What is the Best Way to Structure Payments to You From Your Foreign Corporation?

Feb 11 2017
Foreign Investments

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning a foreign (formed outside the United States) corporation can likely defer the U.S. taxation of the Foreign Corporation income until it is distributed to the U.S. shareholder. However, any interactions between the U.S. person and the foreign corporation will likely have U.S. tax implications, regardless of the level of ownership. So, what is the best way to withdraw money from the foreign corporation?  Should you take a wage or dividend?

From a U.S. perspective, foreign-sourced wages and dividends are taxed quite differently. It is important to consider the U.S. tax consequences of each of these in tandem with the resident country taxation.

Wages

Wages are earned income.  As such, this income can be excluded (up to $101,300 for 2016) using the foreign earned income exclusion. If the wages are taxed in the resident country, foreign tax credit can also be used to offset U.S. income tax on these wages. Click here to read more about the Foreign Earned Income Exclusion.

Dividends

Dividends are unearned or passive investment income. As such, this income cannot be excluded with the foreign-earned income exclusion. If U.S. tax is due on these dividends, the only means of U.S. income tax relief is foreign tax credit.

If there is a U.S. income tax treaty in force with the resident country, the dividends may be qualified dividends, if the holding period requirements are met. This would afford a favorable tax rate of 0%, 15% or 20%, depending on the income tax bracket you are in. 

In addition, because dividends are investment income, they may subject you to the Net Investment Income Tax. You can read more about Net Investment Income Tax here.

Have questions?

Let us help you optimize the best structure to minimize taxation across both jurisdictions. Contact us today for a consultation.



©2017 SDC, LLC    www.sdcglobalcpa.com
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction.

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