I liken an American corporation to a steel cage. The assets are trapped in this cage by the tax law. This applies to an S-corporation, a C-corporation, a foreign corporation,
International Tax Strategies when a foreign offshore or domestic corporation is like a steel cage
When a corporation transfer any type of property (tangible and intangible property, a taxable sale occurs. The exception is a domestic reorganization that is classified as tax free by the tax law.
A reorganization by an American corporation with a foreign corporation is not tax free.
Tom called the other day. His Nevada corporation has unique software to search big data. The data is hosted by an unrelated business outside of the United State. He is the only employee. The corporation pays Tom a salary and withholds the payroll taxes. Tom told me that the corporation has no assets. He just wants to start using a tax haven corporation.
Here is what’s going on. The corporation has goodwill and that is intangible property, Goodwill includes. among other items, a trade name, customers, knowhow, websites, unique software, and workforce in place. The corporation will owe taxes when the business transferred.
Tom believed that he owned the software and knowhow to search and manipulate big data. However, he worked for his corporation and result of his work is owned by his corporation.
What is the solution for others. In starting new business, which may move offshore, create a foreign corporation and not an American corporation if you can afford the expensive legal fees and annual CPA fees. Do not do this yourself without both an attorney and a CPA.
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
What is the worst international tax structure for small business?
Small business international tax planning should avoid the use of a U.S. corporation. This above structure is the worst for small business. Corporations traded on the stock market can use this structure because they have a different tax law than privately owned businesses.
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.
Foreign Tax Credit Planning for the Small Business
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.
Citizens of Canada, the U.K., Australia, New Zealand, the European Community, have a unique tax advantage while living in the U.S. 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.
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 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.
A 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.
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.
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.
Form 5471 is full of international tax planning and tax savings. As you prepare Form 5471, carefully look at the instructions. They hint at the hidden tax savings. (If this is the first year or a late filing, then please see this link.)
It is here, hidden in the fine but dull print, that you will find your tax savings. For example, does your tax preparer know that an offshore corporation acting as a finance company can avoid U.S. taxes?
Or that a foreign contract manufacturer related party sales are tax-free?
My video below is from an international tax class that I gave to the California Society of CPAs. If you want to start to save taxes while preparing your Form 5471, then call me, Brian Dooley, CPA, MBT at 949-939-3414.
This blog posting contains one of the most important concepts in creating wealth with tax planning.
Warning; it may be a little dry because it contains a new hard to understand concept.America has two independent sets of tax law. First, we have the tax code (Internal Revenue Code).
The second tax law is hidden. It was not enacted by Congress. It is called “doctrines”.
One of my clients saved a small fortune by the use of the doctrine of “debt versus equity”. At the end of this blog posting, I have an secret IRS report on the doctrine. Send this to your CPA to keep in your file for your future tax planning.
My client’s name is Bill. Bill is a great small business owner. Like most of us, he treated all of his corporations’ money with complete disregard to the legal concept of a corporation. He took money from one company to fund new businesses in another corporation.
However, on new business “went under” and Bill lost everything. Worse.. he could not deduct the loss because of his the “at risk” rules exclude money you borrow from a related business. Continue reading →