1. IP Migration
Nearly all large U.S. technology companies use the 'Double Irish" or similar strategy to dramatically reduce their worldwide effective tax rate.
Growth companies would do well to begin considering intellectual property migration when it first considers expanding outside of the United States; that is the first time that valuable deferral can be had. The earlier the U.S. company migrates its IP, the lower the U.S. tax cost imposed on the migration itself is.
There are several variations of the structure, but generally require a U.S. company to migrate its intellectual property to an offshore subsidiary resident in a low-tax jurisdiction. Then, the offshore subsidiary (instead of the U.S. company) receives royalties on the use of the intellectual property outside of the United States. As a result, tax on the royalties is deferred until repatriated.
2. Small Captives
Large companies have been forming captive insurance companies (captives) to self-insure their risks since the 1950’s.
These captives were formed to lower insurance costs, provide access to the reinsurance market, and cover exposures where there are gaps in the commercial market.
Section 831(b) of the Internal Revenue code was enacted to extend the benefits of self-insurance, from large publicly traded companies to smaller middle market closely held business entities. This section provides a tax advantage by allowing up to $2.2 million (beginning in 2017) of premium to be tax free. It can further provide tax benefits for its owner in the form of deductible premiums paid to the captive as ordinary business expenses.
3. Active Foreign Business
A controlled foreign corporation (CFC) is any foreign corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly, indirectly, or constructively by U.S. shareholders.
Under certain circumstances, current earnings of a CFC may be deferred from U.S. tax if not actually distributed to the U.S. shareholder.
Our team has more than two decades of experience assisting with the establishment and ongoing operations of properly managed CFCs.
An employee stock ownership plan is a powerful structure that can allow a business to generate profits income tax free, 'freeze' the value of appreciating stock, transition ownership to the next generation (or new buyer), or to create liquidity if no third party buyer is available, without the seller losing control of the business.
ESOPs are used successfully by large corporations (e.g. Publix, Scheel's, Winco) to help incentivize employees as well as by middle market companies.
5. Roth IRA
In 2014, over 9000 Americans had account balances of over $5,000,000 in their IRAs. http://www.bloomberg.com/news/articles/2014-09-17/how-to-join-9-000-u-s-taxpayers-with-romney-sized-iras
This is especially notable in the context of Roth IRAs since the contributions going in and the distributions going out are all tax free. While cash contributions into Roth IRAs are severely limited to a couple of thousand dollars a year, these extreme balances are possible when the retirement account acquires stock of a startup company that later enjoy substantial appreciation.
This transaction, as is the IP migration strategy, is particularly popular for high growth tech companies and their executives.
Roger Fuller, CPA
Former International Tax Director for multi-national companies including Huntsman Chemical, Hypercom, and Ancestry.com