International Tax Planning Lawyer

International Business and Tax Planning Attorney and CPA

All individuals and businesses who live, operate, or own assets between the US and a foreign country need to understand the potential legal and tax laws applicable to them. If not, they could be exposing themselves to major legal and tax implications.

Our team of international business and tax lawyers is well versed in understanding legal and tax laws applicable to those individuals who live and operates between multiple countries and how to best plan to mitigate their legal and tax consequences in and outside of the United States. Below are just some of the strategies we help our clients utilize and implement.

International Business and Tax Planning Services

There are two segments of international business and tax planning services that our team offers. That is both ‘outbound’ and ‘inbound’ planning services. Outbound planning services pertains to US companies operating offshore, whereas inbound planning services are tailored to those foreign companies operating in the US. Each of these segments have their own unique corporate tax planning considerations.

Outbound Business and Tax Planning  Services

Outbound business and tax planning considers the impact of cross border transactions for U.S.-based individuals and businesses alike operating in foreign countries. It goes without being said that cross border planning such as this is nuanced, complex, and requires a comprehensive approach.

In order to plan and put a U.S. individual or business in a tax-efficient position when operating overseas, there are many factors that need to be considered. Generally, this requires continuous planning, monitoring, and measuring of the tax consequences of these activities to maintain a competitive effective tax rate (ETR) and maximize corporate foreign earnings.

Tax planning is not a static exercise because the facts surrounding international business are ever-changing. Thus, a business must respond with a tax planning strategy that continually evaluates the company’s operational and financial positions and responds with tax analysis that prospectively addresses the needs of the business.

Effective planning also requires coordination with the financial management functions of the individual or business. This is because the financial personnel of a business seek to access and redeploy excess cash among related affiliates to maximize the return from capital.

To effectively manage continual planning, an aggressive tax planning framework needs to be operated. Generally, this framework should consider the following objectives–

(1) Establish the factual foundation for planning;

(2) Reduce U.S. tax;

(3) Reduce local country tax;

(4) Utilize foreign tax credits;

(5) Facilitate the movement of cash among foreign affiliates; and

(6) Provide for efficient repatriation of cash from foreign affiliates to the U.S. affiliated group.

Reducing U.S. Taxes for Outbound Business Operations

There are several techniques that are available at a tax professional’s disposal, and we will only be able to scratch the surface of what is available out there.

Utilization of Offshore Losses. 

One primary technique surrounds the utilization of unrealized losses or ongoing losses incurred by a business to offset U.S. taxable income.

In planning for cross-border operations, one important focus is the ability to obtain a deduction in the United States for built-in losses offshore and loss operations conducted in foreign countries.

Because the U.S. imposes tax on worldwide income of a U.S. corporation, structuring foreign loss operations as a branch of a U.S. corporation or a flow-through entity owned by a U.S. corporation may reduce U.S. taxable income. 

Captive Insurance Companies

Another strategy commonly used to reduce U.S. taxable income is the formation of a “captive insurance company”. This strategy is only applicable for companies who are willing to commit the capital necessary to operate one.

A “captive insurance company” is generally considered to be an insurance company owned by a single shareholder (or a small group of shareholders) that insures only its shareholder(s) and its affiliates. In a typical captive arrangement, a corporation purchases insurance from a commonly controlled brother/sister insurance affiliate.

If utilized, the “captive insurance company” applies insurance tax accounting rules in calculating its taxable income and the insured will deduct the premiums paid to the insurance subsidiary. The premiums paid to an insurance subsidiary may be deductible by the insurance subsidiary’s owner or its affiliates. The insurance subsidiary itself would include the premium income in income but be allowed to offset its premium income with loss reserves, including discounted unpaid loss reserves.

State and Local Tax Planning

State income tax is another important component of lowering a company’s U.S. taxable income. The normal starting point for state taxable income is that defined by the federal government, subject to a number of adjustments and modifications. Accordingly, in the absence of a specific state modification, federal taxable income (or lack thereof) will determine the calculation of state taxable income.

At the state and local tax levels, the income of a controlled foreign corporation is generally treated as dividend income as opposed to an income inclusion calculated for federal tax purposes. This could qualify such deemed dividends for a dividend received deduction.

Transfer of U.S. Assets to a Foreign Corporation

Another method commonly used to reduce U.S. taxable income is to shift the location of certain income-producing assets overseas.

In evaluating the manner in which assets are transferred to a foreign corporation, the tax consequences surrounding the transfers will depend on a number of factors, including the types of assets being transferred (tangible or intangible property, and the manner in which the transfer is effected (i.e. contribution, license, or sale).

Inbound Business and Tax Planning  Services

At its core, the U.S. tax framework governing the taxation of income earned by non-U.S. persons is straightforward. The key to understanding international taxation is the concept that it treats a non-U.S. person differently depending on the level and extent of that person’s U.S. activities.

A non-U.S. person who is engaged in an active trade or business in the United States and earns income from that business generally is taxed on its U.S.-source (and some foreign-source) income that is considered “effectively connected” with that business.

Not all non-U.S. persons operate in the United States with sufficient regularity and continuity to create a U.S. trade or business. In the absence of a U.S. trade or business, a non-U.S. person who does not operate a U.S. trade or business is taxed only on U.S.-source passive-type income (dividends, interest, royalties, rents — defined as “fixed or determinable annual or periodical” income, or “FDAP”). FDAP income is taxed at a rate of 30%, but this rate often is reduced or eliminated under an applicable U.S. income tax treaty and when certain procedural requirements are met.

In addition to the federal income tax, there are various other tax obligations and reporting requirements a foreign person or business with inbound operations to the US needs to consider.

  1. State Income Taxes
  2. State Gross Receipts Taxes
  3. State Franchise Taxes
  4. State and Local Personal and Real Property Taxes
  5. State and Local Sales Tax
  6. Use Tax
  7. Federal and State Employment Taxes