How do the Cayman Islands assist in avoiding taxes?

CET · Feb 14, 2009

Quote from ElliotClark:

Cayman Islands do not help evading taxes. <a href="http://www.offshorebankingtoday.com/">Offshore banking</a> centers do not have tax evasion punishments, since they have no taxes and nothing to punish for.
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Since there has been a complaint about the link in the above post, the poster should edit his post and remove the link. It would be appreciated by all.

wilburbear · Feb 14, 2009

Quote from Cesko:

Now, here comes the complication. Since often a lot of the hedge manager's own income comes as a slice of the fund itself, so what happens to taxes? Enron (hehe), lead a group of fund advisors (which Enron often sees itself as one), convinced the US congress to pass a law (I believe attached to the Derivatives Modernization Act, aka, Jesse Helm's deregulation act), that indicates that fund advisors can *defer* their gains in the fund itself, for up to 10 years, and is only subject to income tax after or once the income is "cashed out", and taken on-shore. This is *huge* for hedge fund managers. Since they can effectively defer the capital gains up to 10 years into the future.

I asked about it on this forum long time ago, nobody knew a shit. I got my answer now.
Do not forget, for U.S. citizens, anybody who can trade, trading in your retirement account is a huge thing.
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Retirement accounts have been confiscated in other countries (Argentina?). There's also the possibility that the future terms of the account will become onerous in some unforeseen way as Washington D.C. looks for money.

Does anybody else see this as a danger?

chartman · Feb 14, 2009

Saipan is better for taxes since you pay only half of the federal income taxes. They have no local income tax or sales tax. Plus you get the bonus of an island paradise!

ElliotClark · Feb 15, 2009

Quote from CET:

Since there has been a complaint about the link in the above post, the poster should edit his post and remove the link. It would be appreciated by all.
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I tested it myself and did not find any threat whatsoever. I can just assume that the guy was lying.

WinstonTJ · Feb 15, 2009

Quote from ElliotClark:

I tested it myself and did not find any threat whatsoever. I can just assume that the guy was lying.
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Agreed - nothing wrong with that link here either. Maybe the guy accusing has spyware already on his machine???

WinstonTJ · Feb 15, 2009

I think that what you guys are missing is that this Cayman scheme is like a traditional IRA - you are going to go through a whole lot of effort to create an offshore SPV but then the second you start withdrawing money, paying yourself, purchasing domestic goods, etc. you have to pay US income or cap gains taxes on that.

For some it may be a tax break - but if you are at the income level where you would seriously be considering a Cayman SPV I highly doubt you'd be asking how to do it on ET.

There are other reasons to open up an offshore SPV as well, one of the mutual funds my firm manages uses an offshore Cayman SPV so that we can invest directly in commodities and avoid paying penalties & taxes for outright owning commodities in a 40-Act Fund. There are many benefits but done legally they take an awful amount of effort for not that much gain.

I have also worked with many hedge funds and there are some real tax benefits to this, but again, you need to be at a very high income level to even consider this.

KeithOmalley · Feb 15, 2009

Quote from rufus_4000:

There is tax evasion (illegal) and tax avoidance (legal, but disliked by IRS), these two are completely different things. I will attempt to talk only about tax avoidance here, not outright tax evasion.

First of all, any foreign entity (let's say for a moment that it is strictly owned by non US citizens) and foreign nationals, do not pay US taxes. This is obvious.

Two, US is the *only* country in the world, where its citizens are subject to income tax, regardless of where they reside. Any other country in the world (Canada, UK, Germany, etc), as long as you declare yourself a "non-resident" of the country, your income (outside of that country) will not be subject to income tax.

Therefore, you see all these British nationals, move themselves to Monaco, Gibraltar, Dubai, etc, often the lower taxes in those places is one of the reasons.

Now let's talk about off-shore companies. A standard way for hedge fund managers to manage non-US citizen's investments, is to create a fund (the "investment vehicle") outside of US, so the non US citizens' income will not even be subject to US tax code (which is, of course, legal). Then the fund managers themselves, would form a "management company", that acts as "advisor" to the off-shore fund. Hence, only the Manager's fees (to themselves) are essentially "flowed on-shore", and therefore subject to US capital gains and income taxes (for the managers only, not the investors). There is nothing illegal here, right?

Now, here comes the complication. Since often a lot of the hedge manager's own income comes as a slice of the fund itself, so what happens to taxes? Enron (hehe), lead a group of fund advisors (which Enron often sees itself as one), convinced the US congress to pass a law (I believe attached to the Derivatives Modernization Act, aka, Jesse Helm's deregulation act), that indicates that fund advisors can *defer* their gains in the fund itself, for up to 10 years, and is only subject to income tax after or once the income is "cashed out", and taken on-shore. This is *huge* for hedge fund managers. Since they can effectively defer the capital gains up to 10 years into the future.

Looking through that list of investors for Carlye, I don't get what the big deal is. Most of the investors are non-US citizens or entities anyways, so they shouldn't be subject to US income taxes. It really is as simple as that.

Take myself as an example. I lived in the US for 12+ yrs, and I have always resisted getting a green card, for the express purposes of future (well current) tax planning. I know of a few couples, where one of the spouses would never get US citizenship for the same reason (and he / she would hold most of the assets), not to mention the almost 1000 person who gives up US citizenship annually. US really have one of the most backward tax code in the world. Sometimes I consider becoming a US citizen make you disadvantaged in wealth creation, even more than ppl from traditionally "socialist enclaves" like Sweden or the UK. And Yes, there is a reason why a lot of ppl go live in Switzerland, but that's another long (and strange) story altogether.
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great post. 1 comment. i think that even if you give up your citizenship you still have to pay us income taxes for the next 10 years if your income was or is above a certin amount. it was changed in the past few years.