Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

Overseas Investment Income

The IRS has done quite a thorough job of catching the income or capital gains from just about every kind of offshore or foreign investment that US residents can get involved in. Taxes are either applied as gains are made, or they are applied when an investment is realised, with taxes being calculated back over the period of the investment and compounded forward to the time of payment.

Some of the key tax collection mechanisms over the years have been aimed at Controlled Foreign Corporations, Foreign Personal Holding Companies, Foreign Investment Companies, Passive Foreign Investment Companies, Grantor Trust Provisions and Foreign Trust Reporting Requirements.

Although US citizens may still choose to set up offshore trusts, the rationale will be asset protection rather than tax minimisation. Trusts are caught by the legislation as much as other types of investment structure, and should be considered as tax-neutral at best.

As far as 'passive' income is concerned, international tax planning for US residents is therefore concerned with providing investment structures which are fiscally transparent, so that the gains from higher-yielding international or offshore investments can be taxed in the investor's hands on the same basis as domestic investments. This usually means employing limited partnership or limited liability company structures, which are provided by many offshore jurisdictions, which are usually un-taxed in the offshore jurisdiction, and which are treated as fiscally transparent by the IRS.

Straightforward investments into public offshore investment funds, which may offer superior returns to domestic funds, will be caught by the Passive Foreign Investment Company legislation, and it will often be correct to make a QEF election in order to pay tax year-by-year on the fund's increase in asset value (excluding unrealised capital gains).

Individuals who have significant 'active' business income may be able to make use of offshore corporate tax shelters, although the foreign sales corporation (outlawed by the WTO) has now been abolished.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

Foreign Bank Account Reporting (FBAR)

Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if the person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.