BACKUP PLAN – Unnecessary taxes you should NOT pay!

WHEN EXPATRIATING IN ANTICIPATION OF A LIQUIDITY EVENT LIKE AN IPO, DON’T LEAVE YOUR HARD-EARNED ASSETS ON THE TAXMAN’S TABLE.

THAT’S NOT A TAX…IT’S AN UNNECESSARY DONATION!

This 5th instalment in our series about Backup Plans that aren’t solely focused on taxation will be a bit of an exception because this time we will talk about taxes…but in a different sense. We will discuss how to not mistakenly pay taxes when expatriating in anticipation of a liquidity event…such as an IPO…due to insufficient or poor planning or worse, bad advice. 

Our view is that paying taxes that you don’t need to pay should not be called a tax, it should be called a mistaken donation. And most of the time, this generous donation to the US government is simply due to not taking advantage of existing laws and programs that were set up a long time ago specifically to allow those who are expatriating to protect a substantial portion of their assets. Of course we cannot go into minute detail without knowing a person’s factual background, but let us provide you with an overview of a typical case in point. 

TECH FOUNDER DECIDES TO DO AN “EDUARDO SAVERIN”

One of our clients is a founder of a very successful tech startup which was slated to do an initial public offering (“IPO”) within 12 to 18 months. Like Facebook co-founder Eduardo Saverin, he wanted to expatriate before this liquidity event and was fully prepared to pay his fair share of exit taxes on his substantial assets…but no more than provided by law.

THE DANGERS OF DIY AND SALESPEOPLE

This tech founder is, not surprisingly, a clever person, so he initially tried a DIY approach by Googling “Second Citizenships”. He then spoke with a salesperson from the first of many paid sponsorship “advisory” companies that appeared in his search results. This salesperson immediately proposed to him that he should apply for citizenship through the accelerated naturalization program in Malta.

After quickly realizing that the salesperson had no tax knowledge or expertise, the founder also suspected that the promised timing was, in all likelihood, wildly optimistic…meaning that he would not receive his Maltese citizenship before the IPO. As a second citizenship was a mandatory pre-requisite to being able to renounce his US citizenship, he moved beyond trying to do this himself and asked his accounting firm for some assistance…and they introduced him to us.

THE KEY TO SUCCESS IS A PROPERLY DESIGNED…AND EXECUTED PLAN

First, ask some questions

As we had previously worked with the founder’s accountants on several other similar clients, we were brought in to advise him. During our initial consultations, we learned that due to his family history, he had a legitimate claim to an EU country lineage citizenship. This citizenship would take a similar time to process as the Maltese citizenship…but at about 1/40th of the cost. When he wondered why the salesperson had not asked him about his lineage, we could only speculate that it might have been because unlike the Maltese “product” the lineage citizenship country did not payout any commission.

However, while the lineage citizenship would put him on the road to a low-cost EU country citizenship, it still did not solve the issue of the IPO timing.

How important was timing the expatriation and the IPO?

In the founder’s case – as with all our US expatriation files – we had supplemented his accountants by recommending specialized US tax counsel and valuators to come up with an integrated tax efficient expatriation strategy. This integrated team quickly determined that if we could expatriate the client before the IPO, he would save millions in capital gains tax by getting a legal discounting valuation of his founder shares. We therefore added into his plan a citizenship-by-investment in a Caribbean country that would issue him  citizenship months before the IPO. While there would be the cost of another citizenship beyond his lineage citizenship, this additional expense would pay for itself many times over in tax savings.

We also organised the scheduling of his expatriation interview for early in the next tax year….but before the IPO. This provided him time to do proper pre-expatriation tax planning and sufficient time after the IPO to generate the liquidity he would need to actually settle his Exit Tax bill.

How about returning to the US after expatriating?

We also worked on a strategy for the founder to acquire a US B1/B2 visa to allow him to travel to the US post-expatriation. When his EU country citizenship was eventually issued, he then began traveling to the US under the US Visa Waiver Program.

What about tax residency going forward?

Preferring to have no loose ends, the founder agreed to add a foreign tax advisor to his team. As a result, we settled him into tax residency in an EU country where he could enjoy a similar lifestyle to the one he had enjoyed in the US…but at a tiny fraction of his former tax liability. He thereby avoided another frequent outcome of a poor expatriation plan…jumping out of the US tax pot and into another country’s tax fire.

THE VALUE OF AN INTEGRATED TEAM OF EXPERT INDEPENDENT ADVISORS

Through close collaboration with these other specialist advisors, we were able to structure and execute an expatriation strategy that saved this client millions when considering the combined costs of his citizenship / residency strategy and the resultant tax savings…as compared to the “advice” of the  Malta citizenship salesman. This case was a clear illustration of the value of using an integrated team of highly experienced, expert advisors working solely in their client’s best interest.

In closing, if you are concerned about:

  • Protecting your assets over multiple generations,
  • Providing education and career opportunities for children or grandchildren,
  • Ensuring security for yourself and your family…to protect against economic, political, social and climate uncertainties,
  • Reconnecting with your family lineage,
  • Enhancing your lifestyle…

….and yes, possibly looking at your current tax and residency/citizenship structures, then please contact us directly or have one of your trusted advisors do so to discuss how a Backup Plan might work for you.

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