Critique My Lean US - Mauritius Structure (2.1% Effective Tax Rate)

[Leo Vanguard]

Good day Gentleman.

After wrestling with a UAE freezone/US LLC setup that turned into a compliance and AML audit nightmare (9% UAE tax, anyone?), and after spending some time in Georgia before realizing the political vibes weren’t for us (Hello Putin...), we’ve finally think we have found our sweet spot in Mauritius.

Why Mauritius?

Two words: tax perks and lifestyle.

It's by far the best run island I've ever been to - seems to have the chilled beach life when you want it, futuristic infrastructure in the built up areas as well as some high-end, modern villas with epic sunset mountain and sea views.

We’ve decided to strip down the complexity of our previous ideas and UAE structure, and , after flirting with a Trust Owned GBC company (more complexity??) we've landed on what we think is a leaner and smarter setup that works for taxes, pricing, simplicity and overall lifestyle.

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Context (Quick Overview):​

• Wife’s US LLC (C-Corp): My wife is the sole shareholder of a US LLC, elected and taxed as a C-Corp, which generates $1.5M to $3M in royalties annually from US sources.
• Me, as a sole proprietor/contractor: I provide high-level consultancy, including full management, key decision-making, business strategy, and IP creation and marketing management, as well as contractor hiring/recruiting services.
• Non-US Citizens/Resident Status: We’re both non-US citizens and maintain non-resident alien (NRA) status for US tax purposes.
• We do not have the same surname - and plan t keep it that way.
• Mauritius Residency: We’re on a Premium Visa in Mauritius, and after spending over 183 days here, we are tax residents.
• Mauritian Tax System: Mauritius uses a territorial tax system, meaning only income remitted into Mauritius is taxable. Foreign-sourced income (or even income considered local-sourced by PE) remains untaxed unless remitted to the country.

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The Structure and Capital Flow:​

1. Wife’s US LLC (C-Corp):​

• The LLC receives a total of around $1.5M - $3M in royalties annually from US sources, paid monthly.
• General business expenses like marketing platforms and software are observed.
• The LLC is taxed as a C-Corp (8832 form) and pays 21% corporate tax on retained earnings. But before that, I get paid...

2. My Role (Contractor & IP Sales):​

• I work as a contractor for the LLC, providing high level management and marketing services, business strategy, and key decision-making from Mauritius. (rent a CEO style)
• Additionally, I sell high-value intellectual property (IP) to the LLC as part of our business arrangements.
• As an NRA, all my earnings from consulting, management, and IP sales are classified as foreign-sourced income and are not subject to US taxation.
• My wife’s LLC then pays me around 90% of the company’s profits(after the marketing and other expenses), which I receive in my non-resident US bank account (opened with my ITIN).
• The remaining 10% stays in the LLC and is taxed at 21% to keep Uncle Sam happy.
• This results in an effective tax rate of 2.1%.
• To add, a 10% profit rate in our industry is very common.
• My earnings remain untaxed in both the US (because they’re foreign-sourced) and Mauritius (as long as they aren’t remitted). I can defer taxes indefinitely and, when needed, remit strategically to trigger only the 10% tax rate by staying under the Mauritian threshold for remitted income.

3. Why Not a Disregarded Entity?​

• A disregarded entity wasn’t an option because there’s no tax treaty between the US and Mauritius.
• By using the C-Corp structure, we separate personal and corporate income, limiting US tax exposure to 21% on retained profits, while my income from contracting, management, and IP sales remains foreign-sourced and untaxed.

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Potential Vulnerabilities:​

• Transfer Pricing and Arms Length payments: I think the main issue is to ensure that the fees paid for management, consultancy, and IP sales reflect fair market value to avoid raising any red flags with the IRS. However, with a revenue lower than $5M I'm wondering if they would even bat an eye? Ive read that they only audit 0.7% of businesses under $10M - but could be wrong.

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Solution:​

We maintain meticulous documentation to keep everything legit, including time tracking, detailed reports, minutes from meetings, and IP valuations. This ensures we can justify the payments as being fair and in line with market rates.
In short - I am legitimately running her business as a contractor, and she it just pretty much a shareholder.

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Why This Works:​

• US Taxes: We avoid personal US taxes by being non-resident aliens. Only the 10% retained profits are subject to 21% corporate tax, giving us a low effective tax rate of 2.1%.
• Mauritius Taxes: Since we don’t remit income to Mauritius, we can defer taxation indefinitely. When we do need to remit, we control how much to remit and can stay under the threshold to trigger the 10% tax rate, or stagger payments when we need bigger amounts.
• Offshore Flexibility: I can invest the untaxed income in brokerages, real estate, or other global assets without triggering tax as long as the funds stay outside Mauritius.

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My Questions:​

1. Is there anything I’m overlooking in general - but also in terms of transfer pricing or fair market value rules when it comes to payments between me as a contractor and her LLC?
2. Possible Gaps in Compliance: Are there any compliance issues that could arise with the IRS that I might not have considered?
3. Further Optimization: Is there a way to further optimize this structure for even better tax deferral or efficiency?
4. Longevity: How resilient do you think this structure is in the long run?
5. Other Considerations: Are there any other red flags or potential vulnerabilities that I should watch out for?

Lastly - is this entire thing just completely stupid, and is there a better way of doing it? I'm open to some divergent thinking.

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Would love to hear your thoughts and suggestions, or if you think any other structures may be better suited to my situation.

Have a good one gentleman!

 

[Don]

Context (Quick Overview):

• Wife’s US LLC (C-Corp): My wife is the sole shareholder of a US LLC, elected and taxed as a C-Corp, which generates $1.5M to $3M in royalties annually from US sources.
• Me, as a sole proprietor/contractor: I provide high-level consultancy, including full management, key decision-making, business strategy, and IP creation and marketing management, as well as contractor hiring/recruiting services

A company not incorporated in Mauritius is resident in Mauritius if it is centrally managed and controlled in Mauritius.

Resident corporations are taxed on their worldwide income.

 

[Sols]

Just to add to what @Don wrote, Mauritius is one of those few tax havens that actually enforces its tax laws. It doesn't have the best bureaucracy and the tax department is understaffed. But the risk of getting busted in Mauritius is somewhat higher than many of its peers.

This whole structure would crumble as soon as someone looks at critically.

Wife’s US LLC (C-Corp): My wife is the sole shareholder of a US LLC, elected and taxed as a C-Corp, which generates $1.5M to $3M in royalties annually from US sources.

Why not just form a C Corp then?

Mauritian Tax System: Mauritius uses a territorial tax system, meaning only income remitted into Mauritius is taxable. Foreign-sourced income (or even income considered local-sourced by PE) remains untaxed unless remitted to the country.

That's not what territorial tax system means. Mauritius is not a territorial tax system, nor is it universally a remittance-basis tax system, for corporate income tax.

I work as a contractor for the LLC, providing high level management and marketing services, business strategy, and key decision-making from Mauritius. (rent a CEO style)

This is where, as @Don points out, the US company becomes a Mauritian tax resident company.

My wife’s LLC then pays me around 90% of the company’s profits(after the marketing and other expenses), which I receive in my non-resident US bank account (opened with my ITIN).

Look into BEPS: Base Erosion and Profit Shifting. If you don't, the IRS might give your wife a lesson in what it means.