IRS Form 5472 is known as Information Return of a 25% Foreign Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business. As the name of the form suggests, it is for US businesses which have at least 25% of foreign ownership and are involved in a US business or trade.

Form 5472 gives these businesses a way to disclose all “reportable transactions” to the IRS. Around the end of 2016, the IRS came up with some crucial changes in Form 5472. It included foreign owned US disregarded entities under its purview as well. It effectively meant that US disregarded entities would be considered as domestic US corporations.

So, to make it clear, Form 5472 demands information from not only US corporations about foreign involvement in its business, but also foreign persons who have substantial interests in US businesses. The widened scope of Form 5472 has made even non-US persons file IRS forms which are normally meant for US persons. Foreign or domestic, interest in US business is to be disclosed via Form 5472.

The motivation behind the changes to Form 5472

There were plenty of reasons why foreign nationals owned a US LLC. For some, it was a part of their tax planning, while for some others, it was a way to collect US dollars from American customers of their businesses.

The interesting thing with US LLCs is that certain states allow US and non-US persons to own and operate an LLC completely anonymously. States like Delaware, New Mexico, and Wyoming offer great privacy to owners of LLCs.

This anonymity led to certain foreign nationals stretching the laws for activities that the IRS and the US government considered questionable. For example, foreign LLC owners started purchasing property in places like New York City. The properties got registered under the LLCs name and no one would know who owned these properties.

The US government wanted to put an end to this trend and wanted to know exactly how money was coming into the country. There were fears of large scale income tax evasion being carried out via the LLC route. Hence, the changes in the scope of Form 5472 became a reality.

The extensive requirements of Form 5472

Form 5472 now asks foreign filers who own a US disregarded entity to provide a foreign taxpayer identification number (FTIN). Obtaining this taxpayer number is not a simple process. It can take months and involves a lot of time-consuming paperwork. Most importantly, this number has to be in place before the foreign national can file his/her returns.

The list of qualifying transactions that need to be reported on Form 5472 is two pages long. It includes rent payments, sales proceeds, royalties, interest income, commissions, insurance premiums, loans between the LLC/corporation and foreign shareholders, equity related payments from the formation, dissolution, acquisition, or disposition of an entity, and much more. Basically, any cash that is either coming into the corporation or going out of it are covered under Form 5472’s requirements.

What exactly is considered a disregarded entity?

A disregarded entity is one that the IRS disregards an en entity that is separate from its owner for tax purposes. This definition generally applies to US LLCs. US LLCs are tax transparent and all its profits flow straight to the shareholders. A US person owning a disregarded entity does not have to file Form 5472. However, if the entity is 25% or more foreign owned then both the US and foreign owners of that entity have to file Form 5472.

An informational return

It is important to note that Form 5472 is not a tax return. It is simply a way for filers to disclose to the IRS the various types of transactions that their corporations have made throughout the year. These transactions also include transactions made with foreign parties.

For foreign individuals who own a substantial part of an LLC or have an LLC of their own, the Form 5472 is a way for them to disclose their business interest in the US. The IRS wants to know who is doing business in the US and Form 5472 allows it to identify those entities that are trading or doing business in the country. Foreign nationals do not have to file Form 5472 because it will make them pay their taxes. Rather, it is an informational return which will disclose certain details to the IRS.

Who files Form 5472?

Any foreign individual who directly or indirectly owns 25% or more in a US company has to file Form 5472. If multiple foreign nationals hold 25% each, then each of those individuals has to file a separate Form 5472. If multiple foreign nationals hold an aggregate of 25% or more in a US company but individually own less than 25%, then those individuals do not need to file Form 5472.

If you are a foreign individual who has set up a US LLC through services like Stripe Atlas, then you need to file Form 5472. Foreign individuals have to disclose their name, address, country of citizenship, organization information, and all qualifying transactions made by the individual.

Any foreign company that does business in the US and derives income from any economic activity in the US also needs to file Form 5472. If a US citizen operates a foreign company abroad, and if that company owns a US disregarded entity, then that US citizen also has to file Form 5472. Even non-US citizens who own a foreign company that, in turn, owns a US disregarded entity, then such non-US citizens also have to file Form 5472.

When should you file Form 5472?

Form 5472 is normally filed along with the US corporation’s annual tax return. Any extensions availed by the US corporation also apply to deadlines for Form 5472.

For a foreign national, the IRS considers the tax year as the calendar year. So, if the foreign national has no US tax return to file, then he/she will have to file Form 5472 in early January for the year gone by.

Are there penalties for not filing Form 5472?   

The standard penalty for not filing Form 5472 or filing an incomplete Form 5472 is $10,000 per year. Other collateral damage would be increased vigilance of the company by the IRS and multiple follow-ups and audits in subsequent years.

Even though Form 5472 states the penalty for non-compliance to be $10,000, the penalties can actually be a lot higher. Recent changes in the Tax Cuts and Jobs Act hiked the penalties required under Sections 6038a (d)(1) to $25,000.

These changes also extend to any reportable transactions occurring under Section 6038b. That section is the basis for all the filing requirements of Form 5472. It is always recommended that you file Form 5472 if you think you are required to.

Countries around the world are increasingly getting serious about tax returns and informational returns. Provisions like FATCA make it very difficult to hide any transaction or ownership of assets. It is a good idea to work with a tax professional and understand whether the Form 5472 requirements apply to you.

The US, with its network and reach, will find out one way or another, if there is any non-compliance. The penalties for non-compliance are quite steep as well.

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The minimum percentage of stock ownership in a foreign company which qualifies a US person (green card holder or citizen) for mandatory filing of Form 5471 is 10%. So, for example, if you own a Panama corporation, a Hong Kong corporation, or have invested in stocks of a foreign company in which you hold more than 10% stake, then that holding or ownership has to be disclosed to the IRS through Form 5471.

It is important to note that Form 5471 is not a tax return. It is simply an informational return. Form 5471 does not carry any obligations with it as to make payments to the US government. The only monetary obligations associated with Form 5471 is any penalty that is payable in case of non-filing.

However, Form 5471 is used by the US government to track people who may be hiding assets in order to avoid paying taxes on those assets. There is no tax requirement associated with Form 5471. The IRS simply wants to have information about foreign assets of US persons.

Some people may have foreign assets for completely legitimate reasons like risk diversification, the ability to hold foreign currency, or genuine international business expansion. For some people, having foreign assets does offer some tax benefits. The United States has tax treaties with various countries and it is perfectly legal for businessmen to take advantage of these treaties and avail foreign tax credit.

Form 5471 simply allows the IRS to keep tabs on what US persons own abroad.

Who needs to file Form 5471?

Form 5471 is required by US citizens and green card holders who are officers, directors, or shareholders of a foreign corporation. A foreign corporation can be any legal entity which has been formed under the laws of a country outside the United States. The word corporation does not imply that only entities which are called “corporation” under foreign law will be treated as foreign corporations. The IRS will regard any non-US entity in which the owners have limited liability as a foreign corporation.

Even large companies like Apple and General Motors that have subsidiaries in foreign countries have to file Form 5471. So, regardless of whether you live in the US or not, if you own a foreign company, open your own business in a foreign country, or have a US company which has an interest in a foreign company, or if a company has a subsidiary in a foreign country, all of those instances mandate the filing of Form 5471.

Keep in mind that if you live outside the US for taking advantage of tax benefits, then filing Form 5471 will not take away those benefits. As long as you do everything legally, you can disclose your foreign asset ownership and still enjoy all the legal tax benefits that exist.

The only way you can exempt yourself from filing Form 5471 is to renounce your US citizenship or give up your green card, if you have one. Even changing the non-US entity from corporation to partnership will not resolve your issue because you would then have to file Form 8865 or 8858, both of which are equally burdensome.

Passing on ownership of the foreign business to a foreigner spouse or a friend will also not work. Neither will putting an island law firm’s name work as you would still have to file Form 5471. If you are the ultimate beneficial owner, then you have to file Form 5471.

Categories for filing Form 5471

There are 3 main categories of filers that IRS classifies for filing Form 5471. The first is a US person who acquires 10% or more stock in a foreign corporation as an officer or director. This category has to report a minimal amount of information about the acquirer and the corporation.

The second category of filer is for a US person who acquires additional stock in a company, taking the holding to over 10%. Alternatively, if the US person sells stock and takes the holding below 10%, then both such instances come under category 2. The amount of information to be reported under this category is quite large. Income statements, opening and closing balance sheets, and identity information all need to be compiled for this category.

The third category applies to a US person who owns over 50% of stock in a foreign corporation. Disclosure requirements are similar to category 2 with the addition of undistributed earnings and reportable transactions.

The best time to file Form 5471

Form 5471 should be filed along with your annual income tax return if you are filing as an individual. For corporates, the Form 5471 filing should be attached to the annual corporate tax return.

It is a good idea to file Form 5471 by March 15th if it is being filed by a corporate. Individuals can file by April 15th and expats can file by June 15th.

Penalties for non-filing

Penalties for not filing Form 5471 can start from $10,000 and run up to $50,000. The initial penalty is $10,000 for each tax year for not filing Form 5471. Then, an additional $10,000 penalty is levied if you do not provide foreign asset ownership details within 90 days of the IRS notice for non-filing of Form 5471.

After the 90-day window, an additional penalty of $10,000 is levied for every 30 days of non-compliance. This way, the penalties for failure to file Form 5471 add up and the maximum limit is $50,000 before more serious measures are pursued by the IRS.

Having outlined the penalties, it is important to point out that these penalties are not like taxes. Even if your foreign business entity is not making profits, the penalties still have to be paid. Taxes get levied only when the business makes a profit, but penalties are more severe.

Conclusion

The IRS estimates that the time to learn about Form 5471 and prepare the filing is around 120 hours. Given the filing requirements of Form 5471, the whole process is relatively tedious and time-taking. You would ideally want to work with a tax professional to file your Form 5471. You would want to make sure that everything is in order and that you because the penalties for non-compliance can be quite steep, as outlined above.

If you are a US person and have a substantial interest (greater than 10%) in a foreign entity, then you have to satisfy the reporting requirements of Form 5471. It is an important part of the tax law and has to be filed one way or another and the information has to be disclosed to the IRS.

The post Form 5471 appeared first on Golden Prime Trust.

When we talk about residency for tax purposes and you only live and do business in one country the rules that apply are very simple.  

If you are a resident of Canada (you live there) Canadian tax rules apply.  

As you start to do business in multiple countries, have customers elsewhere, live abroad, form companies abroad, etc. It becomes more complex. 

It’s always important to look at whose tax rules will apply to you. 

Residency in short means “whose tax rules apply?”  You might have one residency, multiple residencies, or no residency for tax purposes. 

There are three different residencies we talk about: 

1. Personal residency  
2. Corporate residency 
3. Residency of income 

 Personal Tax Residency 

Personal residency will affect which personal tax you’ll have to pay, but will also trigger the application of certain rules, such as CFC rules to your business.  

Personal residency is not legal residency. You could be legally allowed to live somewhere and still not be tax resident there.  

Also, you could be a tax resident somewhere while being an illegal immigrant.  

Yes, that’s right! You could be illegally in the USA and they still expect you to pay tax! You are not allowed to legally be there, they will deport you when they find it out BUT you still have to pay their taxes.  

Another thing to have in mind when talking about personal residency is this: 

Just because you don’t qualify under certain residency rules doesn’t mean that you are non–resident 

For example, spending 183 days per year will make you a resident in most places, but not spending 183 days doesn’t make you non–resident.  

You could be in a situation where you are a double resident or double non–resident.  

For example, people will set up a residency in Panama and Panama only requires them to spend a day out of a year there. That rule only applies to Panama but not to your home country. Your home country will not recognize you as a resident of Panama if you only spent that little time there and they might still tax you depending on their local rules and the other circumstances of your life. In eyes of your own country, you will still be viewed as a resident. This might not always be the case, but it’s very important to be careful.  

Corporate Tax Residency 

When it comes to corporate residency lots of people don’t understand the difference between corporate registration and corporate residency.  

In other words, if you form a company in a certain country it doesn’t necessarily mean that your corporation is also a resident of that country.  

Canada, for example, will consider a company to be tax resident if it’s formed there, however even if your company is not formed there, Canada will still tax exactly the same as a local Canadian registered company it if it’s managed and controlled from Canada.  

So, when talking about company residency these are the three things that you have to have in mind: 

1. Where the company is registered 
2. Where is it managed and controlled  
3. Where is the main office 

Any of these might trigger the tax residency of the company in that country and could potentially mean double tax residency (or double non-tax residency). 

 Residency of Income 

Another residency that you will want to consider is the residency of income, but we will talk more about this in the future.  (See our post on “what is source income?”) 

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What is Tax Residency?  appeared first on Golden Prime Trust.

When a person dies, the government estimates the value of the estate of the deceased person. The estate includes the various types of assets mentioned above. From this cumulative value, all debts are subtracted. What is left is the net value of the estate. It is one of the most hated taxes and many people get trapped. If you want to know how to avoid UK inheritance tax click here.

The idea behind the inheritance tax

Inheritance tax is somewhat of a political issue. Proponents of this tax believe that it helps re-distribute wealth. Without inheritance tax, the rich will keep getting richer because wealth will repeatedly get inherited in perpetuity. Inheritance tax goes to the state which then re-distributes it for the benefit of all the citizens of the country.

Is inheritance tax a tax too far?

Opponents of inheritance tax make the counterpoint that the income which an estate’s assets generate already gets taxed. The estate owner pays income tax on all incomes as soon as they get created. So, inheritance tax is like double taxation and hence redundant.

The house owning trap for many

Rising home prices add another dimension to the political debate surrounding the inheritance tax. As home prices rise, more and more people end up with estate values well over the exemption threshold limits. Thus, there is building pressure on government leaders to raise the threshold limits as well in order to reflect the changing real estate prices.

Inheritance tax rates

The tax code says that inheritance tax is not levied on net estate value of £325,000. So, everything above that threshold is taxed. The rate of inheritance tax is 40%.

So, if your net estate value works out to £525,000, then you need to pay tax on £200,000 at the rate of 40%. That works out to £80,000.

Ways to avoid UK inheritance tax

The inheritance tax rate can be reduced by leaving a certain portion of the estate to charity. If the deceased person leaves 10% of his/her estate to charity, recorded through a will, then the inheritance tax drops to 36%.

The inheritance tax rate can also be reduced if any assets of the estate are given away as gifts. When the owner of the estate gives away some assets as a gift while he/she is still alive, the inheritance that becomes payable upon the death of the gift giver may receive some form of taper relief and the inheritance tax rate may drop below 40% as a result.

For example, a gift given three years before death attracts a 40% tax rate, but a gift given four to five years before death attracts only a 24% tax rate and so on. The amount of taper relief totally depends on when the gift was made during the lifetime of the estate owner.

Exemptions from inheritance tax

Besides the £325,000 limit for inheritance tax exemption, there are some other exemptions worth noting. If couples leave behind a home, the threshold for inheritance tax exemption rises to two times the single person threshold. The threshold for couples is, therefore, £650,000.

There is also a new rule in the offing whereby the duty on homes passed on by parents or grandparents will be scrapped by April 2020 for home values up to £1 million. The exemption for duty will be £500,000 for singles and £1 million for couples who pass on homes to their children or grandchildren.

This £500,000 exemption works out as follows:

You get the basic exemption of £325,000 per person as outlined above (or £650,000 per couple).

The Nil Rate Band Explained

Next, there is something known as the main residence nil rate band, which is a top-up over the £325,000 basic limit. This top-up allowance is valid only on the main residence of the estate owner where the main home is transferred to direct descendants such as children, step-children, or grandchildren.

This additional allowance is £150,000 slated to go up to £175,000 in the year 2020. So, £325,000 plus £175,000 equals £500,000. You would simply double all the number if a couple were to transfer their main home, giving you a total exemption of £1 million.

Homes worth values between £1 million and £2 million will pay the normal inheritance tax rate on amounts above the exemption limits. Homes above £2 million have somewhat complicated rules regarding inheritance tax.

The tax code says that homes of £2 million and above will lose £1 of the main residence allowance for every £2 above the £2 million mark. Essentially, one would lose the complete £175,000 additional allowance for a home that is valued at £2,350,000.

Transferring is an option for exemptions

There are exemptions for inheritance tax on estate transfers to a spouse, civil partner, charity, or a community amateur sports club. In case of assets left to a spouse or a registered civil partner, they need to be living in the UK in order to avail the exemption.

One thing that you must keep in mind is that even if the value of the estate is below the £325,000 exemption limit, you would still have to report the estate to the HM Revenue and Customs (HMRC).

There is also a useful provision whereby if your threshold of £325,000 isn’t breached, then you can add any unused threshold to your partner’s threshold when you die. So, your partner can then have a higher threshold for inheritance tax exemption.

Assets of a business such as shares can get partial or full exemption from inheritance tax under Business Relief. Assets should be passed on to the beneficiaries when the owner of the business is alive and the transfer of such assets is part of a will.

Lastly, inheritance tax is exempt in cases where the estate owner loses his/her life while on active duty for institutions like the armed forces, police forces, fire department, paramedical bodies, or humanitarian aid organizations.

So who actually pays inheritance tax?

If you are worried that you may face a massive tax bill suddenly after the death of a close family member, then you need to relax because there are certain procedures that the HM Revenue and Customs has regarding inheritance tax.

Firstly, funds from the estate being transferred are used to pay inheritance tax. You normally won’t have to pay tens and hundreds of thousands of dollars from your pocket.

The person dealing with the estate (normally the executor of the will of the deceased person) will handle the raising of funds from the estate for the purpose of inheritance tax payment.

Some more clarifications regarding inheritance tax

If one partner passes away a few years before the other, and if the exemption limits when the first partner passed away were different than today’s limit, then which limit will apply?

The answer is to look at what percentage of the previous limit was used up when assets of the first partner were transferred. For example, let us assume that the tax-free limit when the first partner passed away was £200,000 and that 50% of the limit was used.

Now, the tax-free limit is £475,000 (as explained above). So, the remaining (unused) 50% of the NEW limit i.e. £475,000 is the additional top-up allowance that is applicable when the second partner passes away. So, the second partner gets his/her £475,000 limit PLUS an additional £237,500.

Does a gift, given long before dying, attract inheritance tax?

The “long before” is absolutely critical in answering this question. If you gift something (even money), then it is considered as part of your estate. If you die within seven years of making that gift, then that portion will attract inheritance tax.

However, if you live beyond seven years after making a gift, then the rules change. You would have to consult a tax specialist on this topic for correct and up-to-date information.

You can also save taxes on gifts by making gifts every year starting now. A person is allowed to make up to £3,000 of capital tax-free. If you can do that for 30 years, you reach £90,000. It will bring down the amount of gift that needs to be given away during the last years of the lifetime which, in turn, will bring down the taxable inheritance amount.

The post Inheritance Tax in The UK appeared first on Golden Prime Trust.

It’s very important thing to note from the beginning that there is no one size fits all structure for a business, investment, operation, etc.  

Every case is different and there are lots of things to consider:  

• Who are the owners? 
• Who are the customers? 
• Where are the suppliers? 
• What type of business is it? 
• Where the staff are located? 
• What the assets are? 
• What the risks are? 
• What regulations apply? 
• How you accept payments? 
• What are you trying to accomplish?
• etc. 

When considering international corporate structuring you want to pay attention to lots of things.  

First of all, you want to pay attention to tax.  

This breaks into the three pillars of residency: you as an individual, your income, and your corporation.  

Second, you want to pay attention to liability consequences.  

What if you get sued? What happens if you get divorced? What if some government intervention occurs? 

Third, you want to pay attention to banking. This is a huge thing today.  

Historically, you were able to form a company anywhere. You could open a bank account very easily just walking into a bank. Bank account opening in Switzerland was very common among rich people. Those days are long gone.  

Banks do lots of screening today. Whether they accept you or not depends on lots of factors. Some banks are easier to deal with then others. This is why when planning international structure banking is one of the things that we consider first.  

Besides this, we need to consider how are you going to accept payments. Some countries don’t support certain services, such as PayPal.  

Fourth, you need to pay attention to regulations in a foreign country.  

Maybe you are in the industry that’s not supported in that country.  

Then, you need to worry about audit. Do you need audited financials?  

What about VAT, what about sales tax?  

What are regulations around investing? There is lots of other rules and regulations that you need to pay attention to. 

Finally, one thing that’s changed in the world today is that you really need to have some substance in a foreign country when setting up a structure. Or at least if you don’t you’re going to have a hard time maintaining a stable structure and even a harder time with tax. 

Ideally, you’ll want a real office, team, customers and everything else that proves that you are doing legit business in that place. If you don’t have what the country is looking for you might end up having lots of issues.  

This is why we need to be very thorough when setting up an international business structure.  

It’s why a lot of the advice from those unqualified in the field, or even lawyers or accountants who might just look at one component and save you on tax but screw up your business operations are dangerous. 

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post 5 Things to Consider When Building an International Structure  appeared first on Golden Prime Trust.

Most people only think of one, in some cases two layers of tax. 

In fact, we generally, have three layers of tax to consider whenever we’re doing international tax planning and structuring.  

The first layer is corporate income tax, which is what most people are trying to reduce by going to a low or zero tax jurisdiction.  

After earning these profits and paying tax on them the company pays dividends to the shareholders.  

Of course, most people are aware the shareholders will pay some sort of tax in most cases when they receive those dividends.  Generally, avoiding these taxes is one of the reasons a person will shift their residency. 

If these dividends are paid outside of the country you might have to pay the third layer of tax, which is withholding tax.  

In other words, the income is earned at a company level and the company pays tax.   

Then the company distributes a dividend and the company withholds a tax from that income, which is payable to the government of the country where the company is resident 

And then the shareholder who receives the dividend pays a tax on those dividends in the country where they are resident. 

Withholding tax in Different Countries

Now, not all countries have withholding taxes and those taxes will vary based on the treaties that might apply. 

Up till now we’ve talked only about the withholding taxes applicable to dividends but there are several types of income that might be subject to withholding tax: 

• Dividends
• Royalties 
• Interest 
• Capital gains 
• Rent 
• Director’s fees 
• Technical service fees 

The first 3 are almost universal.  The fourth is usually only applicable on the sale of real property, the others, as well as various permutations based on local law, will vary. 

Note, how something like royalties or interest withholdings could affect your business adding a potential fourth layer to the three layers we discussed. 

Examples of Withholding Tax

Say a company in Country A is licensing IP to a company in Country B. 

The income from this licensing is royalties income and therefore could be subject to withholding tax in Country B.  In other words company in Country B pays royalties to the company in Country A but withholds a certain portion for taxes payable to country B. 

Company in country A then pays taxes on the royalties received (they might receive a tax credit for taxes already paid depending on local laws).   

They then might distribute to a shareholder in Country C. 

This might mean taxes are withheld in Country A before the dividends are finally taxed in Country C. 

The same principle would apply to interest income and in some cases technical service fees and some other classes of income depending on the country’s rules and source income rules. 

The rates of withholding will be determined by a combination of country-specific local laws and the applicable tax treaties between countries. 

The idea behind withholding taxes is because you earned money from a particular country you should pay tax there but they have no way to tax you once the money has left the country so they withhold the tax from the payment up front. 

You need to look at withholding taxes on a country by country basis because some countries have none at all and others such as China and Brazil have very strict rules. 

If someone has a structure that works perfectly well for them, doesn’t mean that it will work for you as well. In fact, it might be extremely bad for your situation and you might end up having lots of issues.  

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What is “Withholding Tax”?  appeared first on Golden Prime Trust.

Taxation basis in simple words means – which portion of your income is the country going to tax.  

The two most common you will hear about are worldwide income taxation and territorial taxation. There are few other forms of taxation basis that are not so common, including zero tax and remittance or blends of these. 

Worldwide taxation basis means that all of your worldwide income will be taxed.  

The common misbelief is that the USA is the only country in the world that still taxes worldwide income. This is untrue. Most countries have worldwide taxation, however, a lot of countries have what’s called a participation exemption or rules under which they don’t tax income distributed as dividends from foreign subsidiaries.  

The next option is territorial taxation. In this case, they only tax the local source income. As we mentioned in our video on “what is source income” what constitutes local source income is a little tricky.  

Rules vary from country to country, but unlike what many think it’s NOT based on where your customers are.  In other words, usually, a territorial taxation nation will still tax you even if your customers aren’t located in the country if your operations are taking place in the country. 

Territorial taxation can be very good for you if used well but certainly isn’t a “pay no taxes” or even remotely similar to zero tax ticket. 

Some countries have remittance–based taxation.  

This means that you will only pay taxes on income that you bring back into the country.  

For example, in Thailand, if you make income abroad in a foreign country and don’t claim the dividends and bring them back into the country for a year you will not have to pay taxes on them.  

Note that Thailand has worldwide taxation on resident companies, it’s simply territorial remittance based for individuals.  

Malta, Gibraltar, and Singapore have some sort of remittance–based taxation in certain cases. So as long as you don’t bring your money into the country you will not have to pay taxes.  

There are lots of rules and lots of exemptions for foreign income depending on the company type, income type, etc. This is why it’s important to dig into the rules of each country you’re doing business in. 

It’s important to note that territorial taxation doesn’t mean zero tax. This is a common misconception. It could mean zero tax in certain cases if structured properly. It’s very important to understand all these rules, otherwise, you could get into an issue. 

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What is “Taxation Basis”?   appeared first on Golden Prime Trust.

Lots of people have the idea of setting up an offshore company in a low or zero tax jurisdiction and then charging the original company (that’s in high tax jurisdiction) with management or marketing fees (or similar fees).  

Well, there are rules against doing this. These rules are called “transfer pricing rules”. 

If you are billing from one company to another that’s abroad and these companies are related (owned by you, your family member, etc) you have to bill the fair price as you would bill an unrelated third party.  

So, what you are paying your own company, for example, for marketing services needs to be similar to what you would pay some random marketing company that’s completely unrelated to your businesses if it was doing the same thing for you.  

So before billing your own company for some service, many countries require you need to do transfer pricing study. This will tell you what is the fair market value for that service. 

Depending on the country there are different rules about how you need to conduct these studies, the pricing methods involved and then what reporting is involved. 

If you don’t do this, or you do it and misprice those transactions (what’s called “transfer mispricing”) you can be subject to fines in some cases ranging up to 400% of the difference. 

All this takes lots of work initially, especially for a small business. So, when we do international structuring we are looking to avoid transfer pricing since it lowers your costs and risks at the beginning.  

However, transfer pricing is widely used by all the big companies (it’s rare to find a Fortune 500 company that doesn’t use it in one form or another) because sometimes it’s the only viable option to save on tax and it pays for itself many times over. 

Transfer pricing will prevent you from excessively abusing your ability to shift profits from a high tax jurisdiction to a low tax jurisdiction and shouldn’t ever be the first choice for international tax planning but it is very useful to have in your belt.  

So, even though setting up proper transfer pricing structure is lots of work initially this is something that can massively pay off later on. 

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What is “Transfer pricing”?   appeared first on Golden Prime Trust.

There are lots of misunderstandings when it comes to CFC rules (controlled foreign companies rules) and CMC rules (management control rules, part of Corporate Residency Rules). Lots of people get confused about which is which.  

You have to pay attention to both.  

However, not every country has them, some countries will have CFC but not CMC and vice versa.  

So, which are the principles of CFC rules? 

Think of it like this… 

All the countries want their local companies to reach further than just within the country of origin. They want their businesses to succeed globally. This is very good for the country because it brings more money back to local shareholders, creates jobs, etc.  

However, let’s imagine this situation: 

An American company sells in Germany. In this case, if they will have to pay taxes in both countries: in the USA and in Germany. This will put them at a disadvantage compared to a German (local) company, which only has to pay taxes in one country. 

This would be bad for the US, which wants their companies to be competitive when doing business abroad to gain market share.  

Because of this, they created rules that let the company form a foreign subsidiary company to do business there and only pay taxes on the income earned in the other country where they’re doing business.  

Of course, this naturally leads to lots of exploitation where companies could either never bring the money back and hence never pay the tax (sort of like creating an unlimited deferred retirement plan (which is why CFC rules are called “anti-deferral rules”).  Or, they form foreign companies in countries where corporate taxes are much lower even though it isn’t simply because they are doing business there in order to gain tax savings.  

(Sometimes they can bring the profits back tax-free see “participation exemption” or “holding company regime”). 

This is where CFC rules come in. 

The tax departments are smart, they know businesses will form these foreign companies artificially just to pay less tax or move and keep income abroad to pay less tax. 

CFC rules at least, in theory, are designed to prevent this abuse while still allowing for the legitimate uses described above. 

The way these rules work is if a company meets certain criteria (usually owned and controlled more than a certain percentage by shareholders of a particular country) and the income of that company meet certain criteria, even though the company is foreign they force the shareholders to pay taxes on the money as though they brought it back even if they didn’t.  

It’s very important to be aware of these rules in each country you live and operate. 

However, if you are structured properly you can often work around these rules.  

You can give us a call and we will discuss how you could avoid paying all the taxes while still following all the rules.  

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What are CFC Rules (Controlled Foreign Company rules)? appeared first on Golden Prime Trust.

Today we’re going to learn about “income source”.  

Have you heard about territorial tax systems?  

What it means, in theory, is that they only tax you on your locally sourced income.  

By contrast, some countries will tax you on your worldwide income, meaning you pay tax on everything you make everywhere. (For the difference see taxation basis)  

Most places will tax you on your local source income unless we are talking about tax heavens, zero tax countries like Bahamas or Cayman Islands, however, these are super rare. 

However, there’s the catch.  

What exactly do they mean when they say ‘’local source income’’?  

This totally depends on the country. Some people believe that they will be taxed based on where their customers are, this is not completely true. In some cases, this will happen in some others it won’t.  

Usually, there are a few basic principles they apply. 

The first is called ‘’permanent establishments’’.  

This is very broad, but we can think of it as a permanent place of business.  

For example, if you have a team and an office that can be considered a permanent establishment if you have a store that can be considered a permanent establishment as well.  

In some cases, even a person can be considered a permanent establishment – for example, you have a manager somewhere who is doing their work remotely. They can tax you in the country where your manager is, as well as in the country where your operations are. This is something to be very careful about.  

Next thing to consider is something called the “operations test”.  

This means that they are going to look for where your business operations take place. For example, you could have your employees in Hong Kong, they do all the work but your customers are from Australia. In this case, you will be taxed in Hong Kong because this is where your business is operating from.   

So, things to consider when thinking about source income: 

• Permanent establishments
• Where is the work taking place 
• Capital gains – for real estate you will be taxed based on where the property is 
• Royalties – you will be taxed based on where your customers are 
• Interest – you will be taxed based on where is the person paying interests from 
• Dividends – usually taxed based on where is it paid from. 

Note, these might be taxed at both ends, something to investigate.

These would be the rules loosely, however, when thinking about taxation the best is to look into each situation closely and that’s how we will know which structure will suit your business the most. 

We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing.  Have a question you want answered?  Book a consultation now! 

The post What Does “Source Income” Mean?  appeared first on Golden Prime Trust.