One of the hottest topics among many small business owners right now is offshore tax. What happens if you move outside the US? What happens if you move your assets outside? Or maybe start an offshore business? We received this question at USTaxAid.
Q: I’m an American citizen. I have a company here and I’m thinking about setting up a company in Brazil, where I would be the owner. If I hire employees there and I pay that company say $1M a year, is that $1M only taxable in Brazil, or do I have to pay taxes on that in the US as well since I own that company?
A: As a US citizen, you are subject to worldwide tax. If you live outside the US and qualify to take a foreign earned income exclusion (FEIE) and foreign housing exclusion, you can legally avoid tax on a little over $100,000. The FEIE is $100,900 for 2015. Plus the housing allowance could be $20K or more. That’s also an income exclusion. If your spouse also qualifies, there is another $100,900 available.
Most of our clients in a similar position will set up a foreign corporation (international business corporation – IBC) and take a “salary” equal to the amount of exclusions available. The rest of the income stays inside the company. If you pay Brazilian tax on the salary, you will receive a foreign income tax credit for that amount.
You mentioned that you will pay the company $1 million. If you are funding the company with loans or capital contribution, you don’t have to pay tax but you do need to report it.
You do want to make sure you’re making all of the proper US tax filings for your foreign company, distributions, contributions and investments. Even if you don’t owe tax, you still need to file tax returns you’ve probably never heard of before. The penalties are huge if you don’t and since FATCA (foreign account tax compliance act) came into full force 7/1/14, you can’t hide. Foreign banks are reporting on your activity.U
Give us a call at 888-592-4769. We can work with you to develop a plan that will minimize taxes and make sure you stay legal.