This is the first year that Americans have had to comply with FACTA regulations. The early reports are that the new reporting requirement is a nightmare.

As income tax filing deadline rolls around, spare a thought for the millions of Americans overseas who have been singled out by Congress for special treatment, with a new form that will add to the hassle of tax time for many and, critics say, set up the unwary for penalties.

“It’s a monstrosity,” Steven R. Horton, whose tax practice in Paris advises American expatriates, said of the new demand from the U.S. Internal Revenue Service: Form 8938, the Statement of Specified Foreign Financial Assets. “It compels every taxpayer to try to find a way that they’re guilty of some kind of omission.”

FACTA is an additional reporting requirement on top of what expatriates and investors with foreign accounts already fill out which is Form TDF 90-22.1, the Foreign Bank and Financial Accounts form, known as FBAR.  FBAR must be filed by anyone who had an aggregate of $10,000 or more in overseas bank accounts at any time during the year.

The penalties for non-compliance of either FBAR or FACTA start at $10,000.

What is confusing is that Form 8938 asks for much of the same information as FBAR.

The Report of Foreign Bank and Financial Accounts is due to the Treasury Department each year by June 30th. Thus, if you held a financial interest or signature authority over a foreign account you must file with the Treasury Department. You need to report all bank accounts, brokerage accounts, insurance policies with cash value (like whole life), annuities, mutual funds, etc. It is also important to note that you must include all corporate accounts that you have signature authority over, or accounts for other individuals that you control.

Many readers are unsure about what to do with accounts at Gold Money or other businesses that store unallocated gold. According to FinCEN ruling last year an account similar to a GoldMoney account should be reported.
You are exempt from filing an FBAR if the aggregate value of all accounts was less than $10,000 for the entire year. If at any point during the year the aggregate amount exceeded $10,000, even for a day, the FBAR must be filed. To be clear, the FBAR is filed for the previous year’s accounts, so you would file by June 30, 2012 to reflect your 2011 accounts.

There was a wonderful interview on the Financial Sense with Erick Townsend who has researched several different jurisdictions for expatriation.

Townsend was a software entrepreneur who cashed out at 33 and traveled the world like Jim Rogers.

In the interview, Townsend describes how his economic forecasts such as peak oil, the U.S. government debt problem have not caused the problems he thought they would. On the other hand, the degradation of civil liberties has been going a lot faster than he thought it would.

As Townsend traveled the globe he was looking for the “old America” with lots of economic opportunity, low corruption and protected civil liberties. What he found was that the “old America” did not exist anyplace in the world. Every country has it’s warts and nothing can compare to the United States during it’s peak up until the early 1970′s.

However, for those considering expatriation, Chile and New Zealand were his two favorite spots to ride out the coming economic storm.

One of the frequent questions that we receive by e-mail revolves around how to open an offshore bank account. Many readers seem to be confused about the requirements in terms of opening the offshore account and also the reporting requirements to the IRS or similar tax authority.

It has become increasingly more difficult to open an offshore bank account due to legal liabilities that have been imposed on any foreign bank that is perceived to be assisting with tax evasion. For example, this week a Swiss bank was indicted for helping US citizens pay taxes. The fall out from cases like this is that offshore banks are hesitant to open new accounts. Obviously, in a free market system all of the banks would be competing for deposits as that is the lifeblood of their business. However, the reality is that many offshore banks have to turn away honest citizens that are trying to open an offshore bank account. If the reporting requirements, bureaucracy and the mountains of paperwork did not exist offshore banks would open accounts in a matter of minutes.

There are certain factors that will determine whether you will be able to open an offshore bank account at your desired institution. The first and most important determination is the amount of money that you will be depositing. Obviously, if you’re looking to deposit $10 million there would be a greater selection of banks that would want to open the account for you. These offshore banks would be compensated for having to deal with the reporting requirements because a large account would bring in large fees. However, if you are looking for information about how to open an offshore bank account with only $20,000 your options will be far more limited.

The second major factor that will determine how you will open an offshore bank account is your citizenship and residency. Citizenship and residency are often used interchangeably but there is an important legal distinction. Citizenship is best understood as the passports that you hold from a particular nation. Residency is a legal term that indicates in which jurisdiction you spend most of your time and subsequently in which jurisdiction you pay income tax. Obviously there are many people who live in one country yet were born in another country. Every bank has a different policy and opening an offshore bank account as a US citizen will be far different than opening offshore bank account as a Costa Rican citizen. Some banks have a policy not to accept US citizens and US residents. Other banks will only accept US citizens who meet certain minimum deposit threshold.

Offshore banks and local banks must perform due diligence on all clients. This is typically known as the “know your client” rule. Furthermore, banks generally prefer a referral from another professional. For example, if you are using an offshore company formation services or lawyer you might ask these individuals to introduce you to an offshore bank.

In most cases you will have to physically visit the offshore account that you are looking to open. In rare cases, you can open an offshore account by mail.

The reason you need to visit the bank is that the banker will want to interview you and determine the source of funds. They will also want to get a better understanding of why you are looking to open an offshore bank accounts. Of course, they want to ensure that you are not evading taxes or trying to shuffle money to an offshore bank account before you declare bankruptcy or have creditors attacking your local account.

Documents Required to Open and Offshore Bank Account

Typically to open  an offshore bank account you will need:

1. A letter from your local banker that indicates you are a client in good standing  – typically this letter will indicate how long you have had an account with the bank
2. Certified copy of passports of all signatories
3. Proof of residential address (typically a cable bill) – banks use this to determine your residency
4. Letter stating expected activity, with supporting documentation if available – for example if you are opening an offshore business account the purpose might be trade. This would be different than if you were opening the account in order to trade stocks
5. Evidence of source of funds to be deposited – eg – was the money your salary, inheritance, corporate profits etc. If the money was an inheritance you will need to provide information of the deceased’s will

If you are wondering how to open an offshore bank account it is first important to determine your own individual circumstances usch as deposit amount, citizenship, residency, purpose of offshore account and then narrow down your choices.  Every bank will have different account opening rules and it is more efficient to only focus on the jurisdictions that are open to you.

There are several reasons why businesses and individuals have a difficult time choosing the best offshore accounts for their specific purposes. First of all, there are strict laws that govern the advertising of the best offshore bank accounts. Although you are constantly bombarded with advertisements from your local bank you most likely have never seen an advertisement for an offshore bank. Even on the Internet it is rare for the best offshore banking institutions to advertise. For example, private banks in Switzerland generally operates on a referral basis. Subsequently, advertising their services to the broad public would serve no purpose.

The second reason why it is difficult to make an informed decision about the best offshore banking solution for you is that foreign accounts are generally discouraged by local governments. Whether it be the US government, Canadian government, or the Australian government the song remains the same. There is a concerted effort to portray individuals who use offshore banks as greedy villains.

Furthermore there is the general misconception that people use the best offshore accounts to hide money or dodge taxes. It is interesting to point out that Pres. Bill Clinton has most of his wealth in the Cayman Islands and it was recently reported that presidential hopeful Milt Romney has several accounts in the Cayman Islands. Furthermore, it was previously reported that several members of Parliament in Canada had offshore accounts in Europe. It is sheer hypocrisy that these government officials benefit from the best offshore accounts yet publicly criticize them and discourage citizenry from using them.

What is not reported is that the best offshore accounts provide better levels of service, more online security and diversification options for account holders. For example, many people want to diversify outside of currencies such as the United States dollar and the Euro. It is not easy to waltz into your local Citibank and request that your account be held in gold or Singapore dollars. However, the best offshore bank accounts would offer that solution which would help minimize exposure to weak currencies.

In fact, offshore banking is not really used by people looking to minimize taxes anymore. The reason for this is that in this day and age of computer eyes accounts it is highly likely that the IRS or any authority has all of the information that it needs about any account. In other words it is not possible to hide money there is a paper trail of wire transfers that is reported to several agencies across the world. the reporting requirements for offshore accounts is so stringent that nobody takes chances trying to hide money from tax authorities.

Another reason that a lot of money has flowed into the best offshore bank accounts is due to the financial crisis of 2008. If you remember, it was large domestic banks that made horrific bets on the housing market with leverage of up to 40 or 50 times their capital. It was banks such as Citibank and Bank of America that misused insurance derivatives that resulted in several federal bailouts. However, the best offshore banks in Singapore and Hong Kong were absent from the headlines. The reason is that these Asian banks did not participate in the CDS market and did not gamble on the US housing market with risky loans to unemployed strawberry pickers. Subsequently, many savvy investors decided that some of the banks in the United States, England and Germany were no longer sound. These investors pick up their account and moved them to some of the best offshore banking jurisdictions in the world.

When determining what is the best offshore bank account for your individual circumstances here are some of the important considerations that one should focus on:

1. you should be able to hold your account in a desirable currency. The best Offshore bank accounts will seamlessly let you switch from lesser-known currencies such as the Singapore dollar into the more established currencies like the Swiss franc. You should not be forced to hold US dollars or Euros if you’d like to save your wealth another currency.
2. Since you’ll be doing most of your banking online is of utmost importance that the bank employs cutting-edge security. Usually this means two tier security.  This means that you will receive a security device that will have a constantly changing password. of course, it is also important that you have the ability to send international wire transfers using the online system.
3. you should be comfortable with the capital ratios and the legal jurisdiction. The best offshore banking institutions will be conservatively financed and located in jurisdictions where the rule of law prevails.

There are several offshore jurisdictions that investors may consider when determining where to hold assets.

Of course, the most famous offshore jurisdiction is Switzerland. Switzerland holds about 30% of the world’s wealth according to most estimates. Despite the fact that banking privacy is limited and the Swiss Central bank has lost credibility with currency devaluation attempts, Switzerland is still the preferred choice for most investors.  There are dozens of small, private banks that only have operations in Switzerland. Switzerland is the most likely destination if you are opening an offshore trust account.

Another popular offshore jurisdiction are the Cayman Islands.  Many hedge funds have an offshore hedge fund that will be domiciled in the Cayman Islands.  Most recently, it was revealed that presidential candidate Milt Romney holds up to six accounts in this jurisdiction.

Perhaps the fastest growing offshore jurisdictions are in Asia. Singapore is famous for it’s stable banking system and concierge like services at it’s banks.  Many business people create a Marshall Islands corporation and choose to bank in Singapore.

Another popular offshore jurisdiction in Asia would be Hong Kong. The fees for offshore company formation and yearly costs are lower in Hong Kong than Singapore. Most investors also appreciate that Hong Kong and Singapore are rather distanced from the long arm of the I.R.S. Thus, there is a feeling that offshore accounts might be subject to less scrutiny in Asia than in Europe.

The last offshore jurisdiction that is often overlooked by most U.S. investors is Canada. Many small account holders from the U.S. choose to open an account in Canada by simply driving over the border.  Of course, the laws are similar in Canada giving account holders some confidence in the legal system. In addition, many U.S. citizens only want to open an offshore account in an English speaking jurisdiction. However, the benefits of holding a bank account in Canada might be limited due to it’s close connection with U.S. authorities.

Several people confuse offshore accounts with offshore trust accounts. Both have unique advantages and costs.

The main benefit of an offshore bank account is that the money cannot easily be frozen by an unruly government agency. In most cases, an individual can go to Switzerland or the Cayman Islands and open an account in their own name. Of course this is becoming more difficult for U.S. citizens and residents due to FACTA.

However, an offshore bank account will offer limited asset protection benefits from creditors. This is the main source of confusion for most clients who think that an offshore account cannot be pierced by creditors or ex spouses.

Similarly, establishing a bank account though a company. If a creditor comes along, the account is not in your name, so the creditor would have to go through the added steps of suing the LLC or going after your membership interest in the LLC. The creditor may or may not be able to do that. LLCs do offer some degree of asset protection because it’s not so easy for a creditor to stroll in and lay claim to that bank account—they have to go through the formality of prosecuting a claim against the company.

Benefits of Offshore Trust Accounts

By far and away the most asset protection is gained through a trust-owned bank account. To me, what you are doing here is giving up complete authority over the account. You still beneficially own the account because you gave the trustee the money to begin with, and you are probably the named beneficiary under the trust agreement, but you have now given your money to someone else independent of you to own and control those assets.

Of course, with the added benefit of privacy and asset protection come certain risks. With a trust, you are ‘trusting’ someone else to hold your assets for you, hoping that they won’t steal those assets and that they’ll accurately report the status of accounts to you.
Now, from an asset protection status, nothing is more powerful than divorcing yourself from those assets and entrusting them with another individual.

To give you an example of  how much control you give up with your assets. The person who applies for the bank account is the trustee, not you. You may have to provide some ID documents as the beneficiary, but the trustee will fill out all the bank account documentation, and you will have no signature authority over that account whatsoever. The main idea is to totally divorce you from the offshore account.

The costs to create an offshore trust account are the

a) set up fees

b) plus whatever the trustee charges to attend to the account opening procedures. Usually this will cost between $500-1000

c) ongoing fees to the trustee – usually around $2500-3000/yr

Given the fees for offshore trust accounts it does not make sense for accounts that have less than $300,000.

U.S. citizens also have another big advantage with offshore trusts. Currently, it is difficult for U.S. citizens and residents to open foreign accounts. However, by using offshore trusts, U.S. citizens can access different offshore jurisdictions.

The primary jurisdiction for most offshore trusts is still Switzerland. By most estimates, Switzerland holds a quarter of all the world’s wealth.

A reader from the Netherlands sent us the following question:

“I have a few new ideas for Microsoft Kinect applications. Since I also want to close all ties to Netherlands I need a new company structure for these software projects. It would be a purely online business. I would do the work outside of Hong Kong (Mostly Thailand)  and I would get paid from US companies through bank wire (Microsoft) or Paypal (Client Downloads).

Hong Kong  has a flat profit tax of 16%, but only on local profit. If I do the work, which is either programming myself or hiring someone, while I am in Thailand and I sell the applications through an American company, which then pays me to my Hong Kong Company bank account, am I exempt from the profit tax?

1. As far as I see and understand from the research I have done, I am, but I would like to get your opinion.
2. Can you make any recommendations on companies that can set up an offshore Hong Kong company?
3. What would be the yearly costs for an offshore Hong Kong company? What about a Singapore offshore corporation?

Offshore Hong Kong Corporation Taxes

1.  Currently, there are a lot of software developers who want to reside in countries like Thailand yet access the U.S. market. Of course, everyone wants to structure their businesses in a tax efficient way.

Since nothing is sold in HK, you should be fine. However, you will need to make sure your CPAs fill out the paperwork to make this happen. They need to “prove” to the government that none of the profit was derived from HK.

Offshore Company Formation Hong Kong: Service Providers

2. If you decide to incorporate in Hong Kong, here are some recommendations for you.

Contact info:
Renee Seeto
Director
VISIONOne Fiduciaries Limited
TEL : (852) 3596 2388
FAX : (852) 8167 6984
renee.seeto@visionone.hk

Another option would be http://www.companysec.com/ which we’ve mentioned before.

Costs of Hong Kong Offshore Corporation

3. As you can see from the following costs, opening an offshore business account in Hong Kong is costly meaning your business should have revenues of over $200,000 to make it worthwhile.

Cost for opening and running:
Opening:
Government:

• Business registration certificate HK$2,450
• Certificate of incorporation HK$1,720
• Capital duty HK$10
• M&A, company kit, common seal & rubber stamp HK$850

Formation company, based on prices on companysec’s website:

• Incorporation service: HK$1570
• Opening of bank account at HSBC: HK$1,200

Running cost:

• Company Secretary: HK$2,500 (Using companysec)
• Government fees: HK$105
• Anual audit cost: “On average, about US$500-100 for annual accounting, auditing, and tax filing. ”
  

In preparation of  FACTA compliance, foreign banks are starting to liquidate accounts held by U.S. Citizens.

A highly respected Swiss bank informed U.S. clients that they have 60 days to inform the Swiss bank where to transfer assets.

Swiss regional bank Zuercher Kantonalbank told U.S. customers it was closing their accounts, a Swiss newspaper reported, as the bank, embroiled in a U.S. tax investigation into Swiss banks, pulls back from the risky offshore business.

Furthermore, it appears that clients only have 60 days to find another bank.

“The cantonal bank is giving its customers 60 days to name a new bank where ZKB can transfer their assets,” Tages-Anzeiger said on Thursday, adding account holders who reside in the U.S. had been informed by letter before Christmas.

One can expect that more offshore banks will choose to liquidate holdings of U.S. clients. The FACTA regulations are simply to onerous for most large banks. Most likely the only offshore banking options for U.S. citizens will be in small Caribbean offshore banks in Belize and other second tier jurisdictions.

U.S. citizens will be forced to take one of the following options in order to internationalize their assets:

a) foreign property purchases. Foreign property cannot be repatriated.

b) offshore gold storage

c) application of foreign residency. Some offshore banks will still service non-resident, U.S. citizens.

It will be interesting to see whether Canadian banks will continue to accept U.S. citizens. Thus far, there have only been empty threats that Canadian banks would avoid U.S. citizen accounts.

It is important to clear up some confusion regarding the reporting of foreign bank accounts. First of all, US citizens do not have to report a foreign bank account under $10,000. Unfortunately, many Americans think that this loophole means that someone can open up 100 different accounts in various countries with $9,000 and not have to report anything to Treasury Department.

This is a poor interpretation of the law.  Anything above $10,000 triggers reporting for all of your bank accounts. The Treasury Department only cares about the total sum of money you hold in foreign financial accounts in which you have an interest or signature authority.

First of all, you must determine whether you exceeded $10,000 at any time during 2011. If you exceeded $10,000, you will need to disclose all the accounts on TDF 90-22.1 by June 30, 2012.

Reporting Foreign Bank Accounts: Case Study

Many people who purchase foreign real estate forget to report the foreign financial account used to facilitate transfer of the property. For example, let’s say you wanted to buy a house in Costa Rica. You opened up a corporate bank account in Costa Rica and wired $100,000 from your personal bank account in the United States. You used this Costa Rican corporate bank account to purchase the house in Costa Rica. Since you had a balance of over $10,000 in a foreign bank account, you must report the foreign financial account.  This is an important consideration when purchasing foreign real estate.

Many US citizens strive to be non-resident in order to achieve tax savings. There are also a number of U.S. citizens who are increasingly frustrated with the reporting requirements for foreign bank accounts.

Here are the general guidelines for how a US citizen can be non-resident.

The general rule is that a US taxpayer becomes a non-resident if s/he is gone for at least 330 days a year, but this isn’t set in stone.

The US grants its citizens who live and work overseas a “foreign earned income exclusion” of approximately $100,000 per year. In addition, such a person can qualify for a “foreign housing exclusion.” However, in order to qualify, the US person must meet one of two tests:

• He must be outside the US for a minimum of 330 days in a 12-month period; or
• He must have established a bona fide tax home in another country for a full calendar year. This entails severing most of his key ties with the US – home, car registration, clubs, church, doctors, etc. – and re-establishing such ties in another country. Visits to the US would need to be restricted, especially in the first couple of years abroad.
Note that any income above the exclusion amounts remains subject to US tax.