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Banks against US companies

Banks against US companies  Formerly, U.S. companies of LLC type were a convenient tool of international tax planning. The key advantage of LLCs was cheapness of registration, as well as little reporting formalities. Most companies that were actively trading in CSI countries were not even accounted for in Internal Revenue Service, and even those that complied with all the requirements on reporting, were not paying taxes in the U.S., as partnerships do not pay federal corporate tax. Everything had been fine until 2004, when banks-correspondents started chasing LLCs. Banks were referring to the Patriot Act, which had earlier accused American credit institutions for insufficient vigilance in exposing money-laundering and terrorism financing. Banks began to monitor senders and receivers of funds more carefully, and it turned out that in some states huge number of companies were registered at the same American addresses. These companies were receiving significant sums of money, even though the companies did not exist in databases and did not feature in local business directories. The lists of suspicious addresses were changing hands, and rather soon Baltic banks stopped opening accounts for LLC-type companies. Later, they started to close already existing accounts.

Some companies fought for the right to be serviced in Baltic states. For that purpose they even provided audited financial reports to the banks in order to prove absolute legality of their operations. The fuss around "non-American American" companies settled down. Survivors continued to work.

But relatively recently there was a new wave. In 2010, Obama signed a new law: Hiring Incentives to Restore Employment Act of 2010. The law itself is rather benevolent towards taxpayers - it stipulated tax exemptions for employers who hired unemployed or partly employed. Employers would also be exonerated of paying social security fees for such employees, but it would not affect their pension plans.

Beautiful. But what does it have to do with American companies in Baltic banks?

As a part of this law, in 2010, another regulatory act - Foreign Account Tax Compliance Act (FATCA) - came into force. This one is exactly about the struggle of the U.S. authorities against tax avoidance by those American taxpayers who keep their savings on the offshore accounts, as it is explained in an annotation to the law on the IRS website. According to this law, American taxpayers who keep financial assets abroad, would now be obliged to submit a new form along with annual tax declaration. Apart from that, FATCA would oblige foreign credit institutions to provide certain information related to the accounts of American taxpayers or foreign companies, in which American taxpayers hold a significant stake. The new tax regime would oblige beginning with January 1st, 2013. Foreign institutions had to sign a new agreement with IRS in 2012.

According to the new agreement, foreign institutions have to:

a) comply with due diligence and client identification standards
b) prepare annual reports on American taxpayers
c) withhold tax at 30%-rate on payments related to income in the U.S., as well as sale of American securities, and transferred to i) a non-cooperating foreign bank; ii) a private person who did not provide enough information to determine whether she or he is an American citizen; iii) a legal person that did not provide enough information to determine whether it has American citizens among its shareholders. Withheld tax is transferred to the U.S. budget.

It might be possible to discuss with the bank whether LLC-type companies are American taxpayers (in fact, they are not, even if they are registered with IRS and have a Taxpayer Identification Number). Regarding LLCs, the tax transparency principle plays the major role, meaning that tax burden is being transferred from a company to its owners. It should be clear, though, that this principle works for actual partnerships only, i.e. enterprises, where a joint activity of partners take place. On the other hand, it will not take much effort for IRS to prove that vast majority of LLCs are fictional. Thus, LLCs ultimately flee the scene.

Latvia, Lithuania, LLC, Offshore, U.S. companies

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