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International Formation, Compliance and Planning
Introduction In today's international business environment, tax
requirements and legislation are becoming increasingly complex and
demanding. Tax and international business planning must be a focal point
when starting, funding, and operating an international business.
There are may planning options available (see Offshore Business Options and Country Guide in the right column of this page) and they depend upon your business strategy, country, and many other factors. The most common question I get is, "How can I retain earnings in my international company while remaining compliant with US law?" Yes, it is possible, but it requires a lot of upfront work to set up the business and entity correctly. I attempt to summarize the rules below. The following applies only to those actively engaged in international business. For personal asset protection, click here. There are no legitimate tax deferral options for personal asset protection companies or trusts. There are two major groups of US tax regulations that must be managed: 1) Controlled Foreign Corporation status and 2) Passive Foreign Investment Company rules under Sub Chapter F. The planning options below are available in countries which have a tax treaty with the US...generally not Caribbean islands. PFIC: A foreign corporation with one or more U.S. shareholders (regardless of the % owned) is a PFIC if 75% or more of its income is passive income or if at least 50% of its assets would be invested in instruments which produce interest, dividends and/or capital gains. The consequences to a U.S. resident or citizen of owning stock in a PFIC can be severe. Certain "excess distributions" characterized as ordinary income even if they would otherwise qualify for capital gains treatment. Moreover, tax due with respect to excess distributions or gain from the sale of PFIC stock is subject to an interest charge to reflect the deferral since the income was earned by the PFIC. In addition, shares of PFIC stock are not entitled to a Section 1014 step-up in basis at death. Fyi…PFIC regulations were enacted by US Congress at the request of the US Mutual Fund industry who was losing business to foreign investments. CFC: A foreign corporation is a CFC if at least 50% of either the total voting power or total value of the stock of the foreign corporation is owned by U.S. persons, each of whom owns at least 10%. Stock held by family members is grouped together for the 10% test. The consequences to a US resident or citizen of owning stock in a CFC is that they are taxed on their share of the corporation's "Subpart F Income" whether or not this income was distributed. This includes interest, dividends, rents, royalties, and business income derived from transactions with related parties. In other words, the CFC is treated as a pass-through (like an LLC or S-Corp in the US) for passive income to limit retained earnings and a US shareholder must report these income items on their US tax return each year. Therefore, a company must engage in investments and businesses so as to avoid being categorized as a PFIC and must be constructed to avoid CFC status if it is to retain passive income in a low tax jurisdiction. Again, the above is a summary of the rules and an attempt to illustrate the complex nature of international planning. Please contact me for a free consultation on how your international operation can be structured to comply with the various tax treaties and the US tax code. Compliance
Any US company, citizen or resident that has an
interest in a bank account outside of the US is required to
disclose the account each year to the United States Treasury on form
TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Failure
to file this form can result in extremely severe penalties, but this
is just the beginning of the compliance requirements. For more
information on the risks, see my
Offshore Defense page.
Some of the other basic requirements are: to file Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations, Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation Engaged in a U.S. Trade or Business, Form 5471, Information Return of U.S. Persons with Respect to Foreign Corporations, Form 8858, Information Report with respect to Foreign Disregarded Entities, Form 926 for US persons transferring property to a foreign corporation, Form 8865 for US persons transferring property to foreign trusts, and Form 3520/3520-A reports of foreign trust with US owner. Making matters more challenging, there are a number of State and Federal laws regarding Fraudulent Conveyance that limit the transfer of money and assets out of the US. These apply when you transfer assets for less than fair market value and/or to defeat current or reasonably anticipated creditors. With that said, the complexity of international planning is when and how much of the international businesses income is taxable in the US. Even if you choose to have your entity disregarded for US tax purposes (ie. pay tax as if the business was in the US), there are elections to make, forms to file and what would usually be taxed as capital gains might be converted to ordinary income. Two of the major rule categories are described below. Please contact me by 619-557-0587 or by email at chris@ruschlaw.com to file your returns and keep your business in compliance with US law. Click here for the fees for preparing some of these returns.
Employees and Independent Contractors Special tax rules apply to US employees of a
foreign affiliate (a corporation owned 10% or more by a US person or
corporation).
Click here to schedule a confidential appointment by email or call my direct line at (619) 557-0587. I will personally answer your call and work to structure your international business.
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