Global Entity Structuring: U.S. Taxpayers Doing Business Abroad

Description

U.S. taxpayers are increasingly engaging in activities abroad. The most obvious considerations are whether to form the entity in the U.S. or another country and what type of entity to choose. Adding to the complexity of the decision are the many types of relief available for the taxation of foreign income in the U.S.

A U.S. entity pays tax on worldwide income while a foreign entity pays tax only on U.S. source income. Before tax reform, U.S. shareholders were taxed on Subpart F income (certain passive income and related party transactions) earned by CFCs. Now in addition to Subpart F taxation, Section 951A, GILTI, imposes a tax on net tested income earned by foreign companies. To ease taxation, Section 250A provides domestic corporations with a 37.5% tax deduction for FDII and a 50% deduction for GILTI. This creates an effective tax rate of 10.5% for GILTI and 13.125% for FDII. Additionally, there are benefits of foreign tax credits. Weighing the taxation on worldwide income against the benefits and burdens of being a foreign entity is complex.

Holding the investment individually seems to be a good idea when coupled with the 962 election to take advantage of the lower corporate rates. However, individuals aren't eligible for Section 959 relief from the second level of taxation when assets are distributed.

Listen as our panel of experts explains U.S. taxation of foreign income, anti-deferral rules including GILTI, Subpart F, and PFIC, and relief available by way of Section 962, foreign tax credits, and international treaties to help advisers make the best entity choice for businesses with earnings outside the U.S.