Abusive Offshore Employee Leasing Arrangements
IRS Notice 2003-22

 

In this IRS Notice, the IRS indicates that it is aware of certain employee leasing transactions that are being promoted as a means to avoid or evade federal income and employment taxes. In general, the arrangement involves a series of steps involving domestic and foreign parties, and prior to entering into the arrangement, the taxpayer has little or no business relationship with either the foreign leasing corporation or the US domestic leasing organization. After entering into the arrangement, the taxpayer continues to provide substantially the same services for the Service Recipient Corporation that taxpayer provided before entering into the arrangement.

The arrangement is often designed to provide the taxpayer, directly or indirectly, with explicit or implicit control over the amounts held on taxpayer’s behalf by the Foreign Leasing Corporation (or the trust). Often the arrangement enables/requires the Foreign Leasing Corporation to provide taxpayer with credit or debit cards, for paying personal, business or professional expenses out of such amounts. The arrangement might also permit the taxpayer to submit bills and receipts for payments or requests for reimbursements from such amounts, or even to borrow from such funds (or the trust).

Under this arrangement, the Service Recipient Corporation takes the position that the entire amount it pays to the Domestic Leasing Corporation is currently deductible as a trade or business expense, and none of it subject to withholding. Domestic Leasing Corporation takes the position that amounts paid to taxpayer and the amounts paid to the Foreign Leasing Corporation are currently deductible as valid trade or business expenses. Domestic Leasing Corporation does not treat the amount paid to the Foreign Leasing Corporation as compensation to taxpayer (and therefore, does not withhold). Pursuant to an applicable US income tax convention, the Foreign Leasing Corporation takes the position that no portion of the amount paid to it by Domestic Leasing Corporation is subject to U.S. income tax because such amount is business profits which are not attributable to a permanent establishment in the U.S. The IRS warns that variations in the structure may exist.

If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in any such “listed transaction” on IRS Form 8886. For more information about Federal law requirements, please contact us.