Foreign corporations are a big tax trap in the US, but planning is possible. There are two sets of tax rules that create this problem. When you use a foreign corporations to hold investments, even if investment income is never distributed, the rules under Subpart F of the US Tax Code make all the earnings taxable to the US owners. When you have a business which provides goods or services, net revenues can also be considered taxable as global intangible low taxed income, or ‘GILTI’. It is important to note that no matter whether you have cash receipt of foreign corporate income or not, you generally can’t defer or avoid US tax on it unless your foreign corporation pays the equivalent of a US corporate tax rate (just under 21 percent). Finally, you can’t get foreign tax credits for tax paid by the corporation, because the IRS doesn’t give you credit personally for what a business pays in taxes (unless it’s a disregarded entity). Basically, foreign corporations trap (or strand) foreign tax credits. Our advice: Always report your foreign corporations, because there are IRS huge penalties if you don’t, but also expect that you will lose a lot of the corporate benefits you get from other countries.
