The U.S. tax laws have a lot of rules that depend on where a foreign company is created or organized. For example, if a foreign company gets dividends from another company in the same country, it won’t be taxed as much. And if a foreign company provides services in the country where it’s created, it won’t have to pay certain taxes. This means that a company can set up in one country and be managed from another to save on taxes. For U.S. tax purposes, a corporation is considered domestic if it’s incorporated in the U.S. or any state. Domestic corporations are taxed on all income, including foreign earnings, but can get a credit for taxes paid to foreign countries. Income earned by foreign subsidiaries of a U.S. parent corporation isn’t taxed until it’s brought back to the U.S. as a dividend. However, certain types of income earned by foreign subsidiaries can be taxed even without being brought back to the U.S.
Foreign corporations are generally taxed on U.S. income and income effectively connected to a U.S. business. They may also be subject to tax treaties between their home country and other countries.
In some foreign countries, a corporation is considered a resident based on where it’s managed and controlled, not just where it’s incorporated. This can create tax planning opportunities by forming a corporation in one country but moving its management to another country with more favorable tax laws. The related party factoring income rules say that if a company buys a bill from another company it’s related to, the income from collecting that money is treated like interest on a loan. There’s an exception if the two companies are based in the same foreign country and the related company wouldn’t have made any income from collecting the bill. This means the income wouldn’t be taxed in the US. So, a company might try to work around these rules by moving its operations to a different low-tax country. Basically, by forming a company in Spain and another one in Malta, a company can avoid paying taxes on some of its income. This allows the company to save a lot of money on taxes both in the United States and in other countries. Subpart F income includes passive income like dividends, interest, and rents. There are some exceptions, like if the income is from a related foreign company in the same country. But there’s a rule that is set to expire, so it’s better to plan for the future using different strategies. FBC services income is a type of income that a foreign company earns from providing technical, managerial, or other types of services to a related person outside the country where the company is based. This income can be subject to special tax rules. For example, if a U.S. citizen forms a company in the United Arab Emirates to provide services to a client in Dubai, the income from those services may not be considered FBC services income if the services are performed within the UAE. UST can reduce their tax burden by setting up a company in a country with lower taxes and then moving its management and control to an even more favorable tax jurisdiction. This allows them to potentially bring the money back to the US at a lower tax rate. This strategy involves following certain rules and may require setting up the ownership structure of the foreign company in a certain way. Part two of this article will talk about more ways to plan for foreign income taxes. Subpart F of the Internal Revenue Code deals with taxes on foreign income for U.S. shareholders. A Controlled Foreign Corporation (CFC) is one that is more than 50 percent owned by U.S. shareholders. There are also rules for Passive Foreign Investment Companies (PFICs) and foreign corporations with Effectively Connected Income (ECI). The tax laws are complex and may vary depending on the country in which the foreign corporation is located.
Source: https://www.floridabar.org/the-florida-bar-journal/moving-the-management-and-control-of-a-foreign-corpration-to-achieve-favorable-u-s-tax-results-part-i/
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