Tag Archives: best international tax strategy

Tax Savings with International Tax Treaty Planning for the Resident Alien

International tax treaty planning for the resident alien that are citizens of Canada, the U.K., Australia, New Zealand, the European Community start with the tax treaty. Many have a unique tax advantage,    Tax treaties with these countries provide a unique and little-known tax savings. 

This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should. 

If you have any questions, then please contact me, Brian Dooley, CPA, MBT,  [email protected] or visit our website – https://www.intltaxcounselors.com.  

International tax planning starts with these essential concepts:

Resident Aliens

resident alien’s income is taxed in the same manner as a U.S. citizen.

They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties.  The resident alien must report these amounts whether from sources within or outside the United States.  Depositing of income outside the U.S. is taxable.

If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident.  Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.

Nonresident Aliens  

Nonresident aliens are usually subject to U.S. income tax on U.S. source income.  In some cases, foreign source business income can be subject to U.S. tax.  You will learn more in my book, International Taxation in America for the Entrepreneur.

Dual-Status Aliens  

dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year.  This can occur when you obtain your green card.

Income Types

U.S. Investment income is taxed at a flat 30% of the gross income.  If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.

Business income is taxed on a net income basis.  The alien has the same tax rates as an American.  In some cases, an NRA’s foreign business income is taxed by the U.S.  This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.

Tax Withholding on Foreign Persons

Payments of U.S. income to foreign persons are subject to the  withholding tax rules.  In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income.  This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.

Taxpayer Identification Numbers (TIN) for the non-citizen

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN).  Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.

Sale of Real Estate 

Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate.  In some cases, the withholding tax applies to refinancing.  The withholding tax does not replace the income tax.  Aliens must file an income tax return.  The tax withheld is a credit towards the total tax.  If the total tax exceeds the tax withheld, they get a refund.

Saving Taxes with Tax Treaties 

The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties.  If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.

Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code.  Tax treaties allow you to pay less tax.

Estate Taxes

All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes.    Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance.  They are not entitled to the $5,000,000+ exemption that is allowed for Americans.  Accounts with brokerage firms are frozen upon the alien’s death.   Tax treaties may allow the alien to avoid U.S. gift and estate taxes.

Become an Expert

Become an expert with my book, International Taxation in America for the  Entrepreneur, available on this link and feel free to call me with any questions that you have.

 

 

International Tax Strategy for the United Kingdom, Deutschland, and Français Business owning a U.S. Subsidiary Corporation

What is the best international tax strategy for the United Kingdom, Deutschland, and Français Business owning a U.S. subsidiary corporation?

The answer is long and complicated.  So, please get a cup of tea or coffee and spend a few minutes.    One choice is for the U.K., German or French company to merely open a branch in the U.S. and not form a U.S. corporation.

Legally; this is easy.  The company will register with the state(s) where it is doing business.  If it has employees, it will register with both the IRS and the states.   

The other choice is for the U.K., German or French company to create a subsidiary corporation in the state that will be their U.S. headquarters.  If it has employees, it will register with both the IRS and the state.

The U.S. corporation pays income tax on its worldwide income. The maximum U.S. corporate tax rate is 35% (as of October 2017).  This rate may drop to 20% starting in 2018.

Most states also have an income tax.   So far, it is simple. However, with more than 1,000,000 pages of tax law, it quickly becomes complex.

We start with capitalizing the corporation.   American tax law is anti-debt and especially shareholder debt.  

For example, Keith’s U.K. company starts a California corporation. The U.K. company invests $1,000 in the common stock and loans a $100,000 to the corporation.  The loan is evidenced by a written promissory note and has a reasonable interest rate. The promissory note was approved by the directors of both companies.

The California corporation had a successful first year and paid back the $100,000.  The U.K. company has $100,000 of U.S. taxable income. Yes, the repayment is taxable. 

Why is the loan repayment taxable?   The California corporation was “thinly capitalized”.  For the U.S. standpoint, a loan is treated as preferred stock when the loan exceeds 33% of the capital (including retained earnings).  This tax law is called debt versus equityThis link has more information. 

And there is more bad news for international debts.  If tax treaty exempts the interest income from U.S. tax, a U.S. corporation cannot deduct only a portion of the interest expense.  This law is complicated, and I have an explanation on this page. 

The goal of this law is to prevent the foreign person from removing money from a U.S. corporation free of U.S. income tax.   Luckily, the tax treaties with the U.K., France, and Germany require a U.S. tax and thus interest paid to a residence in this country is not affected by this law.

Avoiding Double Taxation with an International Tax Strategy for the United Kingdom, Deutschland, and Français Business owning a U.S. Subsidiary Corporation or a Branch.

The U.S. tax law wants double taxation on all corporate profits. For the foreign corporation with a branch, this tax is called the “branch profits tax” 

The tax law expects the corporate profits to be paid the shareholder as a dividend.  The U.S. tax rate on a dividend paid to a foreign person is the lower of 30% or the rate found in the tax treaty.  

The rate is between 5% to 15% for in the U.K., France and German tax treaty (please see more on this link).  The tax is withheld by the paying domestic subsidiary. 

For example, the  California corporation had a successful first year.  The business made $250,000.  The U.S. tax is $80,000, and the California tax is $22,000.   

The U.K. company pays out the remaining profit of $148,000 to the UK parent company.   U.S. tax law classifies this as a dividend.  Assuming that the ownership of the U.K. company qualifies for the U.K.-U.S. Tax Treaty for the direct dividend rate, the U.S. tax is $7,400. 

The California corporation withholds the $7,400 and  pays $7,400 directly to the IRS.  The U.K. parent company receives $140,600 ($148,000 minu $$7,400).   By the way, many types of payments of U.S. source income to a foreign person require the tax to be withheld and paid directly to the IRS.  Here is a link with more on this topic. 

How about foriegn  management fees, consulting fees, and other stewardship fees? 

Unlike other nations, you can go to prison for paying these fees unless you can prove that the foreign person did work and the payment is reasonable (read more on this link).

The U.S. courts will want to see your time journal (showing what you did, the day you did the work and the time you spent), proof that the hourly rate is valid and the business reason as to why the foreign person did the work and not someone in the United States.

How about international licensing the technology or a trade name or a trademark?

Much like the payment of fees above, you need to have proof as to the value to the U.S. corporation.   When the amount of the licensing payment is inflated, not only is the deduction disallowed, the event may be considered a crime.

You must be able to prove that the  price paid for  goods, services and licensing is the price that an unrelated person would pay.   

International Tax Strategy for the United Kingdom, Deutschland, and Français Business with a  Cost Sharing Agreements to Shift Profits

Cost sharing is a sophisticated international tax strategy. The courts continue to uphold international tax planning using cost sharing agreements.  You can learn more on this topic on this link.

What if the U.S. corporation does not pay a dividend?

A second corporate tax applies when a corporation does not have a business reason for not paying a dividend to a shareholder.   In the example above, if the profits are needed to expand the business, for a cash reserve for unforeseen events, then the second tax will not apply.

Assuming that the U.K. company ownership qualifies under the tax treaty of the five percent rate on dividends, then the second tax is five percent.

Does the U.S. subsidiary corporation causes the U.K. company to pay U.S. income taxes?

It might!   Here is what has happened, on  this link.  

Finally, there is the U.S. estate taxes for the non-resident alien.

 Assuming that Keith is the sole shareholder of the U.K. company, the value of the California corporation could be subject to U.S. estate taxes upon his death.  Here is more on this topic. 

If you would like to discuss your plans of opening an office in the  United States, then please email me at [email protected]

 

International Tax Strategy for Importers with Contract Manufacturing

International tax planning for the Contract Manufacture

New international tax strategy for importers with contract manufacturing

A new international tax strategy for importers with contract manufacturing allows small business to reduce taxes.  If you import products into the U.S., you want to look at this new law.

By the way, this new law was ordered by the White House.

Here what to do:
1. Briefly, you form and control a foreign corporation where you contract your manufacturing.  The corporation manufactures products for you.  It sells these products, at a profit, to your U.S. business or directly to your customers.

The tax law does not tax you on the profit made by this corporation until you withdraw the profit. The foreign corporation must be formed in the same country where you manufacture.[1] 

In other words, the profit is taxed only when you distribute the money or make certain investments in the U.S. 

2. The sale of the manufactured property takes place outside the U.S. This means title to the property occurs anywhere other than the U.S. Usually, the sale takes place when the property leaves the factory of the contract manufacturer.

3. You or an employee must only do one or more of these activities either via the internet or in person:
(1) Oversee and direct the activities or process which the property is manufactured, produced, or constructed or
(2) Select the materials or the vendor or
(3) Control the raw materials or the work-in-process or the finished goods or
(4) Manage the manufacturing costs or capacities or
(5) Control of manufacturing logistics or
(6) Control the quality such as overseeing the sample testing or establishing the quality control standards or
(7) Develop and direct the use or development of the product, design, and specification.

With this International Tax Strategy for Importers with Contract Manufacturing Importers, Small businesses are Legally Avoiding Taxes.

I know that you are busy and   I wish I could place all the tax breaks on a few paragraphs.   However, to have a blog post for many different types of businesses, this post is a few pages long.

If you want to schedule a time to talk, then email me Brian Dooley, CPA, MBT at [email protected]

Here is some technical international tax information this new international tax law.  You do not pay income tax on your controlled foreign corporation income that is not classified as “subpart F income.”  Subpart F is the location in the tax code that talks about the taxable income.  You want your controlled foreign corporation to earn income that is not Subpart F income.

Subpart F income does not include income from the sale of personal property manufactured, produced, or constructed by a foreign corporation.[1]

For example, Ford Motor manufacture in England.  These cars are sold in the U.K. and Europe through independent dealers.  None of the income is Subpart F income.  The income is not taxed by the United States.

Avoiding U.S.  taxes for Big Business like Ford is easy.  They can afford to build a factory.

Now, small businesses have the same opportunity for tax planning.  Contract manufacturing allows the small business to manufacture its products.
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Best International Tax Attorney or International Tax Accountant

The best international tax attorney international tax accountant must know both the 1,000,000 pages domestic tax laws, the “common laws” from court cases and international tax law.   

The best international tax attorneys and accountants use the tax pyramid.

The best international tax attorney and tax accountant have an advance degree in taxation.

The best international tax attorney and tax accountant have an advance degree in taxation.

The best tax attorneys and best tax accountants are experts in both the common law and the tax code before they learn international tax law.

The best tax accountants and best tax attorneys have an advance degree in taxation.  Law schools and accounting schools do not teach tax law.  Up tp two additional years of schooling is required to be a tax expert.

The international tax adviser studies the “character of your income.  Each type of income has its own tax laws.

 The tax law for consulting income is different than the tax law for importing income.  The best international tax CPA looks at your business’s operations and dissects each step.

Here is an example:  A U.S.  website designer has employees in India.  After dissecting his activities, he decided to incorporate in a tax-free country.  The tax haven corporation files an IRS Form 1120F (F is for Foreign).  Only half of his net income is U.S. taxable. The other half is not taxable.  His business operates the same.

At International Tax Counselors, our international taxation experts have more than 30 years of experience.  Each expert has an advance degree in taxation.

If you need planning, consulting, or compliance, your team at International Tax Counselors has the needed international accounting and legal expertise and skills.

We have unique expertise in:

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How to Prepare Form 1120F for a Foreign Corporation’s non-U.S. Business Income and Investment Income & Form 5471

Table of Contents to Foreign Corporation Tax Planning and Preparation for Form 1120F.  For Form 5471, please click on this link.

International tax planning has a thin line between non-business income and business income.

A foreign corporation pays a tax of 30 percent of the amount it receives from sources within the United States as investment income and sometimes compensation:1

The 30 percent tax does not apply to interest income on a “portfolio debt”  that a foreign corporation receives from U.S. sources.

Avoiding U.S. tax on Businesses Income with no Permanent Establishment. 

One part of the Form 1120-F to report and pay tax on U.S. source investment income and U.S. source income from the sale of property (including inventory).  When the foreign corporation does not file the U.S. Form 1120F, the IRS can at any time assess taxes.  The corporation will also lose its right to deduct expenses.

If you are not sure if Form 1120F is required, you can use the safe method of a protective filing.   If you need help, then please call me Brian Dooley, CPA, MBT at 949-939-3414.

International tax planning has a thin line between non-business income and business income.

This thin line decides which of two very different tax laws apply.  This blog is on the income that is not connected to a  U.S. office or “place of business”.

Sometimes this income is investment income and sometimes business income that is not connected to a U.S. business’s office or place of business.

A foreign corporation pays a tax of 30 percent of the amount it receives from sources within the United States as:

(1) interest (other than bank interest),  dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and royalties,

(2) gains on the disposal of timber, coal or domestic iron ore with a retained economic interest;

(3) gains from the sale or exchange of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property, or of any interest in such property but only to the extent the gains are from payments that are contingent on the productivity, use, or disposition of the property or interest sold or exchanged.   The taxable portion is after recovery of your cost; and

(4) and other “fixed or determinable” annual or periodical gains, profits, and income (this is a “catch all” part of the tax law that rarely applies).

The gross income (income before expenses) is taxed a 30 percent.  Sometimes, a tax treaty may reduce this tax rate.

The 30 percent tax does not apply to interest income on a “portfolio debt”  that a foreign corporation receives from U.S. sources.

The purpose of the portfolio debt tax law is to allow the foreign investor to make loans to U.S. persons and avoid U.S. taxes.  Yes, the intent of the law is to avoid taxes.  The following is a summary of the type of debts.

(1) An unregistered obligation that is payable only outside the United States if the obligation is designed to be sold only to a non-U.S. person; and

(2) A registered obligation for which a statement is if the beneficial owner of the obligation is not a U.S. person.

The following types of interest cannot be portfolio debt interest:

(1) Contingent interest, such as interest payments that depend upon the income, profits, or assets of the debtor;

(2) Interest received by a bank on an extension of credit made under a loan agreement entered into in the ordinary course of its trade or business;

(3) Interest received by a 10-percent shareholder of the corporation paying the interest; and

(4) Interest received by a controlled foreign corporation from a related person.[1]

The other advantage is U.S. estate taxes.  Upon the death of a non-resident alien, portfolio debt is not included in his or her U.S. estate tax return.

Avoiding U.S. tax on Businesses Income with no Permanent Establishment.

Tax treaty corporations have a unique advantage.   They can earn U.S. business income and not pay U.S. taxes.

Here are some examples of international tax strategies.

Personal service income to U.S. customers

A British law firm has American customers.  They perform the services outside of the U.S.  However; they have an office in Los Angeles for administration and marketing.  Payments made by their American customers are deposited into a U.S. bank located in Los Angeles.

Their income is not subject to U.S. taxes.  You will note that the law firm has a permanent establishment in the U.S.  They did not try to avoid having a permanent establishment or even a place of business.

The tax planning is the international tax law on service income.  This income is sourced where the individual (or computer as in the example below) is located when the services are provided.

Web services to U.S. customers.

A Swiss business has an app that is used by both American businesses and European businesses.  The customer pays for the app pay watching commercials or by monthly subscription services.  The Swiss company maintains and office in Orange County, California for their American owners and directors.  The Swiss company does it banking in Newport Beach, California, and Geneva.

The Swiss businesses income is not subject to U.S. taxes.  Learn why on this link.

Sale of merchandise to Americans   

Sam, a Canadian citizen, has an investor visa and lives in Malibu, and his office is in the Santa Monica.   He owns a U.K. company that sales paddle boards via a U.K. website.  He is a director of the U.K. company.  He is also the sole shareholder.

The paddles are shipped directly from Canada using Federal Express ground shipping.  Title to the paddle board passes to the customer via the website in Canada. The income of the U.K. company is subject to U.S. taxes.   Sam must file form 5471.

FOOTNOTE

[1] Code Section 881(c).