VOICE-OVER:
This podcast channel it’s about you, successful international entrepreneurs, successful ex-pats, successful investors. Sponsored by HTJ.tax.
DERREN JOSEPH:
Fantastic. So, thank you for joining us, HTJ.tax. We do this livestreams every week. And today we’re going to talk to those who may have a business in Singapore (for a complete guide on USA tax Singapore click here), and they are considering moving that business to the US. So again, for those who have not joined us before, this is not tax advice. We’re having a general conversation about general principles. What I hope to be doing is equipping you with the key concepts that you need to take to your tax advisors to get specific advice. So, we just having a general conversation. Thank you for those are joining us on the various platforms. Do know that this is being recorded. If you do not want your image to be shown, just simply keep your cameras switch off. So, feel free to type your questions and comments in the box below those who’ve already sent it. Okay. Sorry. Somebody is trying to call me, so I’m going to switch off. All right. Fantastic. All right. Great. So shall we begin? What’s the first question that we have, let’s have a look at it, okay. Somebody is asking, what stage should I set up a company in the US. So, I guess people have a number of reasons for wanting to move the business from Singapore to the US what appears to be the most popular is raising capital, because obviously there’s a much bigger market for raising capital from investors than in Singapore.
So, in terms of with state, that really depends on, you know, a hose. I know everything, it depends, right? But it genuinely does depend on where it is that you decide to set up shop because you have more or less 50 states, and you can set up in any one of those, but each one of these states is a jurisdiction unto itself. So typically you would set up your company where you and your team plan to be based. If it is that you plan to be based in California, then you would want to set up a company in California.
People tend to associate a us entity with Delaware and our Delaware does a fantastic job of marketing itself, but it also does have a great body of law and a chance to record as well. So, it’s people believe in, you know, I guess it depends on the situation that the, the body of law works more in the favor of the investor of the business owner in Delaware than it does in some of the states. But the catch is that even if you form a company in Delaware, but you’re doing business in California, then that Delaware company needs to register as a California company, right?
Because wherever it is, you are physically as the person that is the key decision maker, wherever you are based, the companies as is deemed to be based there also. So you want to get advice. You want to get advice that takes into consideration. What part of the US you and your key decision makers are going to be, or where even if it’s not a key decision maker, if it is a full-time employee, wherever that full-time employee may be based that may create nexus with that given state, and you may need to create subsidiaries there. So, it’s not uncommon for there to be a holding company, for example, in Delaware, but subsidiaries in each of the states, in which you have some sort of economics exposure.
So bottom line is not as easy as just picking a state and incorporating any entity. There you’d want to get advice that takes into consideration your specific business model, where you and your, your team members going to be physically located, and that would help drive where you should set up your company. So for those, that person who asks that question, I hope that we were able to help you at least get the, the key principles that you need to take to your advisors and have that more in-depth conversation. Okay, next question.
Okay. What type of company? So just like in Singapore, you have a number of entity options. The most common would be an LLC, which is a limited liability company. So there’s a company that’s formed at the state level, but then the federal government asks, well, okay, we know you formed because the LLC is a creature of the state, not the federal government. So you’ve formed a company at the state level, but then the federal government is like, well, how should we treat that company? The two basic options, there are a lot of options, but the two basic ones, the two most common ones would be as a, what we call a C Corp.
That will be the equivalent to private limited in Singapore, basically a regular company. It creates a stronger layer of protection between yourself as the, the business owner and any liabilities that may arise as a result of doing business, which is kind of important. But the downside is that, of course, you will be double taxed. When do I mean by double tax in that when that company makes money, that company would be that C Corp will be an entity on its own. It will have its a legal person on its own rights and responsibilities of its own, just like a Singapore private limited.
So it will have to file a corporate tax return. So it pays tax right now. And that’s about 21%, which is your corporate tax level, a corporate tax right now it could change. But right now it’s 21%. That’s at the federal level states, different states, different tax restrooms, but they tend to be single digits low to mid single digits. But anyway, so the company pays taxes. And then when you, as the shareholder receives a dividend from that company in Singapore, that dividend tends to be tax-free. But in the U S that dividend will also be taxable in your hand. So that same money will be taxed twice, but in exchange for that, it is a strong, a layer of legal protection, generally speaking.
So the second option will be an LLC, which is a limited liability company that you did not elect to be treated as a CQL by the federal government, but instead you elected for it to be treated as a pass through entity. So the equivalent, I mean the closest equivalent to that in Singapore would be another pass through panel, like a limited liability partnership, or so they, the point is that the entity doesn’t pay any taxes. The income is taxable in the hands of the, and the LLC. We would call them members. So the kind of like partners in a Singapore limited partnership.
So the tax is paid by the, by the members of the partners, not by the entity. So there’s one layer of taxation, but there’s an argument that the level of protection and legal protection is not as robust as it is with a CQL. So those tend to be the two main entity options. There are a whole lot of others, and there are lots of different structures depending on what you’re trying to do, but those are the two key building blocks that you’d want to have that conversation with your preferred advisor. So, right. And again, those who just joined us feel free to type your questions in the box below today.
We’re talking about moving your company from Singapore to, to the U S and this is something we do all the time. Just last night, I had a long conversation with an, an entrepreneur in Singapore, runs a tech company. And, you know, just having that conversation about how should he structure his move to the US so this is something that we do all the time. And unfortunately, it’s not as easy as just Googling and reading an article and, and thinking that, you know, what, what needs to be done, because this has long-term decision long-term implication. So you’d want to get advice from someone who knows your situation and intimate detail.
So, okay, next question. Okay. What type of visa, or it really depends in Singapore. Singaporeans tend to qualify for one of those easy visas. Otherwise we see L visas as well as EBV visas. So we are not immigration consultants. We’re not immigration attorneys, but we do work with immigration attorneys. Actually, if you go to our website issue, did our tax. I think we have a session with an immigration lawyer coming up either next week or in the following week. So quite imminently in the next few weeks, we’re going to do a live stream with an immigration attorney. And of course those sessions tend to be pretty popular.
We get easily hundreds of RSVPs and yeah, it’s, it’s pretty intense, but it is an opportunity to get a sense for what your options are. So, unfortunately, I can’t answer your question as to what visa would work for. You you’d want to get advice from a properly qualified immigration attorney. And it just so happens that we’re going to have a live stream of one in the next few weeks, have a look at HTJ.tax, okay. Next question, what happens to my investments outside of the US? Yes, now that is the million dollar question. Literally it could be a million dollar question and this that’s another area of practice for us, which is pre-migration planning.
So people who are moving to the US whether it be to take their company to the US or they may be a senior level employee with a multinational, and again, an ex-pat assignment in the U S whatever the case may be, you move into the US and you will be under the full weight of the US tax system. So from an income perspective US income taxes. You will be subject to taxes when your worldwide income. Let me repeat that. You move to the US, and you reside in the US you will be subject to taxes on your worldwide income.
I’ve seen some perhaps uninformed presenters talk about, you know, if you get an L visa or whatever, you don’t need to be know, the immigration law is separate from tax law. You end up in the US as a lawful permanent resident. So that’s Section 7701, or you just spending time enough on US soil to trigger what we call a substantial presence. Again, under Section 771, doesn’t matter what visa you’re in the US where it doesn’t matter if you in the US illegally, the point is that you are subject to taxes in your woeldwide income.
You will be subject to taxes, and you were letting come. So fortunately in Singapore, one of the reasons that we’re all there, it’s because it’s a relatively low tax jurisdictions. So capital gains, a tax-free dividends of tax free in the US those are subject to taxes, and you will be taxed just like any other resident. So what we recommend you do is sit with someone who understands the international side of the us tax code. And what we would do is go through the assets line by line. So typically they come with a spreadsheet.
Okay? So these, all my investments, I have shares in this other company in Singapore, I have shares in a company, Malaysia and Indonesia. I have investments. In unit trusts, have investments in mutual funds in Hong Kong. I have a rental property. I have a few condos in Singapore that I’m renting, whatever it is, we’re going to list them all out. And we’re going to go through line by line, line item by line item. What will be the US tax consequences. Once you enter the US and you spend enough time there to be tax resident. So we walked through all of that with you. And sometimes there may be ways of mitigating the tax impact, but other times, no.
So if there is a way where there may be a planning opportunity to either reduce the tax burden or eliminated completely, and we can have that conversation, otherwise you just need to be prepared to pay taxes. So the US tax is any worldwide income, and you need to declare you roll wide financial assets. So any financial accounts, including your CPF or MPF, depending on which other jurisdictions you’re exposed to, whatever financial accounts you may have outside of the US will be subject to US disclosure. It doesn’t mean that it’s going to be tax, but often it is, but it will be subject to US disclosure.
So you OCBC, you will be bank accounts, everything that’s financial outside of the us will be subject to disclosure. And any returns on that investment will be taxed accordingly. So hope that helps. Okay. All right. Somebody is, somebody’s thinking ahead. So somebody’s asking if I want to walk away. If I want to, after spending a certain number of years in the US, I want to give up my visa, my green card or whatever, and I will return to Singapore. What about exit taxes? So if it is so the way exit taxes trigger is typically one of two ways.
So if your net assets on excess of $2 million, which is basically anybody that has a condo, so that sense of threshold is pretty low, or if your average US tax liability for the past five years, exceeds a certain threshold right now is like roughly around 172,000. So if your average tax liability for the past five years exceeds 172, it moves up with inflation, but let’s just for the purposes of this conversation. Say, if it exceeds 172, then you can trigger the exit tax. What does the exit tax mean? It means that you look at all your assets, and we assume that that there’s a huge liquidity event that you sell everything.
So there’s a deemed sale on everything and whatever the game be, you know, the Delta between what you paid for it or what the basis is, what you paid for it, and what the market value is that Delta will be subject to tax. And that’s, that’s the exit tax. So again, we do, we do work with clients on pre what we call pre expatriation planning. So before you go through the process of surrendering you, your green card, we can work with you, but bear in mind that if it is that you do not take citizenship, but you remain on a green card that once you leave in under eight years, and you give up your green card, you won’t be something, even though your assets may be an excessive 2 million or your tax liabilities in excess of 172,000 on average, you won’t be subject to the exit tax.
Once you’re not a longterm ex-pat being there eight years or more. So when it comes around the sixth or seventh year, I’d stay roughly the six year, because depending on when you enter that it could be, you know, it’s it’s tax years, but it could be six years, you know, depending on when you enter in your exit anyway. So you’d want to have that conversation with someone, someone who’s US tax qualified, just to, you know, to see whether you do trigger any exit tax potentially, and what sort of planning you can do, but basically, you know, keep in mind once you don’t intend to stay there as a long-term resident, i.e. let’s say six years or more, you should not be subject to the exit tax, but again, get advice. Hope that helps.
Okay. All right. So someone else is asking now, and again, if you want to ask a question or make a comment, you can type in the box below, what I’ll do is take a quick look on Facebook and some of the other platforms to see whether anybody else is asking any questions. Nope. Okay. That’s good. All right. That’s fine. Okay. So next question. All right, right. Yeah. So, if you have a company in the US and that US company has a subsidiary in Singapore, would that company in Singapore be subject to US taxes?
Now that’s a good question. Under some circumstances, the answer could be yes. And what we do, so the US has a number of what we call like anti-deferral rules. Then the one in particular that tends to be triggered by companies incorporated in a relatively low tax jurisdiction like Singapore, but is it’s incorporated in Singapore, but it’s owned or controlled by US persons. And what I mean by US persons, it could be a US holding company, or it can be US exposed individuals. So you’re Singapore and you move to the US for the purpose of running one particular company, but you leave other companies behind that.
You still control those companies can be subject to different taxes. And the one that I want to draw your attention to have that conversation with your advisor would be the GILTY regime. So the GILTY stands for the Global Intangible Low Tax Income tax. So that’s, I mean, that’s called a GILTY, right. But basically it’s a tax on, on income that even though it may not be distributed to you, because typically you would imagine that, hey, I’m in the US. I run, I have a controlling interest in a company outside of the US in a low tax jurisdiction.
For example, Singapore, Hong Kong, I would typically only be tasked on distributions from that company. So distributions in the form of like, if I get some sort of consulting fee or I take a salary, that’ll be taxed because I’m now US exposed. Or if I receive dividends after a profitable year, I take dividends, then that will be taxed. But there are circumstances where even though you did not take any money from the company you had, you’re deemed, and the company’s profitable, you deemed to have taken a distribution. And that distribution was subject to the tax at ordinary tax rates. And then deemed distribution can take many forms.
But the one that we see most commonly with entrepreneurs who are US exposure companies in Singapore would be the GILTY tax regime. So again, that’s one to have a conversation with your advisors, so that any subsidiary in Singapore that is controlled by anyone in the US may be subject to the guilty tax, there are other anti-deferral rules, for example, the pediatric regime. So for example, if you own real estate using a holding company, or you have a holding company structure, and you have different subsidiaries that holding company could also be subject to deem distribution rules.
So the different types of deemed distribution rules, I said most common would be guilty where, when it comes to operating companies, but if it is that you have a holding company structure, a company that’s generating passive that’s involved in passive activity as opposed to being an operating company. So it’s more like a holding company that may be subject to the PFIC rules, a passive foreign investment company rules. So bottom line have that conversation with someone to understand the tax implications of moving to the US not just to run the company that you’re moving to the US to run. But the other investments that you leave behind in Asia have a conversation to make sure you understand the implications of those.
And next question, right. Someone is asking about shit services. So, yes, that’s a great question. You would not necessarily move all of your operations to the US you may leave some, some operations behind in, in Singapore, in Asia, and therefore there’ll be shared services, right? So the company that’s in Asia may perform functions like accounting, marketing, you know, some admin back office stuff for the company in the US so there’s some sort of shared services going on.
That is something that you need to pay attention to, and maybe subject to something called transfer pricing. What is transfer pricing? So transfer pricing is a discipline that kind of like is in between economics and taxation. That looks at determining what the appropriate price is for intercompany transactions. So, because, you know, you know where we’re going with this, right? So obviously Singapore is a of all things being equal. It’s a low tax jurisdiction in the US so there may be an incentive when you have two companies, one in a higher tax jurisdiction, and one in a lower tax jurisdiction.
There’s an incentive somehow to try to shift the profit from the high task to a low tax jurisdiction, obviously tax authorities are aware of that. And in order to manage that and to ensure that the price is genuinely arms length, and it’s not any attempt to shift profits artificially, there’s the whole discipline, and the rules are on transfer pricing. So transfer pricing ensures that you get an arm’s length price. So it was as if a third party pretended that third party provided that service. However, that is priced. That’s it, that’s the end game.
That’s what we’re looking for. So there are different methods, you know, there’s the comparable uncontrolled price resale plus resale price method cost, plus transactional net margin sound’s national profit split. So they’re like five acknowledged methodologies for determining what the arm’s length transaction price should be. And what typical pre transfer price discipline we’ll do is go through them and see whether that particular method is appropriate. And if it is not appropriate, say why. And then you end up using one or maybe two, but one method, ideally that fits that specific transaction.
So it creates a governance, corporate governance as to how these related party transactions should be priced. And then you have documentation on a ruling basis where you, every time that transaction is done, you justify that a certain process and procedure was observed to ensure that’s a fair price. So transfer pricing is a huge deal and tax authorities pay attention to it. In Singapore, the threshold for transfer pricing is relatively high. I think it’s a million dollars sink, but in the US there is no threshold. So once there is any sort of intercompany transactions with the US, then with involving a US company and another related one, you would want to have a conversation with your advisors to see whether the transfer pricing is appropriate and often it is.
So I hope that helps. Okay. Okay. So someone is asking a question. What if I remain in Singapore and I formed a company in the us, like a holding company in the US and he, yeah. Okay, yeah. That’s a common because the reputation or whatever, and you can get access to the capital. I get what you saying, but if you just form an operating company in the US but there’s no substance, what I mean by substance, there are no, let’s say there’s no boots on the ground. All the key decisions are still being made from Singapore.
Then, you know, according to the income tax, the income tax act in Singapore, you know, management and control, those are the two tasks management and control management controls being exercised from Singapore. So even though it’s incorporated in the U S if it’s being actively managed in Singapore, then it’s a Singapore company. So it’s not as easy as I said earlier, it’s not as easy as just going online and getting one of those incorporation mills to incorporate an entity. And you have a US company there’s more to it than that. So you need something called substance. You need decisions to actually be made there.
Otherwise, wherever those decisions are made, that company would be taxable in, in this case, Singapore, if you remain in Singapore trying to operate a company from remotely. So it’s not just about getting a paper company, but, you know, when we spoke about transfer pricing, I was looking at those intercompany relationships, getting, understanding the implications of your structure and making sure that you are, there’s a lot of thought that goes behind what functions are happening with that company, that and that you’ve incorporated in the US and who would be placed in the US in order to make those decisions within, within the United States.
So it’s not as simple as just incorporating, hey, I have a US company, but I’m going to sit an operator from Singapore. Okay. I hope that helps just have a quick look. All right. So I think those are all the questions for today. Thank you for joining and thanks for asking those questions. They were, you know, it’s something that we enjoy, something that we do, and we do it every week with different jurisdictions involving the US but we do it every week. So have a look at HTJ.tax to when the next one is going to be and what the topic would be, and this has been recorded, and it will be available on Facebook, on our website, HTJ.tax, on YouTube, on Spotify, iTunes, SoundCloud, basically, wherever you get your favorite podcasts, you’ll find that.
So you can share with your colleagues or friends who could make it. And we put out a new video every day. So if you want to follow us on social media, or there’s a specific topic you’re looking for, you can do a search on our YouTube channel. You can do a search on our website. She did our task. We have like over a thousand articles and international tax issues, and we have hundreds of videos. So all three have a look. They’re not advice. What they do is start the conversation and equip you with the key concepts that you need when seeking out an advisor and making a very important business decision. So, thank you for joining us. Have a good evening, and we’ll see you next time. Bye-bye.
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