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Opening a Business Abroad As An American Expat Entrepreneur: A Case Study
Let us discuss an example of Tom, a US citizen residing in Papua Guinea. He is thinking to open up a business with himself where he is 100% owner, he does not conduct business in the United States. As an American expat entrepreneur who is doing business,setting up a local entity business would be logical. Trying to open bank accounts to conduct business as a US corporation in Papua Guinea would not be a feasible option. He set up a Papua Guinea corporation and pays Papua Guinea income taxes, the IRS will come to his door to collect US income taxes on his business profits from a foreign country.
Before the Tax Cuts and Jobs Act (TCJA) 2017, American owners of foreign companies could defer the taxation of their business income that is active. This income with some deduction like depreciable assets along with subpart F income or any passive income is taxable by the United States annually. The advent of Global Intangible low-taxed income tax or GILTI as part of the Tax Cuts and Job acts 2017, made compliance surrounding reporting income of foreign companies complex, costly and has expanded amounts includible in a United States shareholder’s earning.
As an outcome, Tom will be faced with a more complication with filing form 5471, Calculating Subpart F and Global intangible low-taxed income tax as well as reporting the income on Form 1040. What should Tom do?
When Opening a Business Abroad How to Mitigate US Taxes
Tom can decide the following options to aid him to navigate the intricacies of the tax problem better.
- File a Delaware certificate of Domestication to register as an entity for his foreign company. Delaware is favourable states concerning business incorporation. If no business is done in the state, then the state income tax is not applied. Also, the court system specializes incorporate problems and there is greater privacy. When a certification of domestication is filed then a foreign company is treated as a US company too.
- Tom would file Form 1120 to report his business activity. He can take a 21% share on his profits and would require to compare his tax bracket. Also, the S corporation status can be elected. It brings the advantages of US tax reduction by foreign tax credits and avail of the foreign-derived intangible income deduction
- Also, Tom can make an election in the US to treat his foreign company as a disregarded entity. It will have the authority to treat his company as a sole proprietorship by the United States, with a simple schedule C reporting, unlike the 5471 Complex Form reporting. There is a need to consider the impact of self-employment tax too.
By selecting any of the two options above, Tom can avoid paying Subpart F income or GILTI income tax when opening his business. Also, Tom can study other structures and see if he can take benefit of an income tax treaty abroad.
In the current tax scenario, United States expats have several options to consider when opening a business abroad. It might be the best course of action to the owner while choosing a US-based business. carefully studying all the alternative structures will help you to save tax for long term
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