How can a non-US citizen defer US taxes for 5 years?

[Monkeh]

Suppose you aren't a US citizen and normally reside in a low tax jurisdiction with your smallish ~10 employees business, but want to spend 5 years on a high tax jurisdiction, such as the US, in order to study, for example. You manage to avoid taxation of your CFC either because you don't have Subpart F income there, or because you already pay >90% of the current US corporate tax on the foreign jurisdiction. Now you just need to either avoid paying the 20% US tax on qualified dividends for 5 years, if you want to have access to the cash immediately, or you need to legally defer paying dividends for 5 years somehow, if you can wait until you get out of the US and return to your original country.

As to the latter option, in case you can wait to see the profits of your CFC for 5 years, I know that accumulated retained earnings above 250k without an accepted purpose gets taxed for C Corps. How would that impact a CFC?

As to the first option, in case you need the profit from your CFC in your hands immediately during those 5 years, what are the available pathways?

The only one I've been able to come up with would be borrowing secured by your CFC's unlisted stocks. Loans secured by public company stocks are popular nowadays, but I rarely see discussion about loans secured on unlisted stocks. Look at this lender, for example. So one thing you could do to avoid directly tying up your main company would be to buy publicly traded stocks with your main CFC first, but then do a corporate split into CFC A and B. Company A would be the original, whereas the CFC B would just hold the public stocks that you bought before the split. Since CFC B doesn't generate expenses or profits, it just sits there in a tax neutral position. You could then use CFC B to secure a loan with lenders and, if my intuition is right, they would be able to gauge that CFC B is a pretty low risk company, since all it does is hold some low risk stocks or ETFs. If this is plausible, I'm left wondering what are the minimum and typical values involved on this type of lending, and what are the interest rates. My gut feeling is that these people likely won't work with any petty amounts lower than 500k USD to 1 million, and interest rates would be around 3x what you see on loans secured by public stock.

Any insights or better ideas?

[Kwill]

Welcome! That is the most complicated first post I've ever seen.

My gut feeling is that a super complicated scheme to avoid taxes is probably a bad idea unless you have very competent professional legal advice, and even with that, it might still be a bad idea. Beyond that, I'm not sure. The way you write, you sound American . . . is this a hypothetical involving renouncing US citizenship to build some offshore company? Either way, if you aren't a US citizen, you'll need a visa to study or work in the US, but it seems like it would be difficult to be a fulltime student or employee while also managing a business in another country at the same time.

Anyway, I don't understand the details, but if this isn't hypothetical, good luck.

[PMG]

My eyes glazed over and I didn’t get the intricacies but the US has tax treaties with many countries that allow students to avoid federal income tax on earnings. It’s more complicated than that, but the specifics vary depending on visa and country of citizenship. I don’t know how it applies to dividends vs earned income but maybe that’s a place to start?

[Monkeh]

Thanks, I didn't knew that about student visas. Actually found some good articles about it:
https://www.taxesforexpats.com/articles/non-us-citizens/f-1-international-student-tax-return-101.html
http://publications.ruchelaw.com/news/2018-06/Taxation-Foreign-Students-F1-Visa.pdf

This document implies that dividend income from non-US corporations is also exempt for students on the F1 visa, albeit you would need to watch out for ECI (effectively connected income): "Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation's gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared."

This makes the US an attractive destination for foreign students with a business elsewhere. In Switzerland, such a scheme does not exist, though you cold open a Swiss holding company and at least achieve tax deferral while paying 0% corporate income tax, as long as you don't withdrawal cash to not trigger Swiss income tax.

I think that I threw too much corpo technical jargon in the OP, which made the setup look more complex than what it actually is.

Off topic, but this forum must really attract a boat load of spammers to make us fill all these verifications. It took me a solid 10 minutes to find out "What is the sixth word in the first blog post?", and I almost gave up. I had to search the actual question itself and happened to stumble on a commenter saying the answer by luck. I have no idea in what category the "first blog post" is.

[Kwill]

Not that many spammers get in, but there are still some now and then. I hadn't realized the sign-up process had become so difficult. It's unfortunate if that scares nice people away.

If you want to read the blog, including the first post, here are all the posts in reverse chronological order: https://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

[Sibley]

Not that many spammers get in, but there are still some now and then. I hadn't realized the sign-up process had become so difficult. It's unfortunate if that scares nice people away.

If you want to read the blog, including the first post, here are all the posts in reverse chronological order: https://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

The reason not many spammers get in is because they changed the sign up process. There's a whole thread about it. You don't like it, then donate the time/money/expertise to solve the problem with a simpler signup process. Otherwise, its unfortunate but necessary.