Get to know the authorStarting a business overseas may seem daunting — but it can bring major benefits. For high-earning, self-employed American expats in particular, registering a US-based C corporation and a Controlled Foreign Corporation (CFC) can lead to major savings on their US tax bill.
Before you rush to file your articles of incorporation, though, you’ll want to do your research. Opening a business in another country takes work and has significant tax and legal implications. While it can be very beneficial for some individuals, it’s not right for everyone.
As a tax firm for US expats, we’ve worked with many clients who have registered businesses abroad. We’ve drawn on that experience and our expert tax knowledge to create a brief guide on registering your business overseas. Read on to learn how to start a business in another country, the benefits of doing so, and more.
Tax benefits of registering a business abroad
C corp benefits & taxes
Registering your business as a US-based C corporation comes with some benefits on its own. Doing so allows you to name multiple owners shareholders, shield them from personal liability, offer multiple classes of stock, and pay taxes at a lower corporate rate. That said, setting up and maintaining a C corp can be complex.
Still, high earners who want a flexible business structure and room to grow often find the benefits outweigh any drawbacks. Chief among these benefits is the tax savings.
Corporations pay taxes at a rate of 21%, a full 16% lower than the top individual income tax rate of 37%. That said, both corporate dividends and salaries are subject to income taxes, with salaries also subject to payroll taxes. Corporations can also claim many different business deductions and tax breaks like the Foreign Tax Credit (FTC).
CFCs & the Section 250 Deduction
Setting up a controlled foreign corporation (CFC) — a foreign corporation owned by a US C-corp — can reduce corporate taxes even more.
Actively earned foreign income from a corporation qualifies as Global Intangible Low-Taxed Income, aka GILTI. Individual shareholders with ownership in a foreign corporation pay ordinary tax rates of 10% to 37% on GILTI, depending on their overall taxable salary. CFCs owned by C-corps, on the other hand, typically pay taxes on GILTI at an effective rate of just 10.5% due to a provision called the section 250 deduction.
As the individual owner of a foreign corporation, you’ll still need to pay yourself a reasonable salary from your profits, though. Otherwise, the IRS — and potentially the tax governing body in your country of residence — may suspect you’re shielding income from payroll taxes.
In addition to US tax, income earned by a CFC may also be subject to taxation in the country where it’s registered. This makes it critical to identify the right country in which to register and operate your company — something we’ll discuss more in a bit.
Tax breakdown
This can all sound confusing in the abstract, so let’s break it down with an example:
Ted, an American citizen and digital nomad, is a remote freelance UX Designer who will earn $100,000 in taxable income in 2024. Currently, his entire income will be subject to:
- US income taxes: 22%
- US Social Security taxes: 15.3%
He decides to elect C corp status in the United States and set up a CFC based subsidiary of the C corp in the United Arab Emirates (UAE). There, corporate profits under AED 375,000 (~$102,096) are not subject to taxes. Now, his tax liability breaks down as follows:
- A $70,000 salary, which is subject to:
- US income taxes: 22%
- US Social Security taxes: 15.3%
- $30,000 in net earnings, which is subject to:
- US GILTI taxes: 10.5%
- UAE corporate taxes: 0%
While this simplified breakdown doesn’t take into account factors like tax credits and deductions, it should help illustrate how CFCs can reduce global tax burden.
Note:
Ted can use the $30,000 in net earnings to reinvest in his business without any additional US tax implications. He can also choose to distribute part or all of that money to himself as a dividend, but that will attract additional individual income tax.
When is it worth registering your business abroad?
To know if setting up a CFC is practical, you’ll want to ask yourself two main questions:
Is any part of my business physically located in the US?
To qualify for the section 250 deduction as a CFC, your business must have no physical presence in the US. A construction company that works on building sites in Oregon or an e-commerce company with a fulfillment center in Tennessee, for example, could not set up CFCs to receive the section 250 deduction.
On the other hand, a digital nomad who works as a freelance consultant or the CEO of a completely remote Software-as-a-Service (SaaS) company would likely be able to.
Does my business generate enough income to see significant savings?
The 10.5% CFC tax rate on GILTI income is undoubtedly attractive, but your business will need to earn a certain amount of profit for the tax savings to really add up. You’ll also need to factor in the administrative costs of creating and maintaining a business abroad.
In general, we recommend businesses earn about $80,000 or so in profit before exploring registering a foreign entity.
Choosing the right country to register your business
A few things to consider when choosing a country in which to base your business include:
- Tax rate: Reducing your US taxes won’t mean much if the country you register your business in has tax rates equal to or higher than the ones in the US/your country of tax residency
- Business-friendly environment: Besides low tax rates, you’ll also want to target countries that make it relatively easy to set up and maintain a business, claim tax credits and deductions, attract investors and employees, etc.
- IRS scrutiny: Certain countries invite more IRS scrutiny than others. If you choose to register your company in a country that the IRS considers a tax haven, they may be more likely to flag your returns for audit
- Tip: As a general rule, it’s a good idea to avoid registering your business in a country on the OECD Blacklist
- Political stability: Being registered in a politically unstable country can result in economic instability, drastic and sudden regulatory changes, difficulty pursuing legal matters, and more
When considering these factors, the countries where we most often recommend setting up CFCs are:
Registration step-by-step
Before you can set up a CFC, you must first register a US-based LLC and elect treatment as a C corp. If you haven’t already done so, you’ll generally want to:
- Choose a name for your business
- Select a US state to register your business in
- Tip: A few of the most business-friendly states include Wyoming, Delaware, and Nevada
- Appoint a registered agent to receive legal documents on your behalf
- Draft corporate bylaws dictating how your business will be run
- Appoint a board of directors
- File articles of incorporation at the relevant state office
- Issue stock, if applicable
- Apply for an Employer Identification Number (EIN)
- Apply for any necessary business licenses/permits
- Open a business bank account or accounts
- File Form 8832 to elect C corp tax status
- Stay compliant, which likely involves:
- Filing annual reports
- Filing annual federal & state taxes
- Conducting meetings & recording minutes
Once your C corp is officially registered in the US, it’s time to open the CFC in your country of choice. The business registration process in each country will vary, but there will likely be significant overlap with the steps required to register your US-based C corp. All in all, the process can take from as little as two weeks to as much as six months or more.
Navigating tax and business laws can be complex, even in your home country. As such, you’ll likely want to hire a tax professional and business lawyer in the country where you plan to open your CFC. If you’re a tax resident of another country, it’s probably a good idea to hire a tax professional there as well.
Working with local experts will help you understand the local laws — and in turn, properly register your business, maintain compliance, and optimize your global tax strategy.
Risks & considerations
- New tax & reporting obligations: If you’re filing as a C corp for the first time, your tax return may look significantly different than it did in years past. You may need to file new forms like:
- Form 8832: For electing business structure & tax treatment
- Form 1120: For reporting annual corporate income
- Form 5471: For disclosing shares in a foreign corporation
- Form 1120-F: For foreign-registered corporations that have US-earned income
- Form 1120-W: For reporting quarterly estimated corporate income
- Beneficial Ownership Information Report (BOIR): For disclosing ownership in a business
- Changing regulations: Tax laws and business regulations can change quickly in some countries. What starts out as a favorable climate may not remain one forever — in which case, you may need to consider a new tax home for your business
- Multiple tax residencies: Being a tax resident in another country adds a layer of complexity to your tax and reporting obligations. A US citizen with a business registered in Belize who lives in Australia, for example, will have to navigate three different tax systems and likely, file three different tax returns
- Note: Your business is a separate legal entity from you. As such, your country of residence may tax the salary you receive from your CFC — but if your business isn’t registered there, it likely won’t be able to tax the CFC’s income itself
- Administrative & professional fees: You’ll need to weigh your potential tax savings as a CFC owner with the capital it takes to start and run a business abroad, including fees for:
- Business attorneys in the US & the country where you’ve registered your company
- Tax professionals in the US, the country where you’ve registered your company, and potentially your country of residence
- Costs associated with registering a business (e.g. appointing a registered agent, filing articles of incorporation, applying for business licenses, etc.)
- Costs associated with maintaining a business (e.g. annual report fees)
Optimize & simplify your taxes with Bright!Tax
As you can no doubt tell by now, it’s not exactly easy to open a business abroad. But when you have the potential to significantly reduce your tax bill, you don’t want to just leave that money lying on the table.
At Bright!Tax, we’ll do the heavy lifting for you. Partner with us, and one of our expert CPAs can help you identify the best tax strategy for your business, prepare your US tax return, and help you maintain compliance. Schedule your free 20-minute consultation today!
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