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This happens on a smaller scale all the time with most professionals without having to resort ot offshoring. Anyone who works for a hedge fund will have their

This happens on a smaller scale all the time with most professionals without having to resort ot offshoring. Anyone who works for a hedge fund will have their own company that will get paid thier bonus. Companies have two nice traits. 1) Their end of year can be any month 2) They have a lower tax rate than most high net-worth individuals do. So consider 2 fictional employee's. The first one gets paid a bonus of $500,000 at the end of the year(2014). His tax rate is 40% so he ends up with $300,000. He reinvests the $300,00 at his hedge fund that returns 20% in the year 2015. As of December 31st 2015 he has a net-worth of $360,000. Individual 2 gets the same $500,000 bonus at the end of 2014 but she has a company that gets the bonus. Now the companies year end is November so the tax year on on that bonus isn't until November 2015. That hedge fund also returns 20% so as of December 2015 she has $600,000 ($500,000 * 1.2) and then owes tax of $120,00 (the corporate tax rate is 20% on her $500,000 bonus) so she ends up with $480,000. Now when she pulls the money out of her corporation to spend she'll have to pay the dividend tax rate of %20. But she can let this money ride tax sheltered for any number of years. To recap, she essentially shelters her money in two ways: 1) her bonus is sheltered for 1 year from taxes allowing the full amount to grow 2) she pays the corporate rate at the end of the year allowing her to hang onto an additional %20 until she pulls it out for her own use. Any one can do this, the only preconditions you need to make it worth while are 1) a large bonus 2) a way to make the bonus money grow at a decent rate. Among Doctors, lawyers, etc this is a common practice. Now if you want t up the ante, you move your hedge fund to the Cayman Islands where you don't pay any tax on the gains until you repatriate the money back to the North America. When Renaissance Technologies finally has a tell all book written about then, their brilliance will be acknowledged but I'm going to guess that a very large portion of their returns comes from not paying tax. See: http://www.bloomberg.com/politics/articles/2015-07-08/irs-moves-against-hedge-fund-maneuver-once-used-by-renaissance http://www.bloomberg.com/politics/articles/2015-07-08/irs-mo... people worry about paying fees as a drag on their retirement earnings but paying tax is the single largest drag on creating wealth that the wealthy have. The above corporation sheltering is legal well tested under law and used in a very pervasive manner in the North American and the UK, I don't know anything about the rest of Europe but I'd imagine its the same.

yummyfajitas 11y ago
In your example, Individual 2 gets paid $500k and manages to take out $320k ($500k goes into the corp, $100k is paid as income tax and then $320k comes out after dividend taxes). Assuming a 35% gross tax rate rather than 40% (I think that's the top marginal rate), Individual 1 gets to keep $325k. tl;dr; You aren't avoiding a lot of taxes. Now if you want t up the ante, you move your hedge fund to the Cayman Islands where you don't pay any tax on the gains until you repatriate the money back to the North America. In other news, the Old Monk corporation (sellers of delicious Indian rum, mostly within India) don't pay American taxes either. There is a whole world out there that isn't paying US taxes, oh noes!
- chollida1 11y ago
  I either didn't explain things well or you didn't bother to read what I wrote:) You get tax sheltering two ways. 1) you get to collect gains on the amount you would have paid tax on originally, so if you shelter $120,000 for a year, you get the 20% in gains on that amount. 2) you don't pay the dividend rate until you pull out the money from the corp. So you can leave it in the corporation for 20 years, allowing it to grow at our imaginary 20% rate per year. working through the example again individual 1 is still $360,000 his $500,000 - $200,000 from taxes(I'm Canadian), plus the 20% gains on his $300,000. Individual 2 gets to shelter the entire $500,000 for the year allowing her to get gains on the whole amount so she has $600,000(with 20% growth, we are a hedge fund after all). She then has to pay the %20 corp tax on her original $500,000($100,000) leaving her with $500,000. She is then free to let that amount grow until she wants to take it out, at which point its taxed at the 20% dividend rate. If you compare the person who leaves their money in the tax sheltering corp for 10 years vs the person who takes their bonus as income you'll find that the corp comes out substantially ahead. I've done the math and seen it play out in the real world:)
  - yummyfajitas 11y ago
    You are making a calculation mistake. If interest rates are 20%, then $1.20 next year = $1.00 this year. In reality, the person who invests the money actually comes out worse. If his investment had either profit or capital gains, he paid even more taxes. I.e., instead of getting $1.20 next year for every $1.00 he put in this year, he's getting something less than that. With the current taxation regime, the only benefit to investment is shifting consumption into the future. But you actually pay pretty dearly for that. You can see a more detailed explanation here: http://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842

yummyfajitas 11y ago

In your example, Individual 2 gets paid $500k and manages to take out $320k ($500k goes into the corp, $100k is paid as income tax and then $320k comes out after dividend taxes). Assuming a 35% gross tax rate rather than 40% (I think that's the top marginal rate), Individual 1 gets to keep $325k. tl;dr; You aren't avoiding a lot of taxes. Now if you want t up the ante, you move your hedge fund to the Cayman Islands where you don't pay any tax on the gains until you repatriate the money back to the North America. In other news, the Old Monk corporation (sellers of delicious Indian rum, mostly within India) don't pay American taxes either. There is a whole world out there that isn't paying US taxes, oh noes!

chollida1 11y ago
I either didn't explain things well or you didn't bother to read what I wrote:) You get tax sheltering two ways. 1) you get to collect gains on the amount you would have paid tax on originally, so if you shelter $120,000 for a year, you get the 20% in gains on that amount. 2) you don't pay the dividend rate until you pull out the money from the corp. So you can leave it in the corporation for 20 years, allowing it to grow at our imaginary 20% rate per year. working through the example again individual 1 is still $360,000 his $500,000 - $200,000 from taxes(I'm Canadian), plus the 20% gains on his $300,000. Individual 2 gets to shelter the entire $500,000 for the year allowing her to get gains on the whole amount so she has $600,000(with 20% growth, we are a hedge fund after all). She then has to pay the %20 corp tax on her original $500,000($100,000) leaving her with $500,000. She is then free to let that amount grow until she wants to take it out, at which point its taxed at the 20% dividend rate. If you compare the person who leaves their money in the tax sheltering corp for 10 years vs the person who takes their bonus as income you'll find that the corp comes out substantially ahead. I've done the math and seen it play out in the real world:)
- yummyfajitas 11y ago
  You are making a calculation mistake. If interest rates are 20%, then $1.20 next year = $1.00 this year. In reality, the person who invests the money actually comes out worse. If his investment had either profit or capital gains, he paid even more taxes. I.e., instead of getting $1.20 next year for every $1.00 he put in this year, he's getting something less than that. With the current taxation regime, the only benefit to investment is shifting consumption into the future. But you actually pay pretty dearly for that. You can see a more detailed explanation here: http://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842