the IBC. If you are married, we recommend that both spouses be shareholders and directors. The last item that you’ll have to enter is the address where your books and records will be kept. Just enter the address that is most convenient for you.
– Filling Out Your Due Diligence Articles for Belize –
By Belize law, you will be asked to submit due diligence items to prove that you are a real person and not a money launderer. In order to do this, you will have to submit very simple documentation, such as:
- A notarized copy of the signature page of your passport (does not have to be notarized in the United States)
- A reference letter from a professional such as an attorney or an accountant stating how long you have worked together and swearing that you are a trustworthy person. This doesn’t need to be too long.
- A reference letter from your bank, which is a standard document and it is not too important what the content of this letter states
- A recent utility bill outside of Belize (cannot be in Belize or it is subject to Belize taxes). The address on this bill must match the address on your IBC application.
- A short resume about the last 10 years of your professional life
Step 2 – How to Form Your US-Based LLC:
There are three steps that must be taken to get your structure up and running. The first step is that you have to actually form the LLC.
– Forming Your LLC –
To form an LLC, first you have to decide which state you want your LLC based in. Many people choose either Delaware, Las Vegas, or Wyoming due to their lenient tax laws. Then, you must fill out the documents to register your LLC. Finally, you send these documents to a registered agent that will form your LLC for you.
*For more information on how to form an LLC, click here.
First, you will have to choose a name for your LLC and then you put your name as the contact information. Afterward, you choose an address that works for you. Finally, you will have to choose a short description of your business. This will only have to be a word or two such as “social media” or “online advertising”.
At the bottom of the first page, You will list all the members and managers of the LLC. The LLC should only have one member which is your IBC (which is set at 100% interest). Then you would be the manager of the LLC (which is set at 0% interest).
*If you are married then you and your spouse can both be the managers.
The last page will ask you if you want your name listed to the public. There is no good reason to do so, thus we recommend keeping it private. Afterward, you just sign the agreement, listing yourself as the manager.
Your registered agent will then form the LLC and they will send you a document called “The Articles of Organization”. That’s the official legal paperwork from the state of your LLC. You will be required to submit this paperwork to banks.
– Getting an EIN for Your LLC –
The next step is that you have to get an Employer Identification Number, also known as an EIN. You have to give this number to your bank.
In a lot of ways, an EIN is very much like a social security number for a legal entity. This allows the IRS to track any filings made by the legal entity. To form an EIN, follow these easy steps:
- Go to www.irs.gov/ein
- Follow the online tool provided by the IRS
- Then you will receive your EIN
Things to Consider When Filling out the Online Tool:
The online tool will ask you if the principal business is located in the United States. Though this is technically not the case, your LLC will be a legal US entity with a registered agent in the US, therefore you should be fine. However, if you don’t feel comfortable using this method, then there are other ways of obtaining an EIN on the website linked above.
You will fill out the form listing yourself as the “Responsible Party” with your US tax identification number to get an EIN. Fret not, the guidelines state that the “Responsible Party” can control the US entity without actually having to own the US entity—which is your case.
When you get an EIN for a single member LLC, the EIN system treats the “Responsible Party” as the sole member of the LLC. Don’t worry, this is solely for the EIN system and it has no bearing on other tax systems. The legal structure will stay in place and overrules the IRS’s online EIN tool.
After finishing the online tool, you will receive a confirmation letter. Hang on to this letter because you will have to show it to banks and potential customers in the future.
– Drafting an Operating Agreement for Your LLC –
Finally, you will have to compose an Operating Agreement. This document is simply a legal document that articulates how your LLC will operate. This document really lists that you are the manager of the LLC.
*You can find templates online. Click here to view one.
Step 3 – Opening Your LLC’s US Bank Account:
This stage can be very difficult, or very easy depending on your bank. Some banks allow you to open them online very quickly and not ask many questions about the structure of the LLC, whereas other ones are very thorough.
– Choosing the Bank for Your LLC –
When choosing the bank where you want your LLC’s bank account to be, then you should consider the following:
- You might want to start with a bank that you have a prior relationship with. If you have had an account with a bank for over a decade, then you should consider reaching out to them.
- If you are anxious to try a different bank, then you should consider the billion-dollar banks. The major banks in the United States largely offer the same services and compete for the same customers.
Many US banks will not open accounts online or remotely if there is a foreign owner listed on the LLC due to money laundering potential. At some point, it is very likely that you will have to appear in the United States to finalize the agreement. That’s something to consider, however, the next section of this article will focus more on how you might want to time your transition to living abroad.
You will need to provide:
- EIN Confirmation Letter
- Your Operation Agreement
- The Articles of Organization
- Personal documentation such as a passport, driver’s license…etc.
Timing Your Transition Abroad:
If you are already an expat, and you haven’t started a business yet, then you would want to follow these steps in the order that we have presented them:
- Step 1 – Form IBC
- Step 2 – Form LLC
- Step 3 – Open Bank Account for LLC
However, if you haven’t started your business yet, and you haven’t left the United States, then you face a more difficult scenario:
- Step 2 – Form the LLC (with yourself as the sole member)
- Step 3 – Open Bank Account for LLC (at this point you can do business in US)
- Step 1 – Form IBC (As you are preparing to move outside the US)
- Move Out of the US
- Contribute the interest of the LLC to the IBC
Lastly, let’s cover what to do if you’re an expat and you have already started your business:
- If you already have an LLC with a bank account, then you simply form an IBC and contribute the LLC to the IBC using a Contribution Agreement.
- If you are just doing business in your name, then you should form the LLC and the bank account, then form the IBC and contribute the LLC to the IBC using a Contribution Agreement.
HOW TO OPERATE YOUR EXPAT BUSINESS:
Your business is typically operated by the LLC, not the IBC. The IBC is just a holding company—which is the entity through which you own your LLC. You have the IBC so that you can get the US tax benefits (which we will cover more in depth in a later section). Then you operate the business to the best of your ability as the manager of the LLC.
That’s the most important thing to take away from this legal structure, is that when we talk about how the business is run, we’re talking about the LLC. However, when we mention the US tax benefits, we’re focusing on the IBC.
Operating Your Business Through An LLC:
– Operating through Your Business Bank Account for Your LLC –
To operate your business through an LLC, you need to make sure that you keep your work finances and your personal finances separate. Assets that you use in your business should be held by your LLC. Similarly, your personal assets should be held outside the LLC.
The most important asset to hold through your LLC is the bank account that conducts your business. That’s why we covered it in the previous section. This bank account holds the cash that is generated by your business, as well as the cash that you contribute to your business.
Business contracts typically will be done in the LLC’s name, not in the IBC’s name and especially not your personal name. Therefore, your LLC will become a party to the contract and your signing of the contract is done only as the manager of the LLC.
– Directing Your Cash Source at your LLC’s Business Bank Account –
Then direct all of the business’s cash flow to this bank account. For example, if you are selling wholesale products, then you would direct bank transfers, wire transfers, or checks to this account.
If you are operating on an online platform then would you hook up the payment system for the online platform to this US bank account, and if you need to set up your own payment processing system (such as Paypal), then you would connect that payment processor to your bank account.
– Rules for Operating Your Business Under Your Business Bank Account –
Here are some simple rules that you must follow to ensure that your business assets are owned by the LLC:
- Pay for business assets with your business bank account. The leaves a nice and legal paper trail which can be followed, whereby one of your LLC’s assets (cash) is converted to another of your LLC’s assets (whatever you purchased).
- If you have an asset where the owner’s name must be listed somewhere, then be sure to list the LLC as the owner (not yourself or the IBC). It really depends on the type of asset, but there may be an owner’s name required when purchasing one of your asset’s, or there may be a central registry and legal title involved for one of your assets. Just use your LLC’s title as the owner.
– Spending Money When You Have a Business Account and a Personal Account –
This isn’t as difficult as it sounds. Simply keep your financial lives separate:
- You just have to spend business money on business expenses (such as a subcontractor or a virtual assistant).
- Then spend personal money on your personal expenses (like going to a concert to hear your favorite rock band).
This way you will have two separate, clean account statements to offer the IRS if you should ever get audited.
– Your LLC Paying You a Salary –
Don’t forget that one of your business expenses is a personal salary to yourself. That is how you get personal funds in your personal bank account. These must be made by actual bank transfers from your business account to your personal account. You can’t just take out funds from the business account and call that your salary. You should plan on setting a standard salary for yourself, as you are an employee.
Making Sure Your Legal Tax Structure Is Not Engaging in a Business or Trade Inside the US:
Your legal tax structure is going to be engaging in a business or trade, we completely understand that this is the purpose of your business. However, we are more concerned about the logistics of when a business is legally considered as being engaged in a trade or business in the United States.
If you are engaged in business or trade in the United States, then your IBC would be subject to taxation by the United States on its business income—which defeats the purpose of having this legal structure in the first place. This is because a non-US “person” (such as your IBC) must pay taxes in the United States only when they are engaged in business or a trade in the US.
– The Laws Concerning Being Engaged in Business or a Trade in the US –
When tax laws are formed, it is often by multiple sources. First, Congress enacts laws that become part of the Internal Revenue Code. Then, Federal Government agencies that deal with tax laws may further refine the statutes with Treasury Regulations. Lastly, when a taxpayer and the IRS get into a dispute in court, the Judicial Branch ruling set a precedent and become part of Common Law.
Because this system is so complex, then there is a large room for misinformation available on the internet. Here is a breakdown of the tax laws concerning conducting business or a trade in the United States:
- The Internal Revenue Code simple states that when a non-US person is engaged in business or a trade in the US, then they must pay US taxes. However, it does not define what “business or a trade” means. That means, it is no help in deciding when you have crossed the line into owing the US taxes.
- The Treasure Regulations list off several activities that a non-US person can be engaged in without it actually constituting “business or a trade in the US”. However, they never really go into detail as to what does constitute “business or a trade in the US”.
- Because of this vagueness, the IRS has gotten into a multitude of disputes over the years as to whether or not a non-US person was engaged in “business or a trade in the US”. Therefore, there is a wealth of Common Law (or case law) on the topic. This case law is the only place where you can find out what constitutes “engaging in business or a trade in the US”. However, case law is notoriously fickle, depending on interpretation and circumstance to glean context as to which facts are important, and which prior cases set the best precedent.
Because of this uncertainty, then you might find a bunch of bad advice on the internet recommending that you never engage in any business in the US. Ever. Period. This would be a gross exaggeration.
– Non-Indicative Whether You Are Engaged in Business or a Trade in the US –
The following instances are just some of the many examples that have no bearing whatsoever on whether or not you are legally considered “engaging in business and a trade in the US”:
- Use a US company for web hosting services
- Having a US phone number or address on your website
- Getting paid in US dollars
- Having a US bank account
- Sell products to customers in the US
– How to Know If You Are Legally Engaged in Business or a Trade in the US –
Well, then? How do you know if you are engaged in business or a trade in the US?
You must fulfill two legal requirements to be officially engaged in business or a trade in the US: You must have US Employees or Dependent Agents in the US and these must be engaged in a substantial and regular activity which furthers your business.
We will cover both of these requirements in depth:
US Employees or Dependent Agents:
Without the great need to explain what an employee is, this is a person that you hire to work for your company under you—typically in a hierarchical command structure.
A Dependent Agent is a bit different. This term is really only used in tax structure analysis, and it was created to expand upon the definition of the word “employee”. A Dependent Agent is an independent contractor, such as a freelancer, who is dependent on your contract for his or her livelihood. In effect, though they are independent workers, they still get almost all their business from you.
If they have multiple contracts and you are only one of their contracts who provide for their livelihood and you are but one of these contracts, then this is not a Dependent Agent.
Substantial Business Activity in the US:
Furthermore, you are not “engaging in business or a trade in the US” for simply having an employee or a dependent agent in the US. To make it legally considered “engaging in business or a trade in the US”, this person has to be doing something substantial and crucial to furthering your business. For example, administrative work for you in the US, then this is not considered substantial and regular work for furthering your business.
– Examples –
1: Let’s say you have a drop-shipping company based around selling yoga mats online. You run the business alone. Therefore, you sell yoga mats on Amazon, many of which end up in the United States. You ship yoga mats to an Amazon warehouse, and Amazon sends the products to your customers.
Even though you are targeting customers in the US, that does not constitute the legal definition of “engaging in business or trade in the US”. This is because you have no employees or Dependent Agents in the US. The people who help you run your business are Amazon employees, not your employees. You are just a client of Amazon.
2: Let’s say that you have a travel blog. Within this travel blog, you are an insurance affiliate. Your travel website helps to sell travel insurance abroad. In addition, you also sell your own travel eBooks guides on how to travel throughout Southeast Asia. Therefore, you spend your time: creating content for your blog to gain traffic for your blog, finding new and better affiliates, creating newer eBooks and updating old ones, and boosting social media campaigns to spur organic traffic to your website. That is a typical location-independent business that works for this legal structure.
However, you like to outsource almost every job possible to another person so that you can really enjoy your time traveling throughout Southeast Asia—taking in the sights, flavors, and cultures in each new adventure.
You want to hire 3 people based in the US:
- The first person you want to hire is a Virtual Assistant based in the US. Your VA will manage your emails, find information such as contact details for people related to travel industries, and your VA will handle your scheduling affairs.
This does not constitute “engaging in business and a trade in the US”. This is because the VA only performs cursory administrative and ministerial duties that are not crucial to furthering the business. It would seem odd to say that the business is now conducted in the US because there’s an administrative assistant checking emails and scheduling meetings in the US. Though the VA is an employee in the US, the VA is not engaged in substantial and crucial work for furthering the business.
- The second person you want to hire is the Head of Sales Department. This person would be in charge of marketing the eBooks and finding new affiliates for the travel blog. You won’t even be involved in these activities anymore, your new Head of Sales will take charge of everything as an employee of your business.
Because sales are the lifeblood of any business, then moving your sales department to the US does constitute “engaging in business or a trade in the US”. This would be a scenario that you would want to avoid or else your IBC would be subject to US taxes.
- For your third consideration, instead of a Head of Sales Department employee, you now want to outsource your sales to an independent company that specializes in sales. This US-based company manages the sales for many different clients, and you are merely one of their many clients. You pay the company a fee per sale or a commission for percentage. Thus, the person working with you would be an employee of the outsourced company, not your employee.
Because you are solely using the services of a US-based company does not mean that you are “engaging in business or a trade in the US”.
Because you are an employee of your LLC under your IBC, then if you travel to the US and you engage in business in the US, then you will be the person that “engages in business or a trade in the US”. When you are in the US, you can only use the time as vacation time.
US TAX CONSEQUENCES OF EARNING INCOME:
When evaluating the US tax consequences of earning income, we must remember that in this legal tax structure, there are three persons involved. One is a natural person: you. The other two are legal persons: the LLC and the IBC.
Each one of these “persons” must be evaluated for whether or not they are a separate person for US tax purposes, and then whether or not that “person” is subject to US tax.
– Single Member LLC –
A single member LLC is not considered as a separate entity from the single member for US tax purposes. This is known as a “disregarded entity” or a “tax nothing entity”. It’s only an entity that exists under the laws of the state in which you filed your LLC. Instead, the income and assets of the LLC are treated for tax purposes as income and assets of the IBC.
Because the Single Member LLC is not even considered a person in the US for tax purposes, then it is not subject to US tax.
– Non-US Based IBC –
The IBC is a corporation for US tax purposes. You don’t have to do anything to have your IBC treated as a corporation, this is simply the default setting. You want your IBC to be treated as a corporation. However, because it is a corporation, then it is considered a separate entity for US tax purposes—even though you own 100% of the IBC.
As long as your IBC is not “engaging in business or a trade in the US”, then your IBC is not subject to US tax on income from its business.
– You –
As a human being, you are considered a separate entity for US tax purposes.
As a human being, you are subject to US tax, even if you qualify for the foreign income exclusion and you live outside the United States.
*Therefore, when we are discussing the US taxes on income from your business, we will only be talking about the IBC and you, not about the LLC—even though your LLC runs the business. And the IBC is not subject to US tax as long as it is not “engaging in business or a trade in the US”.
US Tax Consequences of Earning Business Income:
When you are thinking about the taxation on business income, there are two roles that you play in the IBC. The first is that, as a worker, you must consider yourself an employee of the IBC. In this role, you are no different than any other employee in any business. You are compensated for your work.
However, you also have a second role to be considered for US tax consequences: the sole shareholder of the IBC. In that role, you don’t work for the corporation. You simply put in money as an investor, then hire some employees (one of them being yourself), and then you hope that your investment has a healthy return. These returns are called “dividends”.
*Prior to the 2017 Tax Reform Bill, you could pay yourself under $100,000 USD and then the rest of the money could be held by the IBC under what is called a “Deferral”. Then you would have paid $0 US until that extra money came out of the IBC as a dividend. This is no longer the case.
Now, instead of a Deferral, there is something called “Global Intangible Low-Taxed Income” (GILTI)—which is defined as all income over a 10% return on the depreciable asset base. Depreciable assets are generally things like equipment that help run your business. However, for the type of work done by most digital nomads, the depreciable asset base is $0—meaning that all the income of the IBC is GILTI.
When an IBC earns GILTI, then it must also be included in your income each year. This is defined as your net earnings, of course subtracting your compensation. So, if your compensation (or your salary) is $100,000 USD, and your IBC earned $350,000 USD of net income, then you pay absolutely nothing on the $100,000 USD (or less) that you are paying yourself. However, you would have to pay US taxes on the extra $250,000 USD that is in excess of your compensation. Still, the IBC is the only way to get the first $100,000 USD of your business completely tax-free.
To qualify for that free $100,000 USD, it is very important that you as an employee be treated as any other employee in the IBC. This $100,000 must be solely for compensation to you for your work. This compensation must be transferred from the business bank account under the IBC (the LLC’s bank account) to the personal bank account in your name.
Furthermore, your IBC should pay you a regular salary. It should be something like a monthly or biweekly salary if possible, but it should be regular just like any other employee in your company. Then at the end of the quarter or the year, the IBC can pay you a performance bonus based on the growth of the company. Make sure that the compensation that you receive is roughly equal to the work that you actually provide for the IBC.
*If a Non-US Shareholder owns at least 50% of your IBC, then GILTI rules do not apply. You would have to pay taxes on the dividends and any salary above the $100,000 USD foreign earned income exclusion, but you would not have to pay taxes on any GILTI if you defer the IBC income by leaving it under the IBC.
*A Non-US Person is a person who is not a US citizen, a person who lives in the US, or a person with a US green card.
*Be sure that the Non-US person is an actual business partner or a spouse, but do not just find some random person. That is highly discouraged.
Another option for lowering the amount of taxes that you have to pay is to have your IBC owned by a US C Corporation. This would reduce your payment to 10.5% tax on all net income over your salary. Then you would pay an additional 15% tax on dividends from the US C Corporation when that money is paid out to you. However, this model only makes sense if you are making about $350,000 USD a year.
US Tax Consequences of Investment Income:
Though the 2017 Tax Reform Bill did not change the laws for how investment income will be taxed, the changed that were made do have some implications that ought to be discussed.
As mentioned above, before the tax reform, you could defer money by leaving it under the IBC. This would naturally lead to accumulating vast amounts of wealth under your IBC over time. These earnings could then be invested in some other venture to enable a return.
Since the 2017 Tax Reform Bill, there is no incentive to keep your earnings under your IBC. You will have to pay taxes on those earnings whether or not they come out as dividends to you (as long as the income qualifies as GILTI). Once those earnings are paid out by the IBC, there’s no additional tax.
Therefore, you can simply have your IBC pay out all the earnings to you, and then, if you wish, you can invest those funds or keep them, for example, in a tax-deferred retirement fund. On the other hand, when you do make an investment, it no longer has to be through the IBC. It is far simpler to take the funds out as dividends, pay the taxes on it, and invest them as you see fit.
If you do make investments in your IBC, then any passive income from those investments will simply be added to your tax return in the year that the IBC earned the income. This type of income is called Subpart F income, which includes:
In the end, there is no tax advantage to making investments which generate passive income through the IBC.
*If you have a Non-US Person who owns 50% of your IBC, then you can still keep earnings in the IBC and not pay taxes on the GILTI generated by the business. Furthermore, you can invest those earnings and not have to pay taxes on the Subpart F income that is generated from those investments. You would only pay taxes when you receive a dividend from the IBC.
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