Amazing and I am just amazed at the number of telephone calls I get from small business owners with the worst international tax structure.
And to be honest with you, there is nothing that can be done to fix it. First, let me tell you the fatal problem of a corporation for both domestic and foreign tax planning. All corporations are like a cage. You can’t take property out without adverse taxation.
This includes S-corporations, domestic corporations, foreign corporations, and foreign LLCs.
Table of Contents to International Tax Planning Strategies
As the foreign entities make a profit, they start transactions with the U.S. Parent Corporation. These related party transactions terminate the tax deferral legitimately earned by the foreign entities.
In other cases, the foreign entity borrows money from the U.S. Parent Corporation. The IRS can treat these loans as an equity investment in the foreign entity. Repayment of the loans is taxable income. This tax law is called “debt versus equity”. I have information on this debt versus equity on this link.
On the other hand, if a foreign entity loans money to the U.S. Parent Corporation, the loan is treated as a dividend because of tax code section 956. You can learn more about section 956 on this link.
Now here is the dumbest plan that I have seen. A “check the box” election is made for the Foreign LLC #1 creating an unexpected taxable event. This international tax law issue is the same if the U.S. Parent Corporation is taxed as a C-corporation or an S-corporation.
Yep, it is getting worse. This international tax structure causes the loss of the foreign tax credit unless a complicated tax accounting method is elected. This election, once made, is for all future years.
The election works great for publically traded companies because they want “earnings per share” for their audited financial statement. Small business owners want to create wealth and pay less in taxes so that they can grow their business.
If you need help organizing your international business, give me (Brian Dooley, CPA, MBT) a call at 949-939-3414. Of course, my easy to read (in two hours) book is a must for every small business owner.
 Foreign LLC have an exception if you elect to treat them a disregarded entities or partnerships in their first year of business.