Do Tax Haven Countries Interact With the ERTC?

December 12, 2023
Dayes Law Firm

The Employee Retention Tax Credit, or ERTC for short, can be a lifesaver for business owners who’ve fallen on hard times. The ERTC is a refundable tax credit you can use to pay debts, cover bills, hire more workers, or even open offices in a new location.

If you keep some of your money in a tax haven country, you might wonder whether you qualify for the ERTC. Here’s what to know about the ERTC and tax haven countries.

What Are Tax Havens?

Tax havens are countries with very low tax rates for international businesses and individuals. A few well-known tax haven countries include Switzerland, Singapore, Bermuda, the Cayman Islands, and the Netherlands.

Many businesses use tax havens to shift profit by moving money from a high-tax country to a lower-tax jurisdiction. Also called international tax avoidance, this isn’t necessarily illegal, but some countries frown on the practice because it creates tax competition between jurisdictions. 

However, foreign direct investment (FDI) can be a good thing. Some proponents say it stimulates job creation and economic growth.

Phantom FDIs may cause problems, though. Phantom FDI occurs when a business attempts to commit corporate tax evasion by creating empty shell companies in a foreign country. These shell companies conduct no real business activities; rather, they manage intangible assets or conduct intra-firm financing to minimize their international tax bill.

Figuring out how the ERTC and tax haven countries affect one another can be tricky. 

Can You Claim the ERTC If You Store Money in a Tax Haven?

Although moving money into a tax haven can save your business a bundle, problems may arise when claiming the ERTC.

Let’s say you own a U.S.-based business but shift some of your profits to a tax haven, such as Switzerland, to avoid paying taxes to the IRS. You then use that money to pay workers under the table. Because you didn’t pay FICA taxes on those wages, you couldn’t claim them for the ERTC.

This is because the IRS only allows you to claim “eligible wages,” meaning those subject to the FICA tax (including health insurance costs you paid for workers).

Can you claim the credit if you have an international business? It depends. If all of your employees reside in a tax haven country, you cannot claim the ERTC for those workers. The IRS only allows you to claim the ERTC for U.S.-based workers.

For example, assume you have a company in the Netherlands. Some of your employees are residents of the Netherlands, while others live in the U.S. and work remotely from home. You could claim the credit for those U.S. workers but couldn’t do so for the Netherlands-based employees.

How to Claim the ERTC If You Are Eligible

The IRS has a few other requirements that apply to ERTC eligibility. To qualify, your business must either:

  • Have experienced a major drop in gross receipts (50% for 2020 and 20% for 2021)
  • Have closed, partially or fully, in response to a government order

If you meet one or both requirements, you can claim the ERTC by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund

Not Sure Whether You Qualify? Call Dayes Law Firm

Understanding how the ERTC and tax haven countries work together can be confusing. Having a legal professional check your books can be critical. If you store money in a tax haven and want to know whether you’re eligible for the ERTC, call Dayes Law Firm at (800) 503-2000.