Methods for Reducing American Taxes in the Absence of a Tax Agreement
In the ever-evolving landscape of international business, repatriating profits from a US subsidiary without double taxation is a crucial concern for foreign companies. Here's a rundown of key strategies that can help minimize tax exposure and optimize profit movement.
Firstly, utilising the Foreign Tax Credit (FTC) and minimising the haircut is a strategic approach. The recent One Big Beautiful Bill Act has reduced the foreign tax credit haircut from 20% to 10%, effective from December 31, 2025, enabling 90% creditability for foreign taxes paid. This helps prevent double taxation when bringing profits back to the foreign parent.
Planning controlled foreign corporation (CFC) and Subpart F inclusions is another vital aspect. The reinstatement of downward stock attribution rules and new inclusion rules under Section 951B require careful planning of ownership structures to manage when inclusions trigger U.S. tax. Strategic ownership and classification of CFCs can defer or reduce U.S. tax liability on repatriated earnings.
Considering outbound tax-free reorganizations can also be beneficial, although these are complex and often fail to qualify as tax-free unless strict conditions are met. Such reorganizations must comply with Internal Revenue Code Sections 367 and 368 parameters but may trigger recognition of gain.
Leveraging Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) provisions is another strategy. With permanent, aligned 14% tax rates on GILTI and FDII effective in 2026, companies might reconsider where intellectual property and related income are located to optimise tax efficiency when repatriating profits.
Optimising transfer pricing and intercompany payments is also essential, given the permanence and increase of the Base Erosion and Anti-Abuse Tax (BEAT) to 10.5%. Careful structuring of intercompany transactions is necessary to minimise adverse tax impacts on repatriated cash flows.
In summary, a foreign parent should integrate these elements by planning ownership and stock attribution to manage CFC and Subpart F inclusions efficiently, maximising use of foreign tax credits given the reduced haircut, considering tax-efficient reorganizations cautiously, positioning intellectual property to benefit from FDII rules, and reviewing transfer pricing and intercompany payment structures to avoid BEAT exposure.
Given the frequent updates in U.S. international tax law, expert tax advice tailored to the company’s specific jurisdictions and facts is crucial for optimal repatriation without double taxation.
For foreign entrepreneurs and investors looking to tap into the US market, platforms like Facebook, Twitter, Pinterest, LinkedIn, Whatsapp, and Email can be used for communication and marketing purposes when setting up a US-based entity. LLCs, which are "disregarded entities" for tax purposes, offer a tax-efficient structure with members' income taxed only once on personal tax returns.
Delaware is a popular choice for setting up a US-based entity due to its established legal system and favourable tax environment, particularly for software businesses with no major physical presence. Foreign-owned US entities selling online are subject to federal income taxation.
Subsequent sections will cover topics such as US corporations, US bank accounts, U.S. taxation of foreign-owned LLCs, S-corporation advantages, reasonable compensation compliance, the Foreign Earned Income Exclusion integration, and specific strategic implementation considerations.
Transparent fiscal policies, a robust political and legal system, economic stability, and lack of currency restrictions are often motivating factors for foreign investors seeking to invest in the US. Interest on loans made to a corporation by its shareholder can lower the corporation's U.S. taxable income and its U.S. corporate tax liability.
Privacy, asset protection, and tax minimization are important considerations for foreign investors in the US. S-corporation elections can offer savings on self-employment taxes and pass-through taxation for US citizens abroad and non-resident business owners.
An LLC Operating Agreement, Partnership Agreement, and Bylaws are crucial for drafting when setting up a US-based entity. Repatriation of profits can be achieved tax-free by selling the US subsidiary's stock or liquidating the company. The IRS taxes foreign-owned US entities based on their income from US sales.
- To minimize tax exposure and optimize profit movement for a foreign company operating a US subsidiary, leveraging strategic approaches such as utilizing the Foreign Tax Credit (FTC), planning controlled foreign corporation (CFC) and Subpart F inclusions, and considering outbound tax-free reorganizations can be beneficial.
- Moreover, foreign investors looking to tap into the US market can find platforms like Facebook, Twitter, Pinterest, LinkedIn, Whatsapp, and Email useful for communication and marketing purposes when setting up a US-based entity. Choosing states such as Delaware for their legal system and tax environment is also a popular choice for foreign-owned US entities.
