Jean Franco Fernández Clark
How to hide money offshore in a tax haven
Updated: May 23, 2022
Disclaimer: nothing contained herein shall be considered legal, financial or tax advice. We do not promote, encourage, nor in any way motivate or condone illegal activities. Content herein is for information purposes only.
It is still possible to hide your money from public sight of creditors, divorce, lawsuits, etc., but it is very difficult to hide your money from your tax authority using legal means.
Gone are the days when you only had to open an offshore bank account in a tax haven and no one would find out your little secret. We used to live in a world where anyone could form a company using bearer shares which made it almost impossible to link a company to you and banks would allow you to open a bank account for these companies.
As time has passed, governments, international political unions, and intergovernmental organizations have implemented regulations in order to fight tax evasion and related tax crimes, money laundering, terrorism financing, etc., and each time these regulations are getting more complex or sophisticated.
Instruments such as the Common Reporting Standards, FATCA, black lists that exclude from the financial system jurisdictions that refuse to cooperate with the strongest ones, information sharing agreements, Controlled Foreign Company Rules, just to name a few …..
Lets dive into it…
If you are from a developed country which taxes you on your worldwide income, and open a personal offshore bank account, an/or an offshore bank account for an offshore company or for a trust, it is likely that this offshore account will be disclosed to your tax authority under the Automatic Exchange of Information (AEOI) of the Common Reporting Standards (CRS) developed by the OECD in order to fight tax evasion, or under FATCA (Model 1 or Model 2), even if the bank account is in the Cayman Islands, the Bahamas, Switzerland, you name it.
So, how to legally avoid (and not evade) my account being reported under the CRS?
By reading the Common Reporting Standards, you will be able to understand which accounts are reportable, and which ones aren’t, so you are able to circumvent this by playing by their own rules, as the Dalai Lama once said: “Learn the rules so you know how to break them property”.
1. Be an Active Non-Financial Entity
Entities, like corporations, are only reportable if they are Passive Non-Financial Entities whose passive income such as interests, dividends, etc., exceeds 50% of its total income.
If an entity does not fall under the concept of Passive Non-Financial Entity, hence more than 50% of its income is from trading activities, it will not be a reportable entity.
If you were to open a Personal as an Individual, this account would be reported, provided that you are a tax resident in a jurisdiction that has signed the CRS with the jurisdiction you are opening the account in.
2. Change Tax Residency or Acquire a Second Passport
A kind of obvious, yet kind of life changing and expensive, is to change your tax residency to a tax haven (a country that does not levy tax individuals on their foreign earned income) but this is a life changing solution as in some countries you would have to cut ties to that jurisdiction in order to not be considered a tax resident and perform an exit tax procedure, and expensive sometimes because if you were to acquire a second citizenship, the cheapest one costs USD100,000.
3. Open an Account in a non-CRS country.
Another obvious solution, but not that easy to accomplish. There are two types of Non-CRS countries: (a) those who have signed the CRS but do not share information with the country you reside in as a jurisdiction signing the CRS does not necessarily means that it shares information with the rest of CRS countries, and (b) Countries that have not signed the CRS at all, hence do not share
Most non-CRS countries have it a hard time in the financial system due to AML/ATF regulations, and these jurisdictions sometimes only open bank accounts for resident companies with substance, or resident individuals; so for example a BVI company with a bank account in Nicaragua (Non-CRS Country) would not be possible.
On the other hand, there are a few good jurisdictions that by today have not signed the CRS, such as Montenegro and Georgia (Europe), but Georgia, for example will soon (in about a couple of years, more or less start reporting information.
But, there is an exception: the United States of America is not part of the CRS, what leads us to our next one…
4. Open a US Company, preferably a Wyoming LLC
The USA is not part of the CRS, and the USA has full access to the financial system without a doubt. In addition, if structured property, a Wyoming LLC would not pay taxes in the USA on its income that is not U.S. sourced. (Foreign Owned US Disregarded Entity, for example)
How NOT to avoid the CRS
Will opening an offshore trust conceal my financial affairs?
Creating a simple offshore trust, and opening an offshore bank account for this trust, will not keep your account secret from your tax authority, as you will fall under the concept of Controlling Person if you appear as a/the Settlor, Beneficiary, or Protector, hence you would be reported.
But if you open a trust, and under that trust you create a company that is an Active NFE, then it could work.
Will hiring professional nominee shareholders or directors services help?
In theory, yes, but the problem is that there is a risk of the nominee stealing your money and since what you did was kind of illegal, you would not be able to sue them or pursue legal action without revealing that you were doing something illegal, leaving your hands tied.
What if I add 5 shareholders to the company that is a reportable entity, so each one of them has less than 25%, will I avoid being reported?
Technically yes, the shareholders will not be reported as the beneficial owners, but someone has to be reported, and ultimately it would be a senior managing official in case the UBO cannot be determined.