Expanding your business beyond the borders of your home country can be a good business opportunity, whether you are based in the U.S. or in another country. But when your business expands beyond its home country’s borders, it touches at least two tax systems. When your business touches the U.S., you want to structure it to minimize taxes and, perhaps more importantly, streamline it for the least amount of hassle.
Taxes reduce the profits your business can take home. A business can operate at a profit without any tax planning–in fact, having a profit is a prerequisite for paying tax in most cases–, but it can produce more profit with tax planning.
Corporations that are doing business in the U.S. are taxed on “income effectively connected with a trade or business in the U.S.” The effective tax rate on effectively connected income is 34% of income before taxes. In addition, the profits of the corporation are subject to a 30% branch profits tax.
By contrast, U.S. source income that is not effectively connected with a U.S. business is taxed at 30% of gross income.
Can you structure your business in a way to avoid doing business in the U.S.?
The U.S. has entered into income tax treaties with a large number of other countries. Most of these treaties protect the profits of a foreign business from U.S. taxes (and vice versa), as long as the profits are not made through a “permanent establishment”.
Is your business eligible to take advantage of an income tax treaty? Will it remain eligible if you choose to take the business public? Can you structure your business to avoid having a permanent establishment in the U.S.?
Businesses in the U.S. have obligations to report payments and withhold taxes.
When your business is in a joint venture with another–possibly U.S. business–, your clients may have multiple withholding and reporting requirements to fulfill when doing business with your joint venture: One for you and one for your business partner. Your joint venture itself may be a partnership under U.S. tax law, even when you have not registered any formal entities.
Make it as easy as possible for your clients to do business with you. Take the complexities out of your clients’ lives. This ensures that clients want to do business with you, and it ensures that they will not make a mistake when making a payment to you or reporting a payment made to you to the IRS, so you will not incur the extra cost of claiming extra refund from the IRS.
We can help you setup your business to minimize the compliance requirements when your clients do business with you.
The Tax Cuts and Jobs Act completely rewrote Section 965 to force a one-time repatriation of deferred earnings and profits in foreign corporations. It forces income recognition in the 2017 tax year, so there is…continue reading