The Benefits of Tax Planning as Part of the Acquisition of an International Business

When a business is bought by someone else, it can be a good opportunity to make changes to how the company is taxed. This can help the new owner pay less in taxes. Tax planning is important for every business, and it’s different for each business and its owner. The main goal is to pay as little tax as possible. There are rules that allow businesses to move their profits to other countries to pay less tax. Businesses that are not based in the U.S. can also use these rules to avoid paying U.S. taxes on money they make outside of the U.S. Managing taxes for an international business is complicated. The way a business is set up and where it operates can affect how much tax it has to pay. When buying a business, it’s important to make sure the tax setup is efficient and won’t cause problems in the future. With proper planning, a new owner can improve the business’s tax situation. It’s also important to be aware of any potential tax issues before buying a business. Before buying a business in another country, it’s important to plan for the taxes and operations of that business. This involves working with tax experts in the countries where the business operates to create a plan that works for both the buyer and the seller. Sometimes, the plan won’t have a negative effect on the seller, so they will agree to it. Other times, it might cause tax problems or not work for the seller’s business, so they won’t agree to the plan. This article talks about things to think about when buying a business that operates in more than one country. When starting a business, you have to decide on how to structure it for taxes. You can either choose a flow-through structure, which means the business’s income is taxed directly to the owners, or a corporate structure, where the business and its owners are taxed separately. A flow-through structure can be good because the income is only taxed once, but a corporate structure might be better if the business makes a lot of money outside of the U.S. because the U.S. taxes its citizens on their worldwide income. However, the U.S. gives a credit for taxes paid to foreign governments so that you don’t get taxed twice. For example, if a U.S. taxpayer has a business in Ireland, they would be taxed about 12.5% by Ireland and about 39.6% by the U.S., but they would get a credit for the Irish taxes they paid. Basically, U.S. taxpayers who have businesses outside of the U.S. can choose to set up a company to defer paying U.S. taxes on the money their foreign business makes. They only have to pay the taxes when they bring the money back to the U.S. But there are some rules and taxes they have to be careful of, and they might not get a credit for taxes already paid in the foreign country. There are also some treaties that can help reduce the taxes that the foreign country might want to take from the money. If a person from another country wants to invest in the U.S., they have to choose between two ways to handle taxes. Foreign investors often prefer to use a flow-through structure to avoid paying taxes twice. They can also set up their company in a country with low tax rates, like Ireland or Singapore, or in a place like the Cayman Islands where there is no tax. Some countries, like the United Arab Emirates, have special zones with low or no taxes. They can also set up a company in a country like Panama, which only taxes money earned within the country. And in some countries, like Singapore, the Netherlands, and Switzerland, they can get a special agreement with the tax authority to pay lower taxes. For companies that do business in different countries, it’s a good idea to have a company in a country with a lot of treaties and no tax on money received from other countries. When Americans invest in foreign companies, they need to be aware of certain rules that could make them pay taxes on the income from those investments right away. It’s like the government treating the foreign companies as if they were owned directly by the investors, and taxing them on the profits they make. If a foreign company is considered a controlled foreign corporation (CFC), it may be subject to certain tax rules. This happens if U.S. individuals collectively own more than 50% of the CFC’s stock, and at least 10% of the voting stock. U.S. shareholders must include their share of the CFC’s income in their own taxable income. This income, known as Subpart F income, is made up of different types of foreign income earned by the CFC. This includes income from buying and selling goods with related parties outside the CFC’s home country, and income from providing certain services to related parties outside the CFC’s home country. Certain exceptions apply to these rules. If you own a company in another country, the money you make from things like dividends, interest, and rents might be subject to different tax rules. For example, if you get dividends or interest from a related company in the same country, it might not be treated as foreign income. Also, if the foreign company is mostly making money from investments rather than running a business, you might have to pay higher taxes on that income. So, if you’re thinking of buying a foreign company, you should check if they have any investments that could cause you to pay more taxes. When companies buy international businesses, they should be careful about how they structure their sales and service contracts to avoid paying unnecessary taxes. By planning ahead, they can still achieve their goals in a smart way that delays taxes until the U.S. owners receive the income. Repatriation planning involves minimizing taxes when bringing money back from foreign countries to the U.S. This can be done by investing in foreign subsidiaries in a smart way and using U.S. foreign tax credits. Transfer pricing is also important, making sure that transactions between related companies are fair and follow certain rules. It’s like making sure that if you and your friend both owned a business, you would still charge each other a fair price for goods or services. The Treasury Regulations provide ways to decide the value of property, using different economic methods. It’s important for companies to value and document transactions as they happen, to avoid penalties. Owning and using intellectual property can help lower a company’s taxes, and it’s a big deal for most big companies. By managing intellectual property in different places, companies can make sure they pay less tax on profits from that property. When a company sets up a subsidiary in a country with low taxes, they can pay less tax on the money they make from their inventions and other intellectual property. This helps the company save money on taxes. It’s important to have legal experts help with the agreements to make sure the intellectual property is protected. This can get complicated because of U.S. tax laws, so it’s important to stay informed and follow the rules. Three attorneys from Baker & McKenzie law firm in Miami specialize in international tax planning. They help clients minimize taxes and provide guidance on federal income tax.

Source: https://www.floridabar.org/the-florida-bar-journal/the-benefits-of-tax-planning-as-part-of-the-acquisition-of-an-international-business/