Richard Beutelschies, CPA, Tax Partner, TR Moore & Company, A Doeren Mayhew Firm
Not long ago, international business was the domain of large corporations. Today, the Internet, advances in freight and logistics, and other developments have made global markets accessible to even the smallest businesses.
But just because some barriers have been lowered doesn’t mean doing business internationally is easy. In fact, it’s a complex process that requires a company to establish the necessary infrastructure, develop an understanding of foreign cultures, and prepare for a new tax environment. Careful tax planning can help you set up your international business in a manner that minimizes worldwide taxes and maximizes cash flow. Among the issues that should be considered is corporate structure.
Corporate Structure
There are many ways to do business abroad, including direct exporting, a joint venture with a foreign partner, acquiring a foreign company, or establishing a new foreign subsidiary or division. The right strategy depends on several factors, including the laws of the country in which you wish to do business and the level of control you seek.
The structure of your global operations also has significant tax implications. Suppose, for example, that your business operates as an S corporation. Without careful planning, you may find yourself subject to double taxation on foreign income, paying corporate-level taxes in the foreign country and individual-level taxes in the United States.
You can minimize or eliminate double taxation by setting up a hybrid structure — that is, one that’s treated as a taxable entity in one country and a pass-through entity in another — and filing the appropriate elections. These structures allow foreign corporate-level taxes to flow through to the individual owners as credits against U.S. income tax. There may still be double taxation, however, to the extent that the foreign tax rates are higher than an owner’s U.S. income tax rate.
Corporate structure also affects a company’s ability to take advantage of foreign losses or to defer U.S. taxes on foreign income. For example, if a foreign operation is structured as a hybrid entity or as a branch or division, the owners may enjoy significant tax benefits by deducting foreign losses (subject to passive activity loss rules and other restrictions).
On the other hand, if you’re doing business in a country with low taxes, operating through a foreign subsidiary may allow you to defer U.S. taxes on foreign income (subject to limitations). For some companies, an interest charge–domestic international sales corporation (IC-DISC) can provide similar benefits at a low cost.
As Tax Partner, Richard Beutelschies, CPA, leverages more than 30 years experience in foreign and domestic tax to lead international services at TR Moore & Company, the Houston location of top 100 CPA and consulting firm Doeren Mayhew. For more information, contact us.
