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US Nationals

The United States of America operates one of the most rigorous tax systems in the world. If you are a US citizen or resident alien living or travelling outside the United States, you are generally required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.

You may qualify to exclude from income up to US$80,000 of your foreign earnings, but both worldwide income and capital gains are subject to US tax on a progressive scale rising to a rate of 35%. A resident alien is an individual that is neither a citizen nor a national of the US, but who meets either the green card test or the substantial presence test for the calendar year.

As a result, US citizens are not generally able to take advantage of the favourable tax regimes of their host country when working abroad. Stringent anti-avoidance legislation has also reached such a level of sophistication that many of the traditional tax planning techniques that would be effective in reducing tax for other nationals, are ineffective for US nationals. There are, however, still some structures available that can be effective in deferring and/or avoiding US tax. The best of these is the "Rabbi Trust".

Under a "Rabbi Trust" - so named because one of the first such arrangements approved by the IRS was developed by a synagogue for its Rabbi - the Employer acts as the settlor of a trust and pays into that trust a proportion of the agreed compensation which would normally be payable directly to the Employee. Monies passed directly into the trust are not taxable in the hands of the Employee

while they are held in trust and, provided that the trust is correctly structured and set up in a suitable tax haven jurisdiction, monies held by the trustees can also be reinvested and rolled up free of tax.

For a total remuneration package worth US$150,000 per annum, for example, if the Employee were not US-resident then he would benefit from the US$80,000 exclusion, leaving only US$70,000 per annum to be subject to US tax. If, instead of paying the whole package directly to the Employee, the Employer paid the Employee US$80,000 in salary and benefits and placed the remaining US$70,000 into a trust, then that sum could be held by the trustees, invested on behalf of the Employee and rolled-up completely free of tax for as long as it remained within the trust structure. If part or all of the trust fund was removed from the trust structure and paid to the Employee then, at that time, it would become taxable in the hands of the Employee.

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