United States expats and U.S. people who own shares in foreign companies are not exempt from the tax requirements of the U.S. Internal Revenue Service (IRS). As a business owner or shareholder, the taxes you must pay and how you pay them will strongly depend on the type of business you run and your stake in that company. Foreign earnings are typically classified and taxed differently compared to other business income.
When you run or own a corporation outside the United States, it is crucial that you keep track of all the tax-related administration you need to do. One type of tax you must be aware of when you own and control a non-U.S. company is the Global Intangible Low-taxed Income (GILTI) tax.
So, what is GILTI tax, and who does it apply to?
GILTI tax is a special tax imposed on the profits of a non-U.S. company that is controlled by a U.S. person. The IRS describes these non-U.S. companies as Controlled Foreign Corporations (CFCs).
For a company to be considered a CFC and be eligible for GILTI tax, more than 50% of the vote or value must be owned “directly, indirectly, or constructively, by U.S. shareholders.” According to the IRS, if a U.S. shareholder owns 10 percent or more of the company stock, then they’re subject to GILTI tax.
To understand this kind of tax, it’s important to understand how it operated before the current GILTI rules. Under the old rules, a U.S. person could own and control a foreign company. That company could then earn a profit, and that profit was not subject to U.S. tax until it was distributed to the shareholder.
Under the new GILTI rules, the CFC is almost “treated” as an individual taxpayer. If the non-U.S. company is controlled by a U.S. person and has a net profit, that net profit is subject to U.S. tax, even if it has not been distributed to the owner.
Many people don’t like this concept because they’re used to the idea of only paying taxes after they have received the income. With the new GILTI tax rules, a U.S. CFC owner or shareholder is required to report the business income on their U.S. return and to pay U.S. taxes on it, even when it has not yet been distributed to the owner of the company.
This becomes tricky because the owner may not have the cash to pay the taxes when the funds have not yet been distributed. So, if you are an expat or a U.S. resident who owns a company outside the country, there is a lot of planning that goes into restructuring things to try and minimize that U.S. tax.
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Restructuring your non-U.S. company to minimize your tax liability
A few things can be done to mitigate some of the challenges that come with the GILTI tax. First, you can look at whether the company continues to be controlled by a U.S. person. The ownership structure can be changed such that non-U.S. people control or own less than 50% of the CFC.
Under this scenario, the company profit would not be subject to U.S. tax until it is distributed to that U.S. shareholder. That gives the shareholder time to organize the distribution in the year. They would also have time to determine the amount that matches their tax ability to claim exclusions and deductions, which might reduce the tax overall.
There are other things you can do to make sure that the appropriate expenses are available in the right calendar year. This can significantly minimize the net income of the company. As a result, the GILTI tax can be reduced or completely eliminated.
It is important to understand how the tax rules operate in the context of non-U.S. companies owned by U.S. people. You must understand how the income of that company will be taxed under the GILTI rules and try to figure out how to navigate that system.
You can decide to restructure your company accordingly. Also, you need an in-depth accounting understanding of how to define the net income of your non-U.S. company on an annual basis. It is crucial to know how these things can be improved to minimize the GILTI tax.
We provide tailored tax services for U.S. expats across different regions of the globe. You can book a consultation with us right here for world-class service. Our team of highly experienced expatriate accountants will be happy to help you!