Example of the Business Purity Trap | International Tax Attorney Florida
Let me give you an example from my practice; it’s a fairly recent example. I had a Client who was operating a business in one of the Southern states of the United States.
Let’s say he had a product and that product wasn’t doing that well in the United States; so what he decided to do was to go to China to see if he could find a Market there. He went to China and found some people interested in that product. He then went to his Business Lawyer and the Lawyer said, “If you are going to operate in China, you shouldn’t be operating from the United States. Why don’t you open up a Company in Hong Kong?”
So the Client said, “That sounds like a great idea; why not open a Company in Hong Kong?” He then opens a Company in Hong Kong, then he goes to Lithuania. In Lithuania he decided that this was another country where he could potentially find clients for his product. He again talked to the Business Lawyer and the Business Lawyer suggested that he open a Company in Lithuania. The Client then goes to Russia (this is a Russian speaking client) and meets a friend and the friend says, “I like your business; why don’t we operate together?” The Client responded, “The Company in Lithuania is mine and I don’t really want any Partners.”
They both go to the Client’s Business Lawyer and the Business Lawyer suggested, “Very easy; why don’t you form a Company, a joint venture in Russia and then operate from there.” So then they own this Company together. Then he gets interested in another product and creates another Company. Then he goes to Poland because he thinks that in order to operate in Europe he would be better off having Accounts in Poland. Without the advice of the Business Lawyer he opens another Company in Poland by himself – six Companies total.
No Tax Advisor ever was consulted about opening up these Companies. Years go by, then he comes to me for a completely different issue but I’m a very detailed-oriented person as a Tax Attorney should be and I started asking about his other activities around the world and uncovering one Company after another. Then we realize that he’s got six Companies for three years and some of them for a little longer, for which no forms 5471 were filed: six Companies, six forms 5471 X 3, that’s eighteen X $10,000 penalties.
The Business Lawyer exposed his Client to $180,000 in penalties; for a Client with assets this size (this is not a Multinational company), that is a huge hit.
Remember, all Business Transactions have Tax Consequences.
