The structure of an international business is of great importance since the business will be taxed differently based on its structure, both inbound and outbound investments in and from the U.S. are subject to a set of complex tax provisions which could result in the imposition of substantial amounts of taxes. By choosing the right business structure a taxpayer could avoid the imposition of U.S. tax or could be taxed at lower rates.

 

Inbound Business:

 

Inbound business is any foreign owned U.S. business; generally a foreign taxpayer will pay U.S. tax on any U.S. source income whether the income is generated from passive investment or from the conduct of an active trade or business within the U.S. also the foreign corporation could be subject to income tax on the U.S. source income. For example: if a foreign corporation opens a branch in the U.S. for the conduct of a business or trade, any withdrawal from that branch will be subject to a 30% tax rate, and the same income could be subject to income tax under the tax provisions of the corporation’s country of origin. This system of double taxation could be avoided by creating intermediaries, which would conduct business in the U.S., in tax jurisdiction that has a foreign tax credit system or that has a tax treaty with the U.S. reducing the withholding rate by the U.S. or eliminating income tax by the foreign corporation’s country of origin.

 

Also income from passive investment is subject to withholding at source at a rate of 30% and it can be taxed in the foreign corporation’s country as income, so it could be subject to double taxation, this can be avoided if the owner of the income benefits from a tax treaty that reduces or eliminates the U.S. withholding rate.

 

Related Tax Forms for in-bound transaction include:

 

• Form 1120-F

• Form 3520

• Form 3520-A

• Form 5472

• Form 5713

• Form 8832

• Form 8833

• Form 8886

• Form 8891

• Form 8462

 

Outbound Business:

 

Outbound business is when a U.S. person invests in a foreign country. Generally income generated in a foreign country is only subject to the foreign country’s tax, but this income, when repatriated to the U.S., is treated as taxable income. Hence, U.S. persons investing offshore are subject to double taxation.

 

 

A U.S. corporation earning income from the conduct of a business or trade in a foreign country will be subject to the foreign country’s income tax, and also when this income is repatriated to the U.S. person it will be subject to U.S. income tax, so it will be subject to double taxation. This can be avoided if the U.S. corporation does not repatriate the income from a foreign source to the U.S. but reinvests the income in the foreign country. Also a U.S. corporation can claim credit for foreign income taxes paid, which can mitigate the fact that the foreign income is taxed twice.

 

Also a U.S. corporation earning income from passive investment like interests, royalties, and dividends will be subject to double taxation as this income are subject to withholding taxes in the foreign jurisdiction and to U.S. income tax when the income is repatriated to the U.S. This can be avoided if the U.S. corporation earns income from foreign passive investment with a country with which the U.S. has a tax treaty that eliminate or reduce the withholding tax rate by the foreign country.

 

For example: If a U.S. corporation receives a royalty from its Brazilian subsidiary for the use of intellectual property, the Brazilian authority will impose a 25% withholding tax on that payment, in this case the U.S. and Brazil have no tax treaty that can reduce or eliminate the withholding tax rate by the Brazilian authority, this can be avoided by establishing a holding company in a country with which Brazil has a tax treaty that reduces or eliminates the withholding tax rate on royalties.

 

Related Tax Forms for out-bound transaction include:

 

• Form 826

• Form 1118

• Form 5471

• Form 8621

• Form 8806

• Form 8838

• Form 8858

• Form 8865

• Form 8926

• Form 8938

• Form 1042

• Form(s) W8  including Form W8BEN

 

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