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How can a foreign company repatriate their revenue/profits, and what are the taxes they need to pay?
Repatriating funds consists of the transfer of the funds within the parent company from a division legally registered in one country to one registered in another. Any significant funds are likely to be invested in securities of some sort, and repatriating the funds wouldn’t necessarily move the money, but only change the ownership.The tax rules changed in 2018 under the Tax Cuts and Jobs Act enacted last December. Previously US Corporations could defer payment of taxes on income generated by their foreign subsidiaries. According to the Tax Foundation, the new lawEnacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.There are many special cases and additional conditions. For additional details, see
How does a Delaware Corporation that owns a foreign corporation handle its 2017 repatriated tax reporting?
Sure, I can address as the new 2017 tax act created considerable tax changes here. First, as you noted in your question — the tax C Delaware Corporation (“DC”) owns 100% of the shares of a foreign corporation which we call a controlled foreign corporation (“CFC”) as noted in Section 951(b). As Treasury says US persons owning greater than 50% of the shares of a foreign corporation has a CFC for tax purposes (Sections 957(b) and 958(a)).In this scenario. The tax C Delaware corporation represents the US person as noted in Sections 957(c) by reference from Section 7701(a)(30)(C). As a side note, the term tax C comes from the fact we use subchapter C tax law for the Delaware corporation or for any other corporation formed under a state statue in the US (Treasury Regulation Section 301.7701-2(b)(1)).The tax C corporation includes the CFC’s deferred accumulated earnings as income it its 1120 corporate tax return for 2017 (Section 965(a)). So, all past income the CFC has generated ends up on the tax C’s tax return for 2017. Further, this tax law provision also requires a foreign corporation (non CFC) with a tax C owner to include such income in its return as noted in subsection (e).The mechanics of this tax provision play out in various steps. First, these deferred earnings represent subpart F income as noted in subsection (a). This fact allows for the inclusion in the 2017 year as subpart F income always get included.This income faces a 15.5% tax for deferred foreign profits made up of cash like investments and a 8% tax for foreign deferred foreign profits made up of non cash investments (subsection (c)). Since the tax C gets taxed at 35% in 2017, and the C includes the full foreign deferred income in the tax C’s return, the C takes a expense deduction for equalizing the rates down to 15.5% and 8% for this particular income (paragraph (2)(A) and (B)).The CFC or other deferred corporation may use its past foreign taxes paid for reducing the tax C’s tax in the US. However, the tax C can only use a portion of these tax credits as noted in subsection (g). The C reduces the credits by 77.1% for the 8% tax and 55.7% for the 15.5% tax as covered in paragraph (2)(A) and (B)).Further, the taxpayer may elect installment payments under Section 965(h).As in all things tax, we are dealing with complex tax law issues here. As I have simplified the above provision for readability. Though, we work through the complexities for filing an accurate and timely 1120 return including the 965 Transaction statement mentioned below.As a side note, Treasury issued a news release (IR-2018-53 March 13, 2008) providing tax mechanical direction for computing these amounts as they provided a Section 965 Transaction statement format.A calendar year tax C corporation has available a six month extension with a final due date of 15 October 2018 as noted in Section 6018(b) for filing the 1120 tax return. The tax C files a Form 7704 for obtaining an extension for filing as noted in Treasury Regulation Section 1.6081-5(b)(2).So, one tax strategy we use centers on estimating amounts and filing the extension election and the above 965(h) installment election with an repatriated tax estimated payment. This provides time for completing a more accurate 2017 return given the particular complexities for this particular year. Another strategy centers on having an outside tax person familiar with international US tax law handle the 965 Transaction report only as a separate engagement. As computing the repatriated earnings from the CFC have very little to do with actually filing the 1120 return.I have included the above information based on subchapter N tax law. If the situation changes in any way, the tax results may change considerably.
If a US citizen owns 100% of a controlled foreign corporation which has no assets in the US, does the CFC pay taxes to the IRS?
No, absolutely not. The company’s status as a CFC does NOT make the company itself subject to US tax. So, the company can earn all the income it wants, and it won’t ever owe anything to the IRS.This is the structure my expat entrepreneur clients usee. Operating their business through a non-US corporation allows them to (i) pay zero US tax on the first $100k or so of salary from the company and (ii) defer US tax on the company’s net earnings above their salary. Here’s more detail: How to Structure your Non-US Business or Profession - U.S Tax ServicesHowever, the company’s status as a CFC does have a potential impact on you. If the company earns any “Subpart F income,” then you will be required to include that amount in your income, even if the company doesn’t pay a dividend to you. (But you’re not subject to US tax again when the company does pay a dividend.)There are all sorts of Subpart F income. The most common type is passive income-interest, dividends, rent, and gain on sale of assets that produce that income. The way to avoid Supbart F income is by investing your company’s retained earnings in assets that don’t produce current income, like exchange traded funds.Finally, don’t forget that you’ll have some fancy forms to include in your tax return by reason of your ownership of a non-US company. More detail here: Own Stock of a Non-US Corporation? The IRS Wants to Know All About it - U.S Tax Services