February 5, 2008 - Phil Hodgen

International Tax Planning 101 – (4) Until proved otherwise, here is your tax strategy

This is a short series aimed at CEOs, so they can make good decisions about international tax planning without having to become any kind of tax expert at all. I will spot you the “T” and the “X” and if you can spell “tax” with that head start, you’ll be fine.

The first post in the series is here. It’s an introduction.

The second post in the series is here. Look for the easy answers first. Are there some roadblocks that are impossible to overcome? Resistance is futile. Accept the things you cannot change. Etc.

The third post in the series is here. Will your life be easier if you have a company in the country where you are investing or doing business? Yes, probably.

This brings you to a point where you have to encounter tax jargon for the first time. Don’t worry, it’s not as bad as you think.

I have a simple starting point for U.S. companies looking outward for investmnt or business operations. I assume it is best unless proven otherwise.

Where you have cross-border investment or business operations, my starting point is to create a legal structure (companies and all that stuff) that is nonexistent for U.S. tax purposes.

“Invisible for U.S. tax purposes” simply means that the companies you use will not pay income tax in the United States, even if they do pay tax in other countries. Partnerships work this way. So do limited liability companies and Subchapter S corporations.

And, magically, all sorts of foreign corporations fall into this category through the magic of tax law. You can make some–not all–foreign corporations disappear for U. S. income tax purposes.

The liability protection of a corporate entity remains intact. You have a locally-formed company, making it easier to do business in the foreign country.

Cheaper, simpler to run

The first reason I like this concept is that an invisible structure is usually cheaper to operate–in legal fees, accounting fees, tax returns, and the like.

Passes tax credits upstream easily

The second reason I like this is because it makes it easy for the U. S. company to take a credit (against U. S. income taxes) for taxes paid overseas. And that is the key to having a dollar of profit taxed once, not twice. You frequently don’t care WHERE you pay the tax (Germany or the United States) as long as you don’t pay it in both countries.


Next, we look at times when the “invisible is best” structure is not the best. Warning: we’re going to talk about present value.

Tax and Trusts