QUESTION: I'm a small investor with assets of only $27K, who has
decided to 'go' offshore to `run' my 'money trading' business (FX,
Commodities, CFDs etc). Can you point me in the right direction in
regard to:
- where & how to set up an LLC at a reasonable price?
- the same goes with setting up a bank account, which I can use for
transferring money to/from my broker' firm.

REPLY: "Going offshore" can mean that someone sets up a legal entity
in a foreign country and continues to live in the U.S. or that they
physically move to a foreign country. But whatever it means, it's not
inexpensive and it's unlikely to provide any tax benefits not
available in the U.S.

It is inconceivable to me that anyone with only $27,000 in assets
would seriously consider going offshore unless they plan to become
permanent or long term residents of a foreign country and unless they
have a reliable source of enough income (or assets) to cover their
living costs in the foreign country. Yesterday I met with a business
owner who has about $500k of sales outside the U.S. and after an hour
of discussion, he concluded that he should wait until his foreign
sales were closer to $1 million before setting up a foreign
corporation in a low tax country. How much is needed depends on the
reason for venturing offshore and the related facts and circumstances
for each person or company.

Day traders can elect to have their activities treated as a trade or
business if the business is in the U.S. That will permit a trader to
deduct losses and business expenses on Schedule C if the business is
not incorporated. For a lot more details on that see
http://www.greencompany.com

If a day trading business is located offshore and is organized as a
corporation or a foreign LLC that does not elect to be treated as a
disregarded entity, then it will be treated as a controlled foreign
corporation (CFC). But if the owner remains in the U.S. and merely
funnels the money through a foreign corporation, the IRS (and an
informed tax preparer) will treat that as U.S. source income on which
taxes should be paid as if the income were earned by a domestic
corporation. Even if the day trader is physically outside the U.S. all
of the income will be ordinary income and taxable in the year it is
earned by the CFC but losses are generally limited. (A day trading
activity will also be a passive foreign investment company but the CFC
tax rules will take priority for a majority or sole shareholder.)
However, it would be possible for someone with a foreign corporation
to pay themselves a salary that could be eligible for the foreign
earned income exclusion of up to $82,400 (for 2007) per year – if they
lived outside the U.S. for at least 330 days out of 12 consecutive
months.

As for setting up a foreign LLC at a "reasonable price", the concept
of what is reasonable is like beauty – which is in the eye of the
beholder. The quality lawyers with whom I work generally charge from
$3,000 to $5,000 to set up a foreign LLC. You can find a list of them
on the home page at www.offshorepress.com, near the bottom of the page
in the left column. There are links to contact and biographical
information for each of them. Many decades ago, I bought a book called
"How to Form Your Own Corporation without a Lawyer for Under $50" and
tried to set up a corporation for myself in Kansas. It was extremely
time consuming and I had numerous questions that weren't answered in
the book. So I ended up hiring an experienced lawyer to do it for me.
It cost me more money but it saved me a lot of time and it was done
right.

As for setting up a foreign bank account, I'm told that many of the
foreign banks require a minimum deposit of as much as $100,000. But
one bank in the Caymans told me their minimum deposit was only $1,000.
However, they don't accept applications by mail and they do require a
voluminous amount of information about their new accounts. In most
cases, the lawyer who sets up the foreign entity will help to set up
the foreign bank account.

Please note that these comments are not intended to be a "covered
opinion", they do not include all relevant factors and are not
intended to constitute advice for any specific reader. For more
details on that issue see my article on Tax Advisors vs. Taxpayers.
(http://www.offshorepress.com/vkjcpa/disclosurerules.htm )

Vern Jacobs

P.S. We will be discussing how the CFC tax rules affect many
different kinds of investment and business activities at the CFC Tax
Boot Camp on Dec. 7, 2007 at Caesars Palace in Las Vegas. (See
http://www.offshorepress.com/cfcworkshop.htm )