Are you a business owner overseas who is looking to better understand overseas taxes? If you’re considering having an overseas business, it’s a good idea since some of the wealthiest countries are overseas. For example, Qatar is considered one of the richest countries in the world with 132,886 international dollars.
In this article, explore a complete business owner guide to taxes overseas. Read on to explore all about this and why it’s worthwhile to have your business overseas.
Tax Tips When You’re Just Beginning Overseas
If you’re just starting out and haven’t formed your business, you’ll want to determine how you’ll be structuring your company. Each structure will determine tax filing requirements overseas. It’s also a good idea to become knowledgeable of the different taxes out there and seek from companies such as HKWJ Tax Law & Partners Limited.
One of the most common business models is an LLC. If you choose a domestic LLC then your reporting goes through your federal tax return. You don’t need to worry about separate corporate filing with this option. If you choose a foreign LLC, then you have to choose a disregarded status with form 8832.
Bank Account Reporting
You’ll need to report foreign bank accounts. This is the U.S. stopping tax evaders who try to hide their money overseas. If you have over $10,000 or higher, then you have to file form FinCEN 114 each year.
Lowering Tax Liabilities
The U.S. has different credits and deductions that you can check out if you qualify. This will help you to avoid dual taxation.
In order to qualify certain stipulations must be met such as living outside of the U.S. for a year. If you qualify then you can deduct a large sum of money.
Different Structures
Whether you’re a partnership, LLC, or sole proprietor, how you pay taxes will be impacted. If you’re a corporation, you’ll need to file form 5471. This form is a requirement for anyone who has 10% or more of a foreign corporation.
Sole Proprietor
This is where you work for yourself and have no formal entity. Some examples are freelance workers or consultants. This is where you file a Schedule C, along with the form 1040.
You’ll need to report any loss or profits from your business, and any deductions. You’ll also need to pay self-employment taxes for Medicare and Social Security. Keep in mind that foreign countries might tax the same income for their programs as well.
Partnership
This is where a business is owned by 2 or more people. For foreign partnerships, you’ll need to file a form 8865. This is similar to a US partnership tax return, and a Schedule K-1.
Can Business Expenses Be Deducted?
Whether you’re a small business owner or not, you’ll want to know what can be deducted from your taxes. For example, advertising, taxes and licenses, meals, legal, travel, supplies, and many others can be written off. It also depends on your business as well as whether something can be deducted or not.
Totalization Agreements
Whether you’re abroad or within the U.S., you’ll need to pay self-employment taxes in the U.S. (medicare and social security). Many countries will have similar taxes as well. When this occurs it can lead to double taxation.
Some countries have an agreement with the U.S. as far as what’s known as a Social Security Totalization Agreement. That means that you’ll only pay the amount to one of the countries. This depends on your location and how your company’s structure is set up.
For those who don’t have a business entity, or you have a U.S.-based entity, then you’ll need to pay US FICA taxes. This will apply before you can have the Foreign Earned Income Exclusion.
For foreign-based business entities, you might not need to pay FICA or US Social Security taxes. Check with the country your in to see if they have a tax treaty with the U.S.
Taxation on Legal Forms
If you receive taxation on foreign income, it depends on the legal form you use as you run your business. You can consider having licenses on patents or trademarks to foreign companies or having foreign sales representatives. This allows you to market your company without having a business overseas.
You can also consider having a controlled subsidiary within a foreign country that’s either located in the foreign country or U.S. There are tax and business advantages to having a controlled subsidiary.
A controlled subsidiary means you’re an independent business entity and have a controlling corporation as the major and sometimes the shareholder as well. They’re often created due to foreign ownership being restricted in many countries.
Why Controlled Subsidiaries?
A controlled subsidiary is often formed due to a business being restricted in other countries. There are also branch profits taxed as well.
The main advantage is that the income is not included in the parent’s consolidated tax return. The U.S. won’t be able to tax it when it’s earned.
Only when it’s in the U.S. as dividends. The foreign subsidiary will still need to pay taxes to the country it’s located in. Many companies choose low tax jurisdictions.
Form 8938
This form is what’s filed with the IRS. They’ll want to know if your accounts generated income and the amount. This form requires that you list specified assets.
If you have a foreign business then you might have to file this form. It identifies your assets.
If you use this form, you normally don’t have to fill out form 5471. Avoiding filling out this form can lead to high penalties.
Schedule B
For those who have ownership in a foreign business, you’ll need to identify this on your schedule B. This includes having signature authority over foreign accounts. When you identify your signature authorities or ownership, you’ll need to list the countries you have them in.
Before Starting a Business Abroad
Before beginning a business abroad, you’ll want to check local regulations. Some countries make it easy for ex-pats to start a business, while others don’t.
Check your visa as well and ensure that it’ll allow you to have a business overseas, or have employment. Certain visas have limitations as far as investing or starting a business.
While some only let you have a certain amount for the business. Abide by local laws at all times and never go against what your visa status.
Research Costs
As an independent business owner, you’ll need to research export and import costs first. While a country might be inexpensive to live in, this doesn’t mean that imports and exports will be reasonable as well.
Have knowledge of the rates before starting your business. It can be profitable depending on the country you choose and their export and import pricing.
You’ll want to factor in all fees, shipping, duty, labor, equipment, and the cost of materials. Determine what it’ll cost you, for example, wool, cotton, and nylon for clothing. Also, buttons and zippers as well. You’ll need to factor in sewing machines and other machinery as well.
Why Start a Business Overseas?
There are various benefits to starting a business overseas such as taking a look at untapped markets. Many business owners have the problem of competing within an over-saturated business in their country.
For example, maybe a business that you have in China might be unknown in Canada. This can lead to brand new customers with a demand for something that they aren’t able to find as easily.
Recognition
As a small business owner, you might struggle with having others see your business. Many entrepreneurs wind up moving their business overseas in order to increase visibility.
Whether you’re looking to expand overseas or start from scratch, you might be able to gain more customers with increased awareness. It can help with credibility as well.
Reasonable Business Prices
Many major cities in the U.S. are expensive and nearly impossible to run a business. For example, living in San Francisco can cost thousands of dollars even just to have a room in a house. Imagine trying to run a business!
Take a look at different countries where you can hire someone to run your company and be a translator. You can rent a room, buy groceries, and only pay a few hundred U.S. dollars a month.
A Business Owner’s Guide To Taxes Overseas
Now that you’ve explored this business owner’s guide to taxes overseas, you should have a better idea if an overseas business is right for you. Would you like to read more business content? For everything from business to finance, check out our other articles today.