# What to do with offshore profits after paying myself?



## dsiomtw (Jan 26, 2019)

I'm a US citizen and planning on moving myself and my business to Central America this summer, for a minimum of 3 years, and possibly forever.

I'm familiar with the foreign earned income exclusion (and housing exclusion), so the obvious plan would be to pay myself a salary somewhere around 120k, and effectively pay no US taxes on that.

My question is regarding additional profits that will accrue in my offshore company.

Say things go really well and 4 years from now I decide to move back to the US and my company has 1M in accrued profits ...

What are some of the best ways for me to get access to and use this money for investments, etc. - here in the US - without me having to "repatriate" all this money and pay massive amounts of taxes on it?

For example, could my offshore company invest that money in US real estate, which should at a minimum allow me to grow that money on a tax deferred basis?

Or even better, some other strategies for minimizing the taxes I'll have to pay when some or all of that money is eventually distributed to me personally?

For example, could my offshore company buy a house here in the US that I lived in and leased from the company? And why not a nice car that I also leased from the company, etc. If I'm paying a fair market rent for these things, I don't think I'd have to claim them as income??

I know I need to speak to an expat tax attorney about all of this, I'm just trying to get a bit educated myself before I do. Thanks!


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## Bevdeforges (Nov 16, 2007)

Don't try to get too clever about moving money and/or profits around in connection with your business. You don't mention the type of business you have that you will be moving, but you do need to be aware of the rules and regulations for US citizens who own 10% or more of a "foreign corporation." 

You should probably take a look at the instructions for form 5471 to get started:
https://www.irs.gov/forms-pubs/about-form-5471

Even if your business isn't a "corporation" in the usual sense, you may have to do some special reporting as beneficiary of a foreign "partnership" or other type of entity.

And, the business itself may also have to file "informational" forms with the IRS due to your involvement with the business. 



> so the obvious plan would be to pay myself a salary somewhere around 120k, and effectively pay no US taxes on that.


You may already know this, but the salary you pay yourself has to fairly reflect what you do in and for the business. The IRS can challenge your right to exclude a salary that is considered excessive for the work you do for the business. (Included here primarily for any lurkers thinking of doing something similar.)

Just some talking points for when you start discussing with an international tax attorney.


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## dsiomtw (Jan 26, 2019)

Thanks for the reply.

1. Sorry I know I used the word "move" but as far as my software business, I won't actually be moving the existing US company (that would not be fun, as you've alluded to). I will simply start a new offshore company and start doing business under that company going forward.

2. Re: the salary, absolutely. A 120k salary is perfectly in line with what an active CEO/founder of a profitable software company customarily gets paid. It's actually a bit on the low end.

Thanks for reply. I'd be really curious to know if anyone else has any other input, especially in regards to the additional profits that will build up in the offshore company. Thanks!


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## Nononymous (Jul 12, 2011)

Read up on the new transition tax and GILTI and all that. Being the owner of a foreign corporation that's retaining income is a recipe for getting screwed, potentially.

If you want to reduce US taxes you might be better off setting up in Delaware or Wyoming (while living abroad).

Also, presumably, you will need to pay tax in your country of residence at some point.


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## Bevdeforges (Nov 16, 2007)

Not sure if would apply in all countries, but what you might consider doing is to disband and liquidate the foreign company before you return to the US. It depends a bit on the size of the company, but at that point, you'd be settling your tax bill for your country of residence. At that point, you're just repatriating money sitting in your bank account. (Though I don't know if there might be some way that the IRS would try to get hold of that.)


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## Nononymous (Jul 12, 2011)

Transition tax and GILTI are about the US taxing the money sitting in the offshore corporation, are they not? That's how a bunch of (unfortunately) compliant duals in Canada are being screwed. Government encouraged them to keep earnings invested within the corporation as a form of retirement savings (because corporate tax rates are lower than personal tax rates). Then last year's TCJA imposed an 18 percent US tax hit on those assets; what's worse, taking money out of the corporation to pay the IRS bill means additional Canadian taxes. 

So I would be careful about setting up a company offshore if I intended to remain compliant. Do some research.


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## SoCal85 (Jan 14, 2019)

Nononymous said:


> Transition tax and GILTI are about the US taxing the money sitting in the offshore corporation, are they not? That's how a bunch of (unfortunately) compliant duals in Canada are being screwed. Government encouraged them to keep earnings invested within the corporation as a form of retirement savings (because corporate tax rates are lower than personal tax rates). Then last year's TCJA imposed an 18 percent US tax hit on those assets; what's worse, taking money out of the corporation to pay the IRS bill means additional Canadian taxes.
> 
> So I would be careful about setting up a company offshore if I intended to remain compliant. Do some research.


Generally, when you own a non-US company that is controlled by US persons you need to look at the anti deferral rules (subpart F, GILTI, etc.) If it's not a controlled foreign corp (not owned more than 50% by US persons directly, indirectly or constructively) then profits are generally only taxable when they are distributed out from the entity. You however need to also make sure in this case the PFIC rules don't apply.

Transition tax (Section 965) was a one time repatriation of all earnings and profits as of 12/31/17 for US persons that owned 10% or more in a controlled foreign corporation (if you owned it through a entity with a fiscal year end you may be picking it up in 2018 instead). This won't apply going forward but was a big hit for US persons holding profits offshore. The benefit though was the deemed repatriation of this income was subject to tax at either 8% or 15.5% equivalent rate (more for individuals since the rate is based on the maximum corp rates) depending on the cash position of the corp. From a US perspective, this was a "deemed dividend" so you can leave the money in the corp if you wanted to. Any future distributions are treated as previously taxed income not subject to federal taxes. 

GILTI (Section 951A) however is another beast all together. Prior to tax reform, the main anti-deferral regimes were subpart F and the PFIC rules for the most part. Thus, if you didn't have a CFC that earned subpart F income or weren't subject to the PFIC rules you can defer US taxes on the profits offshore indefinitely until it was distributed to a US owner. Subpart F was more narrow previously and covered related party transactions mainly related to sales and services or passive income. GILTI however is now more broad and encompasses all types of income and excludes only a few. Thus, if it's not subpart F income its now likely going to be captured under GILTI. Depending on the tax rate imposed in the local country you may want to structure it differently. You may want to treat it as a pass-through entity through CTB election so you can benefit from foreign tax credits or holding it through a US C-Corp to take advantage of the 50% GILTI deduction (only available to C-Corps). You definitely need someone with international tax experience to help you since you want to do it right the first time around.


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## SoCal85 (Jan 14, 2019)

Bevdeforges said:


> Not sure if would apply in all countries, but what you might consider doing is to disband and liquidate the foreign company before you return to the US. It depends a bit on the size of the company, but at that point, you'd be settling your tax bill for your country of residence. At that point, you're just repatriating money sitting in your bank account. (Though I don't know if there might be some way that the IRS would try to get hold of that.)


Technically, the liquidation of a foreign company (assuming treated as Corp for US tax purposes) is taxable under US law as well. If an individual owns it, its covered under Section 331/336. What occurs is you have a deemed sale (inside sale) of the corps underlying assets at FMV (section 336), this can trigger subpart F depending on the type of assets. Additionally, you have a deemed sale of the stock (outside sale) at FMV under Section 331. 

If owned by a US corp, different rules apply since there are tax free liquidations allowed for Corp-Corp under IRC Section 332 & 337.


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## andrew8 (Oct 5, 2018)

Knowing that you need proper legal advice, some anecdotal thoughts from watching most of my friends tell me that while US residents they reinvest aggressively and pay themselves very little. When they are overseas residents they pay themselves for that sacrifice.

So the answer may be to invest invest invest for the time being!


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