Asset Protection BLOG - Mark Nestmann

Welcome to Panama!

Greetings from the Sheraton Hotel and Convention Center in Panama City. I'm here with The Sovereign Society to speak at the 20th Annual Total Wealth Symposium.

My room is directly across the street from a construction zone.  I awoke this morning at 6am to the sound of jackhammers and trucks rumbling outside my window.

In fact, everywhere you look in Panama City, you see cranes, construction, and new development.  My question is, who is going to buy the thousands of new condominiums, apartments and houses that will come on the market in the next year or two. 

It won't be Panamanians...the average Panamanian earns less than US$5,000 annually, according to the World Bank.  That means the vast majority of the new construction must be sold to expatriate investors...Americans, Chinese, European, and the other nationalities now flooding Panama with their investments.

In the past five years, Panamanian real estate prices have climbed more than 200%.  When I first visited Panama in 2000, you could purchase a nice two-bedroom condo with a view of the ocean for $60,000.  Today, you can't touch a simliar unit for much under $200,000, and often much more.

Can the boom be sustained? I'm skeptical, but I'll be spending a day this week with a well-connected local real estate agent to look at some developments both inside Panama City and in the nearby suburbs. 

One thing is for sure.  If the flow of expats into Panama slows down, the thousands of new housing coming on line in the next few years simply won't be sold at current levels.  That means Panama could potentially experience the kind of real estate slowdown now being experienced in the United States.

Time will tell...

Copyright© 2008 by Mark Nestmann

Bermuda's Squeaky-Clean Image Smeared in Scandals

Bermuda, perhaps more than any other offshore center, has for decades sought to create for itself a reputation as a "respectable" offshore financial center. 

Unlike many competing jurisdictions, Bermuda never enacted a bank secrecy law.  It eschewed the idea of "asset protection trusts," basing its trust legislation on the time-tested provisions of English law, rather than the debtor-friendly legislation of offshore centers like the Cook Islands.  Professional and government fees for offshore services and structures were and continue to be significantly higher than most other jurisdictions. 

Bermuda also remained a British overseas territory, rather than opting for independence.   This provided assurance that British regulators, at least in theory, were overseeing Bermuda's offshore financial industry.

If it were only true.  Events in the last year have exposed corruption and money laundering on an immense scale.  Last month, the head of Britain's Committee of Public Accounts, Edward Leigh, called Bermuda's record "appalling." 

It's not hard to see why:

• In April 2007, authorities in the British Virgin Islands brought criminal charges against IPOC International Growth Fund, Ltd., a Bermuda-registered mutual fund.  The BVI accused IPOC of laundering money for a powerful Russian politician through the Bermuda Commercial Bank, one of Bermuda's largest and most respected banks. 
• In December 2007, the U.S. Securities and Exchange Commission brought securities fraud charges against Lines Overseas Management, headquartered in Bermuda.  LOM stands accused of receiving at least US$5.8 million from two stock manipulation schemes. 
• In August 2007, a local Bermuda newspaper reported that the prime minister, while serving in another ministry, obtained US$150,000 of publicly funded renovation on his home.  In connection with an alleged press leak, police arrested and detained the island's Auditor-General, whose responsibility is to oversee the government's financial affairs.

As a U.K overseas territory, Bermuda is subject to the dictates of the U.K. Parliament and the U.K. Foreign Office.  However, the U.K. authorities have generally not interfered in its offshore sector, as they have historically considered Bermuda to be a well-regulated jurisdiction.  For instance, while most other U.K. overseas territories are subject to the EU Savings Tax Directive, it wasn't extended to Bermuda.

That may now be changing, thanks to the ongoing series of scandals now rocking Bermuda.  I predict a much heavier regulatory hand being extended from the United Kingdom to Bermuda. 

However, there's little doubt that Bermuda's ueber-successful captive insurance, investment fund, and trust management sectors will continue to thrive.  Bermuda's financial infrastructure is also well developed, including numerous international law and accounting firms.

So, don't count Bermuda out of the offshore arena.  But the bloom is definitely off the rose.

Copyright © 2008 by Mark Nestmann

What Happens if Your Offshore Bank Goes Belly-Up?

The sub-prime catastrophe has spread far beyond the United States.  It's hardly beyond the realm of plausibility that offshore banks could be affected. 

That concern came into particularly sharp focus last week, when Switzerland's largest bank, UBS AG, said it expected to write off a staggering US$40 billion in sub-prime losses.

So far, financial regulators have succeeded in preventing a widespread banking panic.  The closest we've come to that nightmare scenario is in the United Kingdom, where the government nationalized Northern Rock Bank after a run on the bank by depositors last September.  Not to mention last month's mysterious acquisition by JP Morgan-Chase of BearStearns.

It remains to be seen whether regulators can continue to sweep multi-billion-dollar problems in financial portfolios under the rug through expanded borrowings, selective capital injections, or further nationalizations.  But if you have substantial assets in any bank—offshore or onshore—you don't want to wait for the regulators to act.  You should take action now to assess the safety of the assets held in your accounts.

The assets in your account at any bank are either on or off the bank's balance sheet.  If they are on the balance sheet, and the bank becomes insolvent, those assets are at risk.  Your funds may or may not be protected by a national deposit insurance scheme.  If they're not, you're simply another unsecured creditor of the bank.   

Assets that are on the bank's balance sheet include checking accounts, savings accounts, money market accounts the bank operates, "unallocated" holdings of precious metals, and (at some banks) CDs.  The basic operating account for a bank (called a current account, giro account, or other names) is also on the balance sheet.  At offshore private banks, this operating account is the springboard for all other investments.

When you purchase securities—stocks, bonds, mutual funds, etc.—through your offshore account, the bank establishes a "safe custody" account for these investments.  Those assets are off the bank's balance sheet.  Precious metals the bank holds for you in "allocated" storage are also off its balance sheet. 

Naturally, investments in safe custody are subject to market risk, but they won't be affected if the bank becomes insolvent.  However, if your offshore bank goes belly up, it will likely be part of a larger economic catastrophe that would decrease the value of any securities portfolio.  Also, there may be a period of time where the securities an insolvent bank holds in safe custody can't be traded.

I'll be discussing additional ways to protect yourself from catastrophic losses in your bank accounts, both domestic and offshore, in an upcoming issue of The Sovereign Individual, the members-only newsletter for The Sovereign Society.

Copyright © 2008 by Mark Nestmann

Swimming with the Sharks

How do you know whether the offshore provider you're dealing with is honest?  What assurance do you have that he simply won't take your money and run?

The only way you can find out the answer is to conduct a little "due diligence."  And that's what the upcoming 6th Annual Offshore Alert Financial Due Diligence Conference is all about. 

Hosted by Offshore Alert publisher David Marchant, this conference will take place on April 13-15, 2008 at the Fort Lauderdale Grande Hotel & Yacht Club in Fort Lauderdale, Florida, USA.  With the theme "The Unexpurgated Offshore," the conference for the first time will focus on offshore financial centers.

My friend and colleague Burke Files, founder and president of Financial Examinations & Evaluations, Inc., will be one of the featured speakers.  If you attend this conference, be sure to have a word with him.  In his 20-plus years dealing in the offshore world, he has some amazing stories.

General sessions include a keynote debate between pro-offshore and anti-offshore parties about the role OFCs play in the global economy, while another debate will ponder the statement: "My Way or the Highway: The United States is Regulating Itself into Economic Decline."

Other general sessions will inform attendees "How to Utilize Offshore Financial Centers WITHOUT Breaking the Law" and go into "Steps OFCs Must Take to Thrive in the Modern Era."

To learn more about this conference, please click here.

Copyright © 2008 by Mark Nestmann

How U.S. Taxpayers Can Safely Purchase Offshore Funds

If you're a citizen or resident of the United States, it's a challenge to purchase many of the tens of thousands of offshore mutual funds traded worldwide—at least not without highly unfavorable tax consequences. 

This is a consequence of the "passive foreign investment company" (PFIC) provisions of the U.S. Tax Code, which I described in my most recent blog entry.

Fortunately, several "safe harbors" exist on which you can rely on to avoid the PFIC rules.

For many U.S. investors, the most practical way to purchase offshore funds is to rely on the Treasury's "mark-to-market" rules to calculate your gains (or losses) in offshore funds.  Under these rules, U.S. investors pay tax at ordinary income tax rates on income or gain from the fund each year. 

Unfortunately,these rules apply only to publicly traded offshore funds listed on a "qualifying" securities exchange.  A long list of additional requirements must be met for these rules to apply, and no official list of approved countries or exchanges exists.  However, many offshore funds traded on major securities exchanges appear to qualify.   

Again, the mark-to-market rules apply only to publicly traded offshore funds.  If you want to purchase offshore funds that aren't publicly traded, without unfavorable tax consequences, there are only three practical alternatives for doing so:

1. Purchase the offshore through your IRA or other type of pension plan. Income or gain within a tax-deferred retirement plan isn't taxed until it's paid out.  When you receive it, it's taxed as ordinary income.  There's no provision in the U.S. Tax Code for income or gain from offshore funds to be taxed any differently.  This offers a convenient and relatively simple way to avoid the PFIC rules. 

2. Purchase offshore funds through an offshore variable annuity. Under U.S. tax law, a variable annuity serves as a tax-deferred "wrapper" for an underlying investment account.  Income or gain in the account isn't taxed until it's actually distributed to the beneficiary.  Again, there's nothing in the Tax Code subjecting offshore funds held within a variable annuity to a different standard.   As with any other investment wrapped in a tax-qualified variable annuity, income or gains from offshore funds is tax-deferred until you receive it, without the PFIC interest charges. 

You should be prepared to invest at least US$100,000 in a variable annuity to make this strategy worthwhile.  Some offshore insurance companies may be willing to issue an annuity for a smaller investment.  Due to state and federal insurance licensing and securities laws, you may need to travel to the country where the annuity contract is issued to put it into force.

3. Purchase offshore funds through a variable offshore life insurance policy.  A life insurance policy provides the advantages of a variable annuity and more: the death benefit received by beneficiaries is not subject to income tax.  The policy can be structured to make the death benefit free of estate and generation-skipping taxes as well. 

This is a more complex strategy that requires substantial customization according to your individual requirements.  For that reason, you should expect to invest a minimum of US$500,000 to make it worthwhile.  Some offshore insurance companies may have lower minimums.  Again, you may need to sign the insurance contract in the country where it's put into force.

WARNING: For a foreign variable annuity or life insurance contract to be "qualified" for U.S. tax purposes, stringent IRS requirements must be followed.  You as the U.S. policyholder may not make investment decisions, although you can make a non-binding request to appoint a particular investment advisor or follow a particular investment strategy.  Consult with a qualified international tax advisor to confirm that any policy offered by an offshore insurance company is U.S. tax compliant.

If you're interested in implementing one or more of these strategies, please contact The Nestmann Group at info@nestmann.com for more information.  We can assist U.S. persons in setting up tax-compliant offshore structures to purchase offshore funds and other international investments. 

Copyright © 2008 by Mark Nestmann

U.S. Taxpayers: Beware Holding Offshore Funds in an Offshore Trust

One of the most unfair and insidious parts of the U.S. Tax Code is Section 1291-1297, which deals with the taxation of offshore mutual funds.

Naturally, the Treasury doesn't call offshore funds "offshore funds."  That would be too simple.  Instead, it calls them "passive foreign investment companies" (PFICs).

For purchases of U.S. mutual funds, the IRS receives a report of income or gain on Form 1099.  Since offshore funds don't file Form 1099, the IRS requires investors to determine their share of the income and pay tax on it. 

That's often impossible for an investor to do.  And if you can't make the necessary calculations, using IRS-approved methods, the IRS imposes punitive taxes and interest payments on whatever taxes you defer.  The details of the calculations are complex, but the result is that for offshore funds held for many years, the tax and interest due can easily exceed the total gain.  However, the law provides that the tax and interest charge shall not exceed the amount of the distribution.  (Gee, thanks IRS!)

Some U.S. investors have tried to avoid these rules by purchasing offshore funds through an offshore trust.  I recommend to my clients that they NOT do so, unless they receive enough information from the fund to use the IRS-approved methods to calculate their gains. 

This recommendation stems from the fact that under the U.S. grantor trust rules (I.R.C. 691-697), income or gain received by a foreign trust is treated as if was received by the grantor (the person who funded the trust).  Since most offshore trusts funded by U.S. persons are taxed as grantor trusts, most of the time, they shouldn't own offshore funds.

Now, the IRS has published an even more extreme interpretation of the PFIC rules.  In a recently released Technical Advice Memorandum (TAM #200733024), it declared that U.S. beneficiaries of a foreign trust are subject to the PFIC rules as well, even when non-U.S. persons established and funded the trust. 

In this case, the foreign trust, established in 1981, five years before the PFIC rules came into effect, owned a foreign corporation (holding company).  The holding company in turn owned the stock of some other foreign corporations. 

The IRS held that the holding company was a PFIC.  When it was liquidated and its assets transferred to the foreign trust, the IRS ruled that it was a taxable event under the PFIC "excess distribution" rules.  This subjected the U.S. beneficiaries not only to tax on the excess distribution, but to interest charges going back 12 years. 

This result doesn't seem to be fair—or in accordance with the rules for this type of trust (called a foreign non-grantor trust).  The beneficiaries may well appeal the ruling.  But it illustrates the extreme dangers of holding offshore funds in an offshore trust without a thorough analysis of the possible tax consequences. 

In my next blog entry, I'll describe a few ways U.S. taxpayers can purchase offshore funds, without worrying about the PFIC rules.

(Thanks to CPA Vern Jacobs for bringing this Technical Advice Memorandum to my attention in the International Wealth Protection Monitor. Link: http://www.offshorepress.com.)

Copyright © 2008 by Mark Nestmann

Offshore Annuities and Life Insurance: Four Key Advantages

Variable annuities and life insurance have a reputation as pretty boring investments.  Yet, they're some of the most flexible contracts available to achieve tax deferral, asset protection, and a degree of financial privacy.  That's especially true if you purchase an OFFSHORE life insurance policy or variable annuity.

Almost every state protects the death benefit of a life insurance policy or payments from an annuity from creditors.  However, the cash value of a life insurance policy may or may not be exempt.  And for distributions from an annuity to be protected, they must be payable to someone other than the contract owner; e.g., your spouse or partner.  Even if a creditor can't get at the money you have in an annuity during the deferral period, it may be able to attach the payments, once they begin. 

State-law protections may not extend to alimony or child support, criminal fines, punitive damages, or federal tax claims, among other possible exemptions. 

A key advantage of purchasing an offshore variable annuity or life insurance contract is that foreign law governs the contract.  By selecting the appropriate jurisdiction, you can achieve a much higher degree of asset protection.  Indeed, in a suitable jurisdiction such as Switzerland, Liechtenstein, or Nevis, an offshore variable annuity or life insurance contract can offer asset protection comparable to that of an offshore trust. 

Offshore variable annuities and life insurance contracts provide numerous other advantages:

• Significantly increased privacy in comparison to domestic annuities;
• Tax-deferred access to offshore securities markets, including hedge funds and other offshore funds;
• Avoidance of possible foreign exchange controls; and
• Tax planning for U.S. citizens or long-term residents considering expatriation.

Numerous offshore commercial insurance companies offer variable annuities and life insurance policies to U.S. clients.  However, if you have a significant amount of wealth to protect, you can create your own private offshore variable annuity and life insurance company.  One way to accomplish this is through a structure called an "International Deferred Private Variable Annuity" (IDPVA). 

Your IPDVA is custom tailored to your needs.  It can stand alone to accumulate tax-deferred income, and provide asset protection and financial privacy for years to come.  It can also capitalize an insurance company that, properly configured, can insure that the assets in the structure pass to your beneficiaries free of estate tax. 

There are many other possibilities.  An IDPVA can also serve as the centerpiece of a tax-deferred international structure.  For instance, it can purchase your domestic or foreign business.  The result: once properly structured, formerly taxable assets grow tax-deferred, for years, if not decades.

Your IDPVA can also capitalize an offshore intellectual property and critical information (IPCI) company.  The IPCI company purchases intellectual property and licenses it back out.  This structure can handle international licenses for copyrights, trademarks, patents, public appearances, etc.  This is a cost-effective solution for licensing intellectual property abroad and deferring tax on the income.

An IDPVA can be cost effective if you have US$250,000 or more to protect.  Costs start around US$50,000, including all supporting structures, agreements, and contracts.  Operating costs are 1%-3% of the funds under management annually, including compliance with IRS reporting requirements, structure fees, and investment management fees.

Private annuity and in particular IDPVA arrangements must in all cases be custom-tailored under the supervision of a qualified tax attorney.  Contact The Nestmann Group, Ltd. at info@nestmann.com for more information.

Note: The term "International Deferred Private Variable Annuity" and abbreviation "IDPVA" are registered trademarks.

Copyright © 2008 by Mark Nestmann

Hope You Had an Offshore Account for Monday's Market Meltdown

Monday, Jan. 21, 2008, was a bloody one for global equity markets.  Yet, since most U.S. securities markets were closed for the Martin Luther King holiday, Americans were trapped in their securities positions.  Except, of course, for those with offshore bank accounts in place. 

If you had an offshore account, when you awoke yesterday morning to see the carnage in Asia and Europe, you could have taken immediate steps to protect yourself.  For instance, you could have contacted your offshore banker and left instructions to "short" selected U.S. stocks or index futures.  If you purchased foreign securities on U.S. exchanges (e.g., American Depository Receipts or ADRs), your positions were frozen until this morning.  But if you purchased those same securities on their home exchange, you could have sold them on Monday.  And, I might add, at a much higher price than you might receive today!

Of course, a holiday isn't the only possible scenario that could lead to the closure of U.S. exchanges.  After the attacks of Sept. 11, 2001, U.S. securities markets closed for four days.  During this time, investors with only U.S. bank or brokerage accounts had no way to trade securities.  But investors with foreign accounts could trade foreign securities on foreign exchanges without interruption.

A future attack on the financial infrastructure in the United States or another major country could lead to a longer suspension of trading.  There are historical precedents: in 1914, U.S. securities markets were shut down for four months!

The prudent strategy is to maintain a "nest egg" outside your country of residence in an offshore asset haven that is politically neutral, and thus a less likely target for terrorist attacks.

What country is best for your offshore account?  There are many to choose from, but one of my favorites is Austria, where I lived from 2003-2005.  Based on my experiences there, I've written an "insider" financial guide to Austria, entitled Austrian Money Secrets.  For more information, click here. 

Copyright © 2008 by Mark Nestmann

Nightmare on the Costa del Sol

In the last three years, an enormous scandal has slowly developed in Spain.  It's now led to the forced demolition, without compensation, of a home purchased by foreign retirees.  And evidently, there's much more to come. 

Spain is very popular with expats, especially from the United Kingdom.  More than 800,000 U.K. expats now live in Spain.  Naturally, this influx of Brits led to a property boom in the areas in which the settled—especially in the Costa del Sol region, on the southern coast of Spain. 

Some developers purchased vacant land in areas of the the Costa del Sol (and elsewhere in Spain) not zoned for development.  The developers paid enormous bribes to government officials to issue building permits for these properties.  This greatly increased the value of the properties.  Once the condos, townhomes, or villas were completed, expats purchased them, in many cases spending hundreds of thousands of euros. 

Marbella, on the south Spanish coast in the province of Andalusia, was a prime target of such schemes.  Both the mayor and deputy mayor have been arrested on charges of bribery, corruption, and receiving compensation for illegal building licenses. 

But the officials involved in the corruption aren't the only ones suffering.  Spanish authorities have vowed to demolish illegally constructed dwellings, especially those built in "green" spaces reserved for beach access or parks.

While there are at least 30,000 properties potentially at risk, only one building has apparently been demolished so far.  On Jan. 2, 2008, bulldozers arrived at an Andalusian villa owned by British retirees Len and Helen Prior.  They had lived there peacefully for five years, and paid £350,000 to purchase it. 

The Priors won't receive compensation for the demolition.  Under Spanish law, they may actually be required to pay for the cost of the demolition.  They could even be subject to the criminal sanctions of the Spanish Penal Code (Article 319), which stipulates a prison term of six months to three years for building on land not officially designated for building. 

When you purchase real estate in a foreign country, you should assume that everything you know about real estate in your home country is wrong.  The property may not be zoned for residential construction, as the seller claims.  It may be legal for someone to simply move in when you're not around, and then file a claim for legal ownership.  You may also discover that you only have a right to live in the property you thought you owned.  Someone else may actually own the building, and the land it sits on.  Nor is it rare for shysters to sell you property they don't even own.  Years later, the legitimate owner may file a lawsuit to reclaim the property "stolen" from him. 

How could the Priors—or anyone else facing this nightmare—have avoided it? 

Before you purchase any property outside your home country, obtain independent advice from a licensed attorney in that country experienced in real estate law.  That attorney should thoroughly investigate the property: whether the seller actually has title to it, if it's in an area where squatters may legally take possession of it, and that the property is legally qualified for its intended use.

Like everything else offshore, when it comes to buying offshore real estate, it's caveat emptor.  Let's be careful out there!

Copyright © 2008 by Mark Nestmann

Revised U.S.-Canada Treaty Eliminates Tax Booby Traps—and Opportunities

Thanks to those intrepid treaty negotiators at the U.S. Treasury Department, there's now a bright, shiny, new "Protocol" in effect between the United States and Canada.

The good news about this Protocol—an amendment to the U.S.-Canada tax treaty—is it eliminates some sneaky tax traps that made it tricky for Americans to invest in Canada using "pass-through" entities such as limited liability companies.  (In a pass-through entity, the entity itself isn't taxed—only its owners).

Essentially, the Protocol makes it easier for a U.S investor in a Canadian business to obtain both limited liability AND to qualify for a substantial reduction of the 25% withholding tax on interest, dividends, and royalties received from a Canadian source.

It does so by stipulating that a U.S. resident (an individual, partnership, corporation, etc.) earning Canadian income through a pass-through entity (such as a limited liability company) is entitled to a reduction in withholding tax.  The "treaty rate" ranges from 0%-15%, and whatever tax is withheld can be applied against the U.S. tax liability of the U.S. resident.  For this favorable situation to apply, the income derived through the entity must be taxed the same way by the IRS as it would have had the income been earned directly by the U.S. resident.

The situation is especially favorable with respect to interest payments.  Canadian withholding tax on such payments in certain circumstances can now be reduced to zero. 

The bad news is that this treaty severely restricts what was once a great tax-savings strategy: the ability of U.S. resident shareholders of a Canadian unlimited liability company to be treated as a disregarded entity for U.S. tax purposes.  This status provided numerous opportunities for cross-border tax planning.  For instance, it permitted businesses investing in Canada the opportunity to consolidate losses from a U.S. federal tax standpoint.  It also maximized the availability of the U.S. foreign tax credit.  Fortunately, the new rules on such "hybrid entities" don't come into effect until Jan. 10, 2010, at the earliest.

There are a multitude of additional provisions in the Protocol, and it becomes effective over time, not right away.  Nonetheless, it's definitely a step toward normalizing bilateral tax relations between the United States and Canada.

Copyright © 2007 by Mark Nestmann

The "Good Guys" at the IRS

Today, I'm going to say something nice about the IRS.  Really!

Thousands of Americans have tax reporting obligations they don't know about for various offshore transactions.  Among the most common of these are unreported interests in particular, foreign corporations.

Forming a foreign corporation is one of those things that, at first glance, would appear not to raise an IRS reporting obligation.

After all, simply buying shares in a foreign corporation doesn't generally create such an obligation.  For instance, if you buy shares of Bayer on the Frankfurt exchange, your only reporting obligation is to let the IRS know when you receive a dividend, or sell the shares for a capital gain.  (However, if you purchase the shares through a foreign bank account, you must report the existence of the account.) 

Logically speaking, wouldn't the same treatment apply to shares of your own foreign corporation?  The answer, unfortunately, is in many cases "no." 

In virtually all cases in which Americans form a foreign corporation to hold assets that generate passive income, they become entangled in the "controlled foreign corporation" or "CFC" rules.

These extremely complex regulations exist to prevent U.S.-based multi-national corporations from diverting profits into foreign subsidiaries, where they can be tax deferred indefinitely. 

If U.S. shareholders own 50% or more of the shares in a foreign corporation (e.g., an international business company or IBC), by vote or value, the foreign corporation is a CFC.  U.S. shareholders are defined as U.S. natural persons, partnerships, corporations, trusts, and estates that own, respectively, 10% or greater interests in the foreign corporation. 

Anyone defined as a U.S. shareholder in a CFC is required to file an extremely complex information return each year with the IRS—Form 5471. 

What's more, if the CFC holds passive assets, the income generated is currently taxable to the U.S. shareholder.  The income need not be distributed as a dividend to be taxable.

Problem is, the offshore companies that form foreign corporations for Americans know little or nothing about U.S. reporting obligations.  Many of them simply tell their U.S. clients what seems obvious—that no reporting obligation exists until the client sells the shares or the corporation issues a dividend. 

Bad advice.  A U.S. shareholder who fails to file Form 5471 when required is subject to a US$10,000 civil penalty.  Harsher penalties, including possible imprisonment, may also apply in aggravated circumstances. 

This situation may also apply to wealthy immigrants who own a foreign business "back home."  They go to a U.S. tax advisor who knows nothing about international tax law.  The advisor tells them that since the foreign business files taxes "back home," it has no U.S. tax obligations. 

Again, bad advice.  While it's true that the company itself may have no U.S. tax obligations, it's now-U.S. shareholders may well need to file Form 5471. 

And here's where the IRS has played "Mr. Nice Guy."  Well, at least a little.

I recently received correspondence from a CPA specializing in international tax compliance who says he files more than 30 delinquent Form 5471s each year.  And not one of these clients has ever been subjected to the US$10,000 civil penalty. 

There are no guarantees, of course.  But especially if the foreign corporation didn't generate any income taxable to its U.S. shareholders, it seems the IRS generally won't impose a penalty. 

If you're a U.S. shareholder in a foreign corporation with delinquent reporting obligations, this is very good news indeed.  You should still obtain professional tax advice before you file the delinquent returns.  But absent aggravating circumstances, the IRS probably won't fine you for this lapse.

Thanks, IRS.

On December 7, 2007, I'll be attending a CFC "boot camp" in Las Vegas designed to shed some clarity on these complex rules.  It's intended to provide a non-technical briefing on CFCs, along with creative ways to avoid CFC tax traps, and will be taught by leading experts in the field of international tax. 

For more information on this event, click here.  Hope to see you there!

Copyright © 2007 by Mark Nestmann, LL.M.

Antigua: Confiscation of Foreign Property is Official Policy

It’s now official.  The government of Antigua and Barbuda has what it considers “official” permission to confiscate a US$60 million resort.

The Half Moon Bay Resort sits on one of the most beautiful beaches in the Caribbean.  It’s justifiably famous for its pink sand.  A consortium of U.S., Canadian, and British investors, owns, or used to own, the resort.

Over the past 35 years, their company, H.M.B. Holdings Ltd., invested millions of dollars in the resort.  However, the Antiguan government has long coveted the property.  And in 2005, the Attorney General secretly transferred title from H.M.B. Holdings to the government.

The Attorney General called this action “expropriation,” not “confiscation.”  However, owners of expropriated property receive some form of compensation.  But the Antiguan government offered no compensation to H.M.B. Holdings.

H.M.B. Holdings unsuccessfully contested the seizure in the local courts.  Eventually, the company lodged an appeal before the Privy Council in London, Antigua’s highest court. In June 2007, the Privy Council declared the expropriation legal, but only if the government paid fair and adequate compensation.

The Antiguan government now claims that this decision provides judicial sanction for its actions.  Yet, it has never offered to purchase the property.  Nor has it offered H.M.B. Holdings a single dollar in compensation.

The confiscation of the resort is only one initiative to discourage foreign ownership of real property in Antigua.  Foreign investors in Antiguan real estate must obtain government permission—a license—to purchase it.  Foreign shareholders of companies owning land there must obtain individual land-holding licenses. 

Investors foolish enough to develop property must also obtain approval from the newly established Antigua and Barbuda Investment Authority.  This agency is empowered to dispense waivers and concessions to encourage politically favored developers.

The Half Moon Bay Resort debacle is only the latest chapter in Antigua’s sordid treatment of foreign investors.  In 2001, the government tried to seize US$76 million in assets recovered from the liquidation of Eurofed Bank, Ltd.  This was despite the fact that the vast majority of these assets belonged to legitimate depositors.

At the time, one Eurofed depositor asked, “What sort of message does this send out to foreigners who are doing business or contemplating doing business with Antigua's offshore sector?"

The message is quite clear.  The Antiguan government, and its representatives, are the new Pirates of the Caribbean. Invest or do business there at your peril.

Copyright © 2007 by Mark Nestmann

How Safe is Your Offshore Cash Stash?

One of the most interesting offshore opportunities isn't an investment.  It's merely keeping valuables—or valuable records—in an offshore safety deposit box or private vault.

This strategy has several advantages.  The most important one is that the valuables are outside your domestic jurisdiction.  If someone has a judgment against you, the assets are effectively out-of-reach. 

For Americans, another advantage is that these assets aren't reportable as a "foreign bank, securities, or 'other' financial account."  That means you don't need to tell the IRS or U.S. Treasury about them.  However, if you have a bank account at the offshore bank where you have the safety deposit box, that account—although not the box—is reportable.

Without mandatory IRS or Treasury reporting, your valuables are essentially invisible.  They won't show up in a domestic asset search.  And an investigator will have a very tough time trying to find them offshore.  With a large enough budget, he might eventually find the foreign bank or vault where you've stashed your valuables.  But even then, he won't be able to find out what you keep in your box.

There is one possible exception.  In a criminal investigation, the government may be able to get its hands on the assets in your offshore safety deposit box or private vault.  Using what's called a "Mutual Legal Assistance Treaty," or MLAT, the U.S. Department of Justice (or equivalent agency in your country) can enlist the assistance of police in another country. 

However, MLATs are used only in investigations of serious crimes.  If you're not doing anything illegal, it's very likely your offshore safety deposit box or private vault rental will remain private.  And, your valuables will remain secure until you need to reclaim them.

Copyright © 2007 by Mark Nestmann

Avoid the "Anti-Terrorism Clearance Certificate" Scam

In the last few months, I've received several e-mails from Sovereign Society members requesting assistance in obtaining an "anti-terrorist clearance certificate."  They supposedly need the certificate to claim a monetary award, generally for US$100,000 or more, purportedly from an offshore source.

One writer, who I'll call Debbie, received a text message informing her that she had won US$500,000 in a contest she didn't know she had entered.  The message instructed her to send a fax to a phone number in Latvia to claim her prize.

After she sent the fax, she received a message similar to the following:

"Dear Debbie,

This letter is to confirm that we have in our possession a CERTIFIED BANK DRAFT for US$500,000 to be sent to you upon receipt of the United Nations Office on Drugs & Crimes (UNODC) anti-terrorist clearance certificate.

Please contact me as soon as possible to obtain this certificate so that we may release these funds to you.

Yours truly,

Lord Michael Ellis, Barrister"

At this point, Debbie became suspicious.  But, since US$500,000 is, well, US$500,000, she decided to investigate further.

She sent an email message to "Lord Michael Ellis" requesting the instructions.  The next day, she received a message instructing her to send US$18,750 to cover the cost of the certificate.  The message stated that such a certificate had to accompany all international money transfers.

That's when Debbie contacted me.  And I told her what I'm about to tell you: you don't need an anti-terrorism clearance certificate to send money internationally.  indeed, no such certificate exists.  Those who tell you otherwise are perpetrating a variation of a very old fraud—the advance fee scam.

In an advance fee scam, a criminal offers you a large sum of money.  The catch is that you get it only after you pay a smaller amount to have the funds released.  Justification for the advance fee varies, but they're all fictions invented by criminals.  Once you pay the money, the criminal—and your money—disappear.

The bottom line: if someone tells you that you need to purchase an anti-terrorist clearance certificate to receive funds from abroad, it's a fraud.  Save your hard-earned money to invest in a legitimate opportunity—not an advance fee scam.

Copyright © 2007 by Mark Nestmann

Don't Let Someone Steal Your Offshore Account

If you read the "fine print" when you open an offshore bank account, you'll likely find a clause similar to this one:

“The bank is entitled, but is not obliged to rely upon and act in accordance with any notice, demand or other communication … by any verbal, telephone, telegraphic, telex, or electronic message if believed by the bank to be genuine and to be presented or delivered by or on behalf of the customer, without incurring liability should it be false or there be any ambiguity therein…The bank shall not be liable for consequences of forgery unless such forgery should through observance of due diligence have been readily detected."

This clause, or one similar to it, immunizes the bank against a lawsuit if they mistakenly disburse funds you've not authorized. 

How might this occur?  One possibility would be if your bank statement is misdirected.  Several years ago, for instance, I received a statement from my offshore bank.  Only, it wasn't my statement—it was someone else's, with a much larger balance than my own.  It's possible that with the name of the bank customer and his account number, I could have ordered a disbursement from that account to another account that I controlled. 

Most offshore banks have sophisticated systems in place to prevent this from occurring, and I don't know of any cases where a depositor in an offshore bank has been defrauded this way.  But it's certainly possible—otherwise, offshore banks wouldn't include this type of disclaimer in their client agreement.

There are several precautions to consider to guard against this potential loss:

• Establish a code word that must be provided to the bank before disbursing funds;
• Have your bank hold bank statements, rather than mailing them to you;
• Open a numbered account whereby you're identified only by a number and code word, rather than by your own name.  (You must disclose your identity to set up the account, however).
• Instruct the bank not disburse funds unless you personally appear at the bank to authorize the disbursement;
• Instruct the bank not to disburse funds unless you send them written instructions with a signature guarantee from a notary. 

Whether your offshore bank is willing to accept any of these conditions will naturally depend on its particular policy.  The larger an account you have, the more willing the bank is likely to be to cooperate with you.

Forewarned is forearmed.

Copyright © 2007 by Mark Nestmann

What the Heck is a "Controlled Foreign Corporation?"

U.S. shareholders in foreign corporations are subject to some of the most complex and confusing tax rules in the entire Tax Code.  I'll be attending a workshop (see below) in Las Vegas Dec. 7, 2007 designed to help U.S. shareholders in foreign corporations, and their advisors, understand these rules and avoid the many "tax traps" that accompany them.

The most severe tax traps are reserved for what the Tax Code calls "controlled foreign corporations."  Here's a highly simplified summary of the rules:

If "U.S. shareholders" own 50% or more of the shares in a foreign corporation (e.g., an international business company or IBC), by vote or value, the foreign corporation is classified as a CFC.  U.S. shareholders are defined as any U.S. natural persons, partnerships, corporations, trusts, and estates who own, respectively, a 10% or greater interest in the foreign corporation.

If you're a U.S. shareholder in a CFC, and it generates what the IRS calls "subpart F" income,  you won't be able to defer tax on that income, even if it's not distributed as a dividend.    Subpart F income includes passive investment income, income from personal service contracts, income from transactions with related U.S. persons or entities and income from certain industries such as insurance, banking, mining and others.   

Naturally, various exceptions apply to many of these general rules.

If that's not enough, if your foreign corporation is classified as a CFC:

• The 15% income tax rate on capital gains and dividends isn't available;
• Losses on investments can't be allocated against gains until the corporation is liquidated;
• Any investments in the United States may result in double taxation;
• The basis of the stock does not step-up to its fair market value at the death of a shareholder for estate tax purposes; and
• Complex reporting requirements also apply.

Confused? You have a right to be.  The CFC provisions are designed to prevent multi-national corporations from indefinitely deferring income on their offshore operations, but they also affect the smallest international business operated by a start-up entrepreneur.

The CFC "Boot Camp" in Las Vegas is designed to shed some clarity on the complex CFC rules.  It's will provide a non-technical briefing on CFCs, along with creative ways to avoid CFC tax traps, and will be taught by leading experts in the field of international tax:

• J. Richard Duke, JD, LL.M;
• Thomas P. McQueen, CPA;
• Joel M. Gross, Esq.; and
• Vernon Jacobs, CPA.

For more information on this event, click here.  Hope to see you there!

Copyright © 2007 by Mark Nestmann

The Unique Benefits of Offshore Life Insurance

Life insurance enjoys uniquely preferential treatment under U.S. tax law:

• All earnings accumulate free of taxes until withdrawal;
• The death benefit can pass to beneficiaries tax-free;
• Tax-free loans are possible;
• Tax-free exchanges are possible; and
• With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes. 

Only life insurance can claim these five advantages.  Essentially, you avoid the impact of tax on portfolio income and transactions (depending on portfolio turnover, anywhere from 20% to 50% of the annual pre-tax returns) in exchange for the cost of insurance; approximately 1-3% per year. 

The most flexible policies are variable universal life insurance (VUL) policies.  Instead of a cash value guaranteed by the insurance company, there a separate account that may consist of may consist of a securities portfolio.  The value of the account is determined by the performance of investments within it.

VUL policies are available in the United States.  However, VUL policies written by non-U.S. companies offer a number of advantages in comparison with U.S. companies:

• Enhanced asset protection;
• Greater privacy;
• Tax-deferred access to offshore securities markets;
• Potential avoidance of foreign exchange controls; and
• Lower taxes, regulatory costs, and distribution costs

Another advantage of dealing with a non-U.S. company is that the world's largest reinsurers are located outside the United States.  Especially for large policies, insurance companies often contract with reinsurers to help pay death benefits upon the death of the insured person. 

The most innovative offshore life insurance products are known as "private placement variable universal life" (PPVUL) policies. It may be possible for the investment manager of the PPVUL policy to place a portion of the underlying account values not only in a portfolio of foreign securities, but also in a foreign corporation or other entity that operates an ongoing international business, with all profits accumulating free of tax. 

Offshore PPVUL policies are worth considering if you're seeking a flexible, tax-advantaged, and comprehensive estate plan providing tax efficiency and access to a wide selection of international asset management options.  Since it requires expert tax advice to set up properly, and requires ongoing maintenance to insure tax compliance, it's most cost effective if you can invest US$1 million or more in the policy.

I'll be addressing offshore life insurance policies in one of my presentations at the Sovereign Society's "Offshore Advantage Academy seminar" November 6-10 in The Bahamas. For more information on this event, just click on the "Offshore Advantage Academy" link on the right side of this page. In the meantime, if you have questions about PPVUL policies, please feel free to contact me at assetpro@nestmann.com. 

Copyright © 2007 by Mark Nestmann

Tax and Reporting Traps in Offshore Investments

Offshore investments are an indispensable component of a globally balanced portfolio.  But unfortunately, Congress has placed numerous obstacles in the way of Americans who venture offshore. 

Probably the most obscene tax traps relate to U.S. taxpayers who invest in offshore mutual funds.  When you sell—or are deemed to sell—your interest in most offshore funds, all income and gains are taxed at the highest ordinary income rate bracket that applies (presently 35%), not your actual tax bracket.  What's more, an interest charge (currently around 8%/year) applies for each year tax was deferred on these gains.  And if you lose money on your offshore fund investments, you can't deduct these losses. 

In some cases, it's possible to avoid these tax traps, but you have to make sure the offshore funds you purchase qualify for the statutory exemptions to these draconian rules.  That's a job for an offshore tax expert.  For most U.S. investors, the safest course is to only purchase offshore funds through a tax-sheltered vehicle—an offshore variable annuity or life insurance policy, for instance—or through a retirement plan.

There are additional tax traps in the reporting rules for offshore investments.  Penalties for failing to file a form with the IRS or the U.S. Treasury on or before the due date are typically US$10,000 for each late form.  These penalties may be imposed even if you haven't made any profit and there is thus no "tax loss" to the U.S. Treasury. 

A failure to file a timely return for a foreign trust can cost you a staggering 35% of the assets in the trust.  Let's say you have a foreign trust containing about US$10 million in assets.  You're a single day late in mailing a required reporting form.  In this situation, the IRS has the statutory right to impose a US$3.5 million penalty.  I know of numerous examples where the IRS has sought to impose this penalty.  While it can be removed for good cause, it may take numerous letters from your tax advisor to the IRS to resolve the problem—if it can be resolved at all.

There are many other examples….my point isn't to scare you away from offshore investments.  It's to help insure that when you go offshore, that you do it right. 

The Sovereign Society can provide significant assistance in this regard.  In fact, we're sponsoring a four-day "Offshore Advantage Academy seminar" November 6-10 in The Bahamas that will focus on the "nuts and bolts" of offshore investment.  I'm one of the "professors" at this event, and you won't want to miss my presentation on how to legally avoid taxes offshore, while fully complying with IRS tax and reporting rules.

For more information, just click on the "Offshore Advantage Academy" link on the right side of this page.

Hope to see you there!

Copyright © 2007 by Mark Nestmann

Why are You REALLY Investing Offshore?

I tried to open my first offshore bank account in 1986, at the Chicago office of a major Swiss bank (NOT something I would recommend today).  After being ushered into a conference room, an attractive 30-something woman came in and introduced herself.

"What makes you interested in a Swiss bank account,?" she asked me.

I wasn't prepared for the question.  But I told her that I was interested in holding Swiss francs as a hedge against the declining value of the U.S. dollar, and potentially make investments in other currencies.  I didn't mention anything about my desire to protect financial privacy.

Nonetheless, I was still turned down, although for a more prosaic reason—lack of funds.  I wanted to open a US$20,000 account, but the minimum at the time was US$100,000. 

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Introducing the foreign country...

Where Your Banker Tells Anyone Snooping into Your Account to "Take a Hike!"
I'll give you a hint...it's not Switzerland. It's not Panama. It's not even Liechtenstein.

But this country's bankers have steadily and quietly maintained their clients' financial privacy for the more than half a century!

And those "in the know" don't even think of this country as an "offshore haven."

So it's the last place private investigators, contingency lawyers or nosy relatives will look for your wealth. Click here to learn more about this fascinating country.

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I was reminded of this incident last week, when a reader—I'll call her Sue—who told me of an incident she recently experienced at an offshore bank.  When asked the same questions I was asked 20 years ago, Sue told the representative that she wanted an offshore bank account because of privacy concerns.  Her major concern was being targeted for a frivolous lawsuit because of her vulnerability and the ease of retrieving financial information in the United States.  Sue also told the banker that she wanted to learn about foreign investments through the bank account.  Finally, she mentioned that she was concerned about the possibility of being wrongly targeted for asset seizure due to some trumped up charge.

Sue was told that the offshore bank did not offer accounts for the reasons she had stated.  The banker's decision could be appealed to a manager, but only if Sue sent the bank certified copies of:

·    A reference letter from her U.S. bank,
·    A letter from her personal lawyer,
·    A letter from her employer verifying employment and length of service, and
·    A letter from her accountant certifying that her U.S. taxes were in order.

This was in addition to information Sue had already provided, including copies of her passport, a utility bill (to verify her residential address), and a notarized statement stipulating that all funds that she would be depositing into the account had a legitimate source.  The additional information was needed, the banker stated, in order to comply with the bank's anti-money laundering policies. 

Learn more about offshore investments, offshore banking, offshore bank secrecy, and offshore asset protection by clicking here.

Copyright © 2007 by Mark Nestmann

An Autopsy of a Phony Offshore Bank

It couldn't have happened to a more deserving group.

Earlier this week, a U.S. District Court in Oregon sentenced four officers of the now-defunct First International Bank of Grenada to prison terms up to eight years. 

While it was in business from 1997-2000, FIBG promised "guaranteed" annual returns up to 300% for funds invested with it.  To assure depositors that their investments were safe, FIBG claimed that an independent deposit insurance company insured them fully.  However, when FIBG went belly-up in 2001, the company supposedly insuring these deposits never made good on them.  Depositors lost nearly US$500 million in all. 

The FIBG scam began when one Gilbert Allen Ziegler came to Grenada from Oregon, after declaring bankruptcy in 1994.  With no banking experience, no identifiable assets, and a passport issued by a non-existent country (the so-called "Dominion of Melchizedek"), Ziegler obtained a banking license in Grenada with the aid of corrupt local officials. 

Grenadian banking regulators permitted Ziegler to capitalize the bank on the strength of a jeweler's supposed US$17 million appraisal of a single ruby.  Ziegler possessed only a photograph of the ruby and wasn't able to prove that he owned it. 

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Radical New Approach to Asset Protection & Privacy

In 2006, more than nine million Americans had their identity stolen and approximately 1.8 million were sued. And laws like the USA PATRIOT Act greatly expand warrantless searches and permit government property seizures without proof of wrongdoing.

Big Business and Big Brother want to keep you and your wealth in plain sight, to be profitably tracked and conveniently seized. However, you can still legally create international 'lifeboats' of wealth and privacy that are practically invulnerable to snooping or confiscation.

Click here to learn more.

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Unfortunately, Ziegler wasn't around to receive his just desserts in the Oregon courtroom earlier this week.  He died in 2005 of a heart attack.  But four of his associates will now be serving time after their convictions on multiple counts of mail fraud, wire fraud, conspiracy, and money laundering. 

The lesson of FIBG is simple: if something sounds too good to be true, it probably isn't true.  Unfortunately, this lesson has yet to be learned by many investors. 

No matter where you invest or do business, onshore or offshore, appearances can be deceiving.  There is no substitute for due diligence.  And while in FIBG's case due diligence was difficult because of the connivance of corrupt government officials with Ziegler and his co-conspirators, anyone promising of a 300% "guaranteed" return can't be taken seriously. 

Further, even a cursory review of Ziegler's background would have demonstrated that he had zero experience in the banking industry.  How realistic to expect that someone with no background in banking could somehow stumble upon a miraculous investment that provides a 300% guaranteed annual return? 

When investing offshore, the first rule is "hang on to your wallet."  Because there are many offshore scam artists ready, willing, and able to separate you from your hard-earned money. 

Copyright © 2007 by Mark Nestmann

You Can't Do It…but Halliburton Can!

During the early 1980s, I lived in south Florida for a few years. Until I moved there, I had no idea of how visceral a hatred many Cuban-Americans living there had for Fidel Castro and the communist regime that had overthrown a pro-American government in 1959.

And it's no wonder. The litany of horrors from Fidel's Cuba is a long one, from outright confiscation of property to the summary execution of political opponents.

In response, millions of Cubans fled their homeland. They settled in many countries, but mainly in the United States, with south Florida being their favored destination. And they pack a mighty political clout.

Perhaps that clout is why the embargo against Cuba imposed in 1962 against the Castro regime, and periodically intensified, have lasted so long. It's unlawful for U.S. citizens to visit Cuba without a "license" from an obscure Treasury bureaucracy called the Office of Foreign Assets Control (OFAC). Even if you manage to obtain a license, you're not supposed spend any money in Cuba.

It goes without saying that most forms of trade with Cuba are illegal as well. Indeed, the Cuban trade embargo has lasted longer than any other embargo in modern history—45 years and counting. Moreover, the embargo has actually been stiffened in recent years, most notably with the 1996 Helms-Burton Act, which penalizes foreign companies that do business in Cuba by preventing them from doing business in the United States. It's relatively easy for foreign companies to evade these restrictions by using subsidiaries to do business in Cuba, and almost every country with significant trade relations with Cuba has enacted laws that seek to neutralize the effect of the Helms-Burton Act.

If a U.S. citizen wants to legally visit Cuba, or do business there, without obtaining a license from OFAC, the only legal way to do it is to give up U.S. citizenship and obtain a passport from another country that doesn't restrict travel there. Obviously, that's not practical for the vast majority of U.S. citizens.

Similarly, the only way a U.S. company can do business with Cuba is to cease being a U.S. company. And with that background in mind, I'm wondering if the recent announcement by oil services giant Halliburton that it's moving its headquarters from the United States to Dubai, might have something to do with Cuba.

Politically connected Halliburton, formerly headed by vice President Dick Cheney, denies it's making the move for tax reasons—the most common motive for corporate expatriations in recent years. I believe them, because Halliburton already makes aggressive use of low-tax jurisdictions for its operations. Moreover, the possibilities for huge savings in such "corporate inversions" have been severely slashed, courtesy of a law Congress passed in 2004 to combat the practice.

So what's Halliburton's motive? Dave Lesar, Halliburton's chairman, president, and chief executive officer, says the goal of the move is to focus on Eastern Hemisphere "oil exploration and production opportunities, and growing our business here will bring more balance to Halliburton's overall portfolio."

But, could there be something else? How about the fact that recent discoveries in Cuban territorial waters indicate the existence of a super-giant oil and gas field, with reserves that could generate billions of dollars for the companies Havana taps to exploit it? Is it possible that Halliburton—itself a "super-giant" in the oil services business—just might want to participate in the development of one of the world's largest untapped oil and gas deposits?

Just a thought…and a reminder that while U.S. citizens are prisoners in their own country when it comes to traveling to or doing business in Cuba, the likes of Halliburton can incorporate in another country,  avoid the embargo by investing in Cuba through a subsidiary, and do so perfectly legally?

Ain't America great?