Off-Shore Tax Planning - Two Businesses

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Sublime8700
Posts: 298
Joined: Tue Dec 01, 2009 2:27 pm

Off-Shore Tax Planning - Two Businesses

Post by Sublime8700 »

Curious if any Bogleheads have any ideas about this... a bit random, but there a bunch of smart people in here, so why not:

I've got two businesses:

1) A software business where the profits are generated by licensing software to people around the world who use the software to trade and profit. (It doesn't actually have anything to do with trading, but let's just say it did for argument's sake.) My partner (who is German) and I have set-up a Bermuda Ltd. corporation with the help of a law firm (and a hefty legal bill) as well as a law firm in Bermuda in order to do this so that he would avoid paying VAT, and I would get the benefits of deferring the income. The reasoning is that while we provide the software and theoretically collect "passive income" we also do a host of very significant "active" things that improve people's profits (for an umbrella term let's call these things "active consulting" and "teaching" as I'd rather not get too deeply into the specifics). As we understand it, our advantage comes if the income is active - if it's passive, it's ordinary income. If it's active, we can defer it for as long as we'd like and pay ourselves a salary or dividend, which would be nice because we're both current in higher tax brackets than we anticipate being in the future and it's nice for the money to accumulate without paying taxes. The downside is that investing the money instead of having it sit in a bank would likely be complicated and involve significant legal fees to figure out if something was/wasn't OK such that it would basically not be worth it.

Question 1: does anyone have any experience with these structures and investing within them?

2) I've got a second business where I am essentially a large affiliate and promote a payment processing service similar in many ways to paypal. Whereas paypal takes 3% for every transaction you make (or something like that) this site takes 2.5% -- of which I get a percentage. The more customers I have and the more transactions they make, the more money I earn. Thus, the goal is to get as many customers as possible and set up incentive schemes to get them to transact such that they earn some % back when they make a transaction as well. Beyond just referring the clients, there are other things I do in my capacity for this company, including helping people straighten out their documents so they can have verified accounts, answering questions people have about whether they are allowed to do something or not, teaching people how to open accounts in different currencies, explaining different fee structures, etc. etc. One of the strongest correlations that exists is between the amount of time I spend talking through a client's strategy for transaction often and earning cash-rewards and how much revenue that client ends up providing. Another strong correlation is between how quickly I'm about to "on-board" the client and whisk them through verification, teach them where to get documents notarized, etc. I try to do both of these things very well, and have set-up systems to do much of this.

Question 2: does anyone think that the income derived from business # 2 can be structured in a similar way to the income derived from business #1 where it was (to a partner at a well known law-firm) quite clear that the income could be reasonably construed as active instead of passive? And therefore, I'd be able to reap the same benefits of deferred income from business #2?

Curious to hear your thoughts. Thanks in advance.
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BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Off-Shore Tax Planning - Two Businesses

Post by BolderBoy »

Are you a US Citizen?

If so, this may sound more like evading taxation than avoiding taxation when the IRS gets wind of it.
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