Question Minimizing income tax via crypto loans and offshore company

[johndough]

I had a question around minimizing income tax. I won't name the country I'm a tax resident of for privacy reasons. I realize that may make it harder to answer, but please, read on. The idea is this:

Current Situation:
1. I (JOHN) run a business, let's call it COMPANY that does consulting
2. COMPANY pays JOHN 100% of profits as shareholder salary
3. JOHN pays income tax on shareholder salary.

Proposed Situation
1. JOHN runs COMPANY
2. JOHN opens offshore company, let's call it OFFSHORE, has nominee directors etc
3. COMPANY outsources consulting to OFFSHORE
4. OFFSHORE invoices COMPANY each month, let's say it costs about half of COMPANY's monthly income. Payment to be done in cryptocurrency so no bank account required for OFFSHORE
5. COMPANY pays JOHN his shareholder salary, but greatly reduced
6. JOHN takes a loan on one of the crypto loan sites for the rest of his monthly expenses. This shouldn't be subject to tax because it's a loan
7. OFFSHORE pays off the loan with cryptocurrency.

Appreciate any feedback.

 

[johndough]

Looking at the CFC laws for the country in question, there is an exclusion where the CFC will be exempt if it passes an "active business test". So OFFSHORE has to have a passive income that is less than 5% of the total income. Is cryptocurrency considered an income? Either way I imagine that would be fine, because there would be no passive income. I'm clueless when it comes to these things though.

 

[KJK]

point #3 does not seem okay, it is the most obvious red flag if the company (paying company) is a regular company
point #6 is very interesting and I think this opens new possibilities in many situations - both as a company or an individual you can own Bitcoin, use that Bitcoin as a collateral and take a loan (in stablecoin or bitcoin) against that Bitcoin. This money goes directly to you and it is not a taxable income because it is a loan you "took".

So yes, this goes in the right direction, depending on how much you trust crypto and the crypto loan providers. They can always disappear overnight.

 

[DavidS]

The crypto part is incredibly sus.
These schemes are not new, have been used for a long while.
But your jurisdiction WILL receive the information that you are beneficiary owner of the offshore company. All of that information will be exchanged, nominee directors are useless with OECD AEoI CRS laws.

They can do audit and determine structure is setup in a way where you avoid taxes and penalise based on that.

 

[DavidS]

What "crypto loan" sites are there?

Can't you just setup your own "crypto loan" website?

Wouldn't there be additional regulations required for this?

What will happen when IRS asks you: "Ok, you took this loan for XXX.... you were supposed to pay it back? How come you haven't paid it back?"

 

[johndough]

What "crypto loan" sites are there?

Can't you just setup your own "crypto loan" website?

Wouldn't there be additional regulations required for this?

What will happen when IRS asks you: "Ok, you took this loan for XXX.... you were supposed to pay it back? How come you haven't paid it back?"

There are loads of crypto loan sites out there. not sure what the regulations are. Are they really entitled to ask how you're going to pay something back? That seems like something you shouldn't need to disclose.

The crypto part is incredibly sus.
These schemes are not new, have been used for a long while.
But your jurisdiction WILL receive the information that you are beneficiary owner of the offshore company. All of that information will be exchanged, nominee directors are useless with OECD AEoI CRS laws.

They can do audit and determine structure is setup in a way where you avoid taxes and penalise based on that.

Yeah I did some more research and it looks like just about all offshore places will report beneficial owners except maybe Dubai. I was hoping that wouldn't be the case without a bank account.

Oh well, back to the drawing board.

Thanks for your responses.

 

[DavidS]

There are loads of crypto loan sites out there. not sure what the regulations are. Are they really entitled to ask how you're going to pay something back? That seems like something you shouldn't need to disclose.

It is a way too easy way to avoid tax and they might detect the "loan" is created for this purpose.

"Oh this loan should have been paid back by now, what's up with that?"

They can also say it was a fictive document intended to avoid taxes and punish you.

Yeah I did some more research and it looks like just about all offshore places will report beneficial owners except maybe Dubai. I was hoping that wouldn't be the case without a bank account.

Actually Dubai also reports as per CRS:
https://www2.deloitte.com/jo/en/pag...national-financial-centre-issues-crs-law.html
They adopted CRS in 2018 I think.

The nominees seem useless now when banks and institutions report beneficiary owners.

But the fact that you don't need a bank account for crypto company makes it easier.

I think crypto will become the replacement for offshore banks in the future.

There also some other schemes like:
- Offshore company gets USDC stable coin
- Deposits on BlockFi
- Uses it as collateral to take loans.

Basically never needing to really sell into real fiat, only synetic USDC.
Or taking collateral against Bitcoin.

I think the answer is somewhere in those directions.

3. COMPANY outsources consulting to OFFSHORE
4. OFFSHORE invoices COMPANY each month, let's say it costs about half of COMPANY's monthly income. Payment to be done in cryptocurrency so no bank account required for OFFSHORE

This part can seem very sketchy to tax office as its a common scheme. "Consulting services" trick has been beaten to death and Putin has milked it as Panama Papers book shows. Everyone is aware of this.

What if...:

1. The COMPANY makes $$$, but does "investments".

2. COMPANY "invests" in cryptomarket.

3. COMPANY buys USDC (crypto stablecoin).

4. COMPANY depoists USDC on BlockFi or similar platforms.

5. COMPANY takes loans against this USDC that OWNER can spend?

Since this is a loan that owner spends no taxes have to be paid.

Maybe even wouldn't need an offshore company here.

 

[johndough]

That's some great advice, thank you. I'm going go down the route you mentioned without opening the off-shore. I'll speak to a local accountant and see what they say, probably omitting some details.

It is a way too easy way to avoid tax and they might detect the "loan" is created for this purpose.

"Oh this loan should have been paid back by now, what's up with that?"

They can also say it was a fictive document intended to avoid taxes and punish you.

Actually Dubai also reports as per CRS:
https://www2.deloitte.com/jo/en/pag...national-financial-centre-issues-crs-law.html
They adopted CRS in 2018 I think.

The nominees seem useless now when banks and institutions report beneficiary owners.

But the fact that you don't need a bank account for crypto company makes it easier.

I think crypto will become the replacement for offshore banks in the future.

There also some other schemes like:
- Offshore company gets USDC stable coin
- Deposits on BlockFi
- Uses it as collateral to take loans.

Basically never needing to really sell into real fiat, only synetic USDC.
Or taking collateral against Bitcoin.

I think the answer is somewhere in those directions.


This part can seem very sketchy to tax office as its a common scheme. "Consulting services" trick has been beaten to death and Putin has milked it as Panama Papers book shows. Everyone is aware of this.

What if...:

1. The COMPANY makes $$$, but does "investments".

2. COMPANY "invests" in cryptomarket.

3. COMPANY buys USDC (crypto stablecoin).

4. COMPANY depoists USDC on BlockFi or similar platforms.

5. COMPANY takes loans against this USDC that OWNER can spend?

Since this is a loan that owner spends no taxes have to be paid.

Maybe even wouldn't need an offshore company here.

 

[johndough]

Looks like you can't use a business loan for personal expenses so that won't work for me.

 

[DavidS]

That's some great advice, thank you. I'm going go down the route you mentioned without opening the off-shore. I'll speak to a local accountant and see what they say, probably omitting some details.

Be careful now. If you are EU citizen and speak with "accountants" and "consultants" they might be obliged under DAC6 directive to report any tax evasion, tax optimisation and offshore structure schemes.

Looks like you can't use a business loan for personal expenses so that won't work for me.

Well, you can obfuscate a lot as a "business expense" in reality.
If you come up with a solution, let us know!

 

[CyprusLawyer101]

What type of consulting are you doing?
And how does crypto relates to this ?
What is your country of tax residency? I sense its either Australia or New Zealand? Its important to give out this info for some real feedback