Tax laws for international businesses can be extremely complex. Your business could be exposed to taxation in the United States and a foreign country if it is unfamiliar with the methods of avoiding double taxation.
Fortunately, our international business tax planning lawyers can provide the guidance your business needs to minimize its tax losses. The type of tax planning your company requires will depend on whether it is based in the United States or another country. However, several methods are available to prevent double taxation regardless of where your company is located.
Contact McCormick Tax Law today at (215) 630-0861 to receive a free case evaluation with our international business tax planning attorneys.
Understanding International Business Tax Planning
If your company has financial investments or business operations in both the U.S. and a foreign country, paying taxes on that income in both jurisdictions is mandatory. To avoid double taxation, it is important to have a strategic approach. Non-compliance with tax laws in either jurisdiction may result in serious penalties.
Navigating international taxation laws can be a complex and daunting task, as regulations vary from country to country. This is where the expertise of our international business tax planning attorneys can help. Our team can assist your company in complying with regulations while also legally minimizing your worldwide tax burden. If you are a U.S.-based company, complex methods are available to limit your exposure to double taxation and help plan your business’s cross-border operations.
Foreign companies operating in the U.S. will likely be exposed to taxation in the U.S. as well as their country of origin. Fortunately, there are ways to limit these types of companies’ tax exposure by understanding how their business will be taxed in the state or states where they operate.
Tax Planning for United States Businesses Operating in Foreign Countries
Several techniques can help save your company money and avoid double taxation. Businesses based in the United States are exposed to additional tax requirements that purely domestic companies are not. Domestic companies with operations in other countries are typically responsible for observing the tax laws in the U.S. and the country in which they are doing business. Fortunately, a few methods can help limit the amount of taxes your business could be liable for.
Utilizing Your Offshore Losses
A key strategy for businesses is using unrealized or ongoing losses to offset taxable income in the United States. When planning for cross-border operations, it is crucial to consider obtaining deductions for built-in offshore losses and foreign loss operations. Since the U.S. taxes a U.S. corporation’s worldwide income, structuring foreign loss operations as a branch of a U.S. corporation or a flow-through entity owned by a U.S. corporation can lower taxable income in the U.S.
Utilizing Captive Insurance Companies
Another strategy often used to structure a business’s taxes so that its taxable income is reduced is to establish what is known as a “captive insurance company.” However, this method is typically only suitable for companies willing to invest the necessary capital to run the insurance company.
A captive insurance company is an insurance company owned by a single shareholder or a small group of shareholders that provides insurance coverage exclusively to its shareholders and affiliates. In this type of arrangement, a corporation purchases insurance from a sister insurance affiliate commonly controlled by the corporation.
If implemented, the captive insurance company applies insurance tax accounting regulations to calculate its taxable income, and the insured can deduct the premiums paid to the insurance subsidiary. The insurance subsidiary’s owner or affiliates may deduct the premiums paid to an insurance subsidiary. The insurance subsidiary would include the premium income in its earnings but would be allowed to offset it with loss reserves, including discounted unpaid loss reserves.
Effective State and Local Tax Planning
Lowering a company’s U.S. taxable income involves considering state income tax as a vital component. To calculate state taxable income, the federal government’s defined taxable income is the usual starting point, but with several adjustments and modifications. Unless there is a specific state modification, the calculation of state taxable income is based on federal taxable income.
Regarding state and local taxes, a controlled foreign corporation’s income is typically considered dividend income instead of being included in the federal tax calculation. This could potentially make these deemed dividends eligible for a dividend-received deduction.
Transferring Business Assets to a Foreign Company
A common way to lower taxable income in the United States is by moving income-producing assets to another country. The tax implications of transferring assets to a foreign corporation depend on several factors, such as the type of assets being transferred, whether they are tangible or intangible, and the method used to make the transfer, such as a sale, contribution, or license.
Tax Planning for Foreign Businesses Operating in the United States
The basic principles of the U.S. tax system regarding income earned by foreign corporations are fairly simple. Understanding the extent of a foreign business’s activities in the United States is critical in international taxation, as it determines the tax treatment it receives.
Suppose a foreign corporation is actively conducting business in the U.S. and generating income from it. In that case, it will generally be subject to tax on the income earned from both U.S. and foreign sources related to that business and considered “effectively connected.”
Apart from the federal income tax, foreign businesses carrying out operations in the U.S. should also take into account other tax responsibilities and reporting obligations. For instance, state income taxes and state gross receipts taxes will play a crucial role in determining the amount of taxes your company owes. States also often have franchise taxes and real property taxes that can further expose a company to double taxation. Foreign-based companies should also take into account the sales tax and employment taxes of the state in which they are conducting business operations.
Understanding how local and state tax laws govern your company’s taxable income is vital to effective tax planning for international businesses. Because the United States is a federal system, states have the same ability to set tax laws as the federal government. This means a business will be required to observe both sets of tax laws. Some states offer more incentives to foreign businesses to encourage them to move operations there, while other states have less attractive business tax options. Knowing which rules apply to your business will require researching the abovementioned local and state tax laws.
Our International Business Tax Planning Attorneys Can Help
For a free review of your case, speak with our experienced international business tax planning attorneys at McCormick Tax Law today by calling us at (215) 630-0861.