Sometimes, U.S. persons are brought to their attention the privacy and tax strategy using a Wyoming LLC owned by a Seychelles Company or Foundation, and even though these strategies surely can bring you some benefits, there are many aspects as this specific strategy needs an specific type of consideration. This is not as simple as just forming a Wyoming LLC owned by a Seychelles Company, and then just being able to not report this income, being 100% a ghost, and bypassing information and reporting requirements.
This strategy works, but it has to be done by foreseeing and protecting the Owner from any possible unforeseen or not communicated potential risk.
The following structures are mostly marketed, and the ones we will talk about,
1- Wyoming LLC owned by a Seychelles IBC.
2- Wyoming LLC owned by a Seychelles Foundation.
3- Wyoming LLC owned by a Seychelles Trust.
The purpose of creating this structure varies, but it usually includes one or a combination of the following:
1- Tax Benefits.
2- Privacy.
3- Asset protection.
On this articles we will discuss the reality behind this structure, as Clients usually request for counseling sessions regarding how to solve the mistakes as sometimes the setup is not done correctly, or are given the idea that they would not pay taxes in the U.S. under this set up., etc.
Taxation:
Wyoming LLC and Seychelles Foundation Strategy
This strategy is usually marketed to U.S. Citizens and U.S. persons with the mistaken argument that they will not need to report this type of entity to the U.S. given that Foundations are a hybrid between Trusts and a Company, and since this type of entity does not specifically exist under the IRS tax classification, they won’t need to report this ownership, especially if they lack control of it.
The above argument is wrong as when a U.S. person forms a Seychelles Foundation, the I.R.S will require the U.S. person to declare ownership, and it must be declared and treated under U.S. tax law as either a Trust or a Corporation, for tax purposes.
There is enough case law supporting this argument, and there are cases of individuals being fined high amounts because they did not declare ownership of an Offshore Foundation as a Trust or Corporation thinking that the I.R.S. had no specific tax treatment or specific requirements for this type of entities.
A Seychelles Foundation will be treated as a Trust or Corporation depending on the form it was created. Each different type of taxation (Trust or Corporation) will bring different types of tax savings, but that is not something you can randomly choose by checking a box, the Foundation would have to be set up correctly depending on the type of classification you would need.
Differences between electing a Seychelles Foundation to be treated as a Trust or Corporation under U.S. tax purposes.
Important note: to avoid repetition, please note that the Foundation taxed as a Corporation, will also give you insights on how the Wyoming LLC owned by a Seychelles Offshore Company will be treated.
1. Tax Treatment and Filing Requirements
Trust Treatment:
If the Foundation is treated as a foreign trust, the U.S. beneficiaries or the grantor may be required to file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner).
Distributions to U.S. beneficiaries may be taxable as ordinary income, capital gains, or as an accumulation distribution, which can result in an additional tax and interest charge (throwback tax).