What Are the Tax Implications of Doing Business Overseas or Making Investments Abroad?
For U.S.-domiciled businesses, depending on the business plan or the foreign expansion, tax issues can range from simple to highly complex. You must consider numerous factors such as where (what jurisdiction) you will recognize the income, whether a tax treaty exists between the foreign market jurisdiction and the U.S., the potential taxes to be imposed in the foreign jurisdiction, as well as your domestic tax and reporting responsibilities. In cases where you are recognizing the income in your home jurisdiction for example, it could involve simply including the added income in your domestic tax return. In many other cases, it could be a much more complex situation, especially where the business model involves more complicated structuring and/or a continuing foreign presence and operation of the business. As we are not international tax experts and won’t give specific tax advice, we do, however, generally assist clients in coordinating with tax experts to plan a strategy to minimize the company’s overall effective tax rate and achieve tax efficiency.
Here are some general rules to review and be aware of:
Taxation on World-Wide Income. It is perfectly legal and common to receive income from a foreign (non-U.S.) source. If you are a U.S. citizen or U.S. resident alien, you are required to report your income from all sources within and outside of the U.S. (your world-wide income) on your U.S. tax return. If you are a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax, regardless of where you actually live. Also, the rules for filing tax returns and paying estimated tax, including as to income, estate, and gift tax, are generally the same whether you are living in the United States or overseas.
Taxation of U.S. Resident Aliens. The income of a U.S. permanent resident alien (a ”green card” holder) is generally taxed in the same manner as a U.S. citizen, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, etc. on your U.S. tax return.
Nonresident Alien. A person who is not a U.S. citizen or U.S. permanent resident for tax purposes (a person who has not passed the “green card test” or the “substantial presence test”) is considered to be a “nonresident alien.” Generally, as a nonresident alien, you will be required to file a tax return if you are engaged or considered to be engaged in a trade or business in the United States during the year and have U.S. source income. For non-U.S. persons that were temporarily present in the United States on an F, J, M, or Q visa, you are generally considered engaged in a trade or business in the U.S., and must file a tax return if you have income that is subject to tax (such as wages, tips, scholarship, grants, dividends, etc.).
FBAR. Under the Bank Secrecy Act, in addition to reporting your worldwide income, you must also report (on your U.S. tax return) whether you have any foreign bank or investment accounts. Under the Act, you are required to file a Report of Foreign Bank and Financial Accounts (FBAR) when “(i) you have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and (ii) the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.”
U.S. Tax Treaties. The U.S. has income tax treaties with a number of foreign countries. Under these treaties, foreign country residents are generally taxed at a reduced rate, and some types of income from U.S. sources are exempt from U.S. income taxes. In addition to federal income tax requirements in the U.S., most states in the U.S. tax the income of their residents. Some states honor the provisions of U.S. tax treaties, so you’ll need to research whether a treaty may be applied as to foreign tax in your state of residence. In general, Treaty provisions are reciprocal, so a taxpayer may be eligible for a foreign tax credit for taxes paid to the foreign country. Some treaties limit their benefits to U.S. citizens residing in the U.S., and U.S. citizens residing in a foreign country may also be entitled to benefits under that country's tax treaties with third countries.
Offshore Voluntary Disclosure Program. In 2012, the IRS reopened its Offshore Voluntary Disclosure Program. This program offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to come into compliance as to their tax and information reporting obligations, including the FBAR. Although the program does not currently have an end date, the IRS may end the program at any time, so you should periodically review the IRS guidance for updates.
For more information on Tax Considerations of International Businesses, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (312) 888-2000 today.