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VOICE-OVER:
This podcast channel it’s about you, successful international entrepreneurs, successful ex-pats, successful investors. Sponsored by HTJ.tax
DERREN JOSEPH:
So thank you for joining us, HTJ.tax. So a weekly live stream where we talk all things international tax. So today we are talking about US Taxes for International Entrepreneurs and Expats. So for those joining us for the first time, please be reminded that this is being recorded and it will be available afterwards on our website it’s HTJ.tax, YouTube, Spotify, SoundCloud, wherever it is, you get your favorite podcasts. We put it in over 15 platforms. It will be available there. If you do not want your image for those that are on zoom, if you do not want your image to appear, it’s pretty simple. You need to keep your camera switched off. So again, so I sent an email and for those who signed up using Eventbrite, you know, that you had the option of submitting questions. So for those who did submit your questions, we got probably about 12 questions. I think, thank you for those submissions, for those who want to do so now feel free to type in the box below and I’ll get to them in the order in which I see them. So if you’re on YouTube or if you’re on Facebook, you can just type in the comment below. If you comment box below, if you are on zoom, same thing applies, okay, please bear in mind that this is not advice, unfortunately, because we were licensed We, you know, we have to abide by certain rules. This is not advice. Nobody can give you advice. And just a few minutes, right? And especially when that professional doesn’t know your circumstances inside out. So what we having is a general conversation about general principles. And hopefully, the takeaway is that you will understand certain key concepts and principles that you take to your preferred tax advisory team. And they’ll give you actionable steps. But right now we just having a general conversation. You can consider it education, or you can consider it entertainment, but it is not advice. So that’s how we stay out of trouble. So. Okay, great, fine.
So I’m going to start at, okay. First question. So we are hoping to address some of the issues. So the first issue when one spouse is an American expat living abroad (for e.g. Americal living in Spain taxes) and the other is a foreign national, a non-resident alien with no intention of applying for US green card or pursuing us citizenship. When is it better to file jointly? And when is it better for the us spouse to file separately? That’s a great question. We get that all the time. I know some people, they, they filed single when they married, but that that’s kind of like misrepresenting yourself on your tax form, right? So if it is, you’re married to a non American, your options are really my filing separately or married, filing jointly or head of household. If the kids have a social security numbers. So head of household is also an option. So the reason why my filing joint Lee’s attractive is because you, I mean, you get the ease of e-filing depending on what system you’re testing is working on, but more importantly, the tax code and the tax tables in terms of income tax, they are created or construed in such a way that those who filed jointly get preferential tax treatment to those who filed separately. So basically depending on what your, what, how you, how you earn your income, you can actually pay less when you pay less in taxes. If you file jointly, as opposed to separately, based on the same earned income, we can debate whether that’s right or wrong, but that’s just the way it is. The code is constructed in such a way. It encourages you to file jointly and there certain tax credits. So that’s in terms of the actual tax rates, and then there’s certain tax credits that are only available when you file jointly, as opposed to when you file separately. So the tax code kind of puts pressure on you to file jointly. So that’s the upside. And the downside is that when you file jointly with your non us spouse, you need to include their income sale, be a Section 613G election. And we you’d wonder will we’ll hold on. Why would a, my non us spouse ever be interested in getting into the US tax? That again, that’s a good question. And we get that all the time. The reason being, and I think, you know this because you kind of hinted at it in the question, the way you phrased it. It’s a good idea if the intent is to pursue US residency. So if at some point in time, you think that your non-us spouse would join you in moving to the US then it makes sense to file jointly because then, you know, they, they have a tax ID and they have a footprint there they’re no longer because otherwise they simply don’t exist in terms of, you know, if they want to get a cellphone plan, if they want to, you know, lease a car, you know, they have no credit score. They have no proof of income. They have nothing. They simply don’t exist in. It’ll take a while for them to create a digital footprint in the US so by filing jointly, it’s a good step strategically. If your non us spouse hopes to join you in moving to the US if it is not the case, which you have clearly said, it’s not the case, then you’re right. It’s best to file separately rather than bring your non us spouses income into the US tax net. So that’s, that’s an option. Another way of getting the preferential tax rates that come with filing joint is if you have a US kids with social security numbers, and I know that’s a big issue, because some of my clients who have had kids in past year or two with the issues with the US embassies abroad, it’s been a bit challenging to register abroad and get socials and et cetera.
So, assuming that you do have social for the kids, you can file head of household, and that gives you better tax treatment than married, filing jointly. So I hope that answers your question next and the above scenario. So he, he or she has like different points under the same scenario. Okay. So in the above scenario, the foreign national spouse is the business owner entrepreneur and the American spouse files as married, filing separately is any us tax obligation for the foreign spouse or for the foreign business. So once it’s a foreign business and the American spouse is in no way shape or form involved in that foreign business, then you’re correct. And it’s completely 100% managed and controlled by the non-US spouse then. And you, especially, if you have no signing authority for that bank account, you have no shareholding. You don’t get any distributions in the form of salary, dividends, bonuses, consulting, fees, whatever you have zero to do with that foreign company. You’re right. It will not appear on the radar. And the, and assuming of course, the company has no nexus for the US then it’s out of the remit of the IRS. So I hope that answered that question. Next bullet point, the implications of owning property abroad, or having foreign bank accounts, personal a signatory and business accounts. Okay. If you own a I’ll deal with the bank accounts first, right? So I think most people should be familiar with the foreign bank account report, otherwise known as FBARS or FinCEN 114, that’s the actual form number. So it’s not new. I know people will be behave like, whoa, where did this all come from this? I think this view, this dates back to 1970-1971 with the bank secrecy act. So any US exposed person whether it be an individual or a corporate entity, so a natural or legal person, if you can control a bank account outside of the US and it’s above a certain threshold.
So, the aggregate maximum balance has to hit a certain threshold, which is $10,000. Then all the accounts are reportable. Even those with below that, that balance or those that may be even dominant, everything becomes reportable. So, and signature authority notice even, even if you are not the ultimate beneficial owner of that account. So for example, because you, a senior employee with your employer, whatever company you work for, you may, it’s not uncommon. You may have signing authority over company accounts, even though it may be, you know, it’s one of those corporate accounts where you quiet two signatures, and you’re just one of them, even that needs to be declared. So, basically yes, once the maximum would be a balance exceeds that threshold, the positive triggered, and if it exceeds a higher threshold for forms that came on and the factor for me, the 938, I think it is. Sorry, yes, The commonly known as the factor form. So those, so that is triggered by a higher aggregate balance, but you need to speak to you to tax professionals. So the bottom line is used to, if you signing for, or you have control over any bank accounts outside of the US it may be reportable to speak to your tax team in terms of winning real estate. If it is income producing real estate, then yes.
Obviously as a US person, you are subject to tax on your worldwide income, right. So that goes without saying, so if it is that you have an investment property outside of the United States, then you need to declare any income that you may have that derives from that property, you know, rental income, of course. All right. So, then some people say, I don’t know what type of real estate you have, whether it is income producing or whether it’s going occupied, if it is just a piece of land or whatever. So the two scenarios typically where it’s reported on your tax return, it’s where that foreign real estate is income producing. And when you hold it through a structure, so when you are holding it through a structure, it may trigger that form. It may trigger disclosure on the form 89, 38, which I mentioned before, which is a statement of foreign financial assets, right? So it’s similar to the AF bars, but the is go to a separate team within treasury, which is, I think it was a financial crimes enforcement network to which some extent, there’s some variations, but it mirrors the app that goes to the IRS. So speak to speak to your tax team, right? If you have investments in real estate, outside of the US and you control foreign accounts, especially when it comes to foreign accounts, they, the penalty for non-disclosure could be pretty aggressive. And it seems counter-intuitive, but the way the IRS works when it comes to domestic tax issues, it’s fine, right? It’s about paying taxes, right? That’s what the prime motivation appears to be. Now, when it comes to international tax, it’s different. The prime motivation is disclosure. And how do we know that we know that because if you don’t pay taxes, then there might be another payment penalty. There may be interest, you know, penalty interest. And depending on the mountain may not be, may not be a big hit to your bank account, right. But if you don’t declare that you have a bank account outside of the US it’s not just civil, but it could be criminal penalties as well. And the civil penalties that can be up to 50% of their reports and balance. And the example we like to give is there was, I think it was a medical professional. I think he was a dentist in Florida, in South Florida, and lots of cases, but this, because we have an office in Florida kind of was like on our radar. So this guy, he had an account in an offshore jurisdiction outside of US. And I think he had about a million dollars in it and he didn’t report it. So the IRS held that he didn’t report this million dollars to three years. So penalties 50% of the reported balance. So the penalty is $1.5 million in an account, $1 million in it. So they, again, the penalties from non-disclosure file foreign financial assets are pretty aggressive.
So it’s important and the penalties for not disclosing investments in certain foreign entities that exceed a certain threshold, it could be aggressive as well. You know, like the Form 5471 is $10,000 per year. And don’t think they are as afraid to levy those penalties. They do. So when it comes to living outside of the US as a US taxpayer, the emphasis is on disclosure. Cause some of these things, I mean, this just disclosing the fact that you have bank accounts in whatever country you’re in. It’s not a big deal. It has no, usually, I mean, once you’re paying tax on the interest, you declare it on your Schedule B and whatever. There is no real tax consequence to having money outside. They just want to know what you’re doing. It’s all about data and they just want to know what you’re doing. So please keep that in mind, let’s scroll down. How does owning a house instead of renting abroad affect the foreign housing, exclusion deduction and filing separately. And the property is solely owned by the foreign spouse and the American rent from, I see where you’re going with that. The biggest, if it is that you are an employee. So we have, we have lots of business owners. We have lots of entrepreneurs, we have lots of business owners. We also have expats as clients. If it is you’re an expat, you’re an employee with a foreign company. Then the biggest benefit that you would enjoy working out of the outside of the US is that Section 911, Foreign Income Exclusion, right. Which goes up each year with inflation. But for last year, as you’re doing your returns this year, I think it’s like $112,000. So like the first $112,000 would be excluded from US taxes, which is depending on your income, that could be a big deal. Now on top of that, another benefit that you get working outside of the U S is that housing deduction. If it is that you own the house, you don’t get the housing deduction if you own, if you are renting that rental payment. And so there’s a big table. So, and depending on where you live, the allowance for housing deduction varies depending on where you are. So for example, if you’re in a low cost jurisdiction where the cost of living, like let’s say you’re living in Ecuador, it might be, it’ll probably be a lower amount than let’s say Monaco or Singapore swam based. So depending on where you are, the housing deduction berries. So, and that, that is a deduction for the rent you pay when you, when you working abroad. So if it is you own the home or your partner, or your spouse, your foreign spouse, if he or she owns the home, then you don’t get that.
So, as to what you are asking, whether you can rent from your spouse, that’s, that seems like it will be difficult. There’ll be a difficult one to you. You can’t basically, I would imagine that there needs to be some sort of formal contract, right? Because you sign US tax return under penalty of perjury. At any point in time, the IRS can ask you to substantiate the figures that you provide, right? So if they ask, you pay rent, well, where’s the rental contract. You need to prove that, right? So you’d need to probably speak to an attorney licensed in the jurisdiction in which you reside and get a formal rental agreement done. And conversely, when your spouse receives that income, he, or she may need to declare that on her or his personal tax return in that jurisdiction. So, you know, and it, it could be I would consult a legal PR, a local professional in terms of getting something drafted up if that’s what you want to pursue. But I, it is possible technically, but I get advice would speak to a tax professional as well as a local legal professionals as well. Okay. Implications of being an owner investor or a director in a foreign company, the US tax considerations. Okay. As I mentioned earlier, the US tax code when it comes to international tax is all about disclosure. So if it is that you involved in a foreign partnership, make sure you get that Form 865. Once you trigger it, or the Form 5471 for foreign company and the money that you invested into the company for nine to six, make sure you, you know, just transparency, make sure you report it once your investment is above whatever the requisite threshold is for disclosure. So, there’s nothing wrong with investing outside of the U S absolutely nothing as long as not one of those countries, which are sanctioned, which is subject to U S sanction. So like, no, what you probably want to avoid Iran, North Korea, Venezuela. So assuming that it’s a jurisdiction in which the US has no problem, then yes, absolutely. You know, put your capital to work, but make sure it’s disclusion a US tax return. So speak to your tax team to make sure that the investment is properly disclosed. The bank accounts that may be tied to that investment are properly disclosed, whatever distributions you get a properly disclosed as well. Otherwise, there’s nothing wrong with investing in businesses outside of the US.
Next question. Is it better to be, self-employed get income from your foreign in terms of extracting income from your foreign business? Is it better to be self-employed? I was a batch in corporate a company and be on the payroll as an employee of that foreign business. Great question. It depends. It really depends on what your strategy is. You can do either. I know, assuming that it is a valid going concern and, and, and whatever you have this business, it’s not something that is commercially viable, right? So you’re doing legitimate business in whatever jurisdiction it is outside of the US if it is that you work as like an independent contractor, like the equivalent of a 1099 independent contractor, you’d be subjected to 15.3% south employment tax. So whatever income you get as an independent contractor, that will B template, ye you would to pay that 15.3% to the IRS that’s self-employment tax. So it really depends because then you may trigger social charges in whichever jurisdiction that you are, because you have to be somewhere, right. So what I would do is speak to a professional tax team. Who’s familiar, not just with the US implications, but also the tax implications of the jurisdiction in which, you know, find yourself. And you want to run two scenarios, a scenario in which, Hey, I’m just an independent contractor to this company. And what does that look like from, because you you’re trying to tax optimize. Now, it’s not just thinking IRS, you’re thinking about the Internal Revenue Service. And you’re also thinking of the tax burden in the jurisdiction, in which you now find yourself, assuming that you’re not in a tax-free jurisdiction like Dubai, right? That you owe someone of the other Emirates, the seven Emirates. So assuming that you on a jurisdiction with is some sort of tax responsibilities, you’d want to speak with a team that’s familiar with both the US and local, and you’d want to optimize across the two. So it may mean being independent may mean remaining independent. It may mean being an employee. It may be mean neither. And you’re just a business owner and you extracted in the form of dividends. Maybe it’s more tax efficient to pull it out as dividends. I don’t know, but you’d need, I recommend that you speak to tax team that understands both. And they will come up with a tax efficient way of pulling, extracting the money out or reinvesting, because maybe you want to reinvest. Maybe you want to pile back in those profits. So they lead to understand what your objectives are and work with you to find the most tax efficient way of achieving your business objectives. All right, I’m moving up. Kay. I see some questions down here.
Let me jump to from, cause I have two laptops open. So I’m going to jump to this one. Does an LLC owned by a non-resident alien is a disregarded entity. So does the owner need to pay any taxes in the US request in, and that’s what we, that’s one of those that we get every day as well. And you know how it goes? The answer is, it depends, right? If it is that you are a non-resident alien and you just have a us LLC, and you have no nexus with the US you have no permanent establishment with the US a technical term, meaning let’s say you have no boots on the ground. You have no dependent agents. You have no warehousing of physical product. You’re not selling any physical product into the US you have no us source income at all. If you have nothing to, with the US aside from you, just happened to pick a us LLC, for whatever reason, then no, there would be no US tax obligation. However, you must be somewhere. And most countries, most jurisdictions aside from a totally tax-free jurisdiction. Of course, they have management and control rules, which means that even though a company is incorporated somewhere else, it management and control has been exercised from within their jurisdiction. They reserved the right to tax that company as if it were a domestic company. So if you incorporate a company, an LLC in Delaware, or Nevada or Wyoming, or one of the other popular states for incorporation, for a number of reasons, and you run that company from Singapore, you run that company from London or from Norway aware of it. As you may find yourself, Costa Rica, Colombia, that company, if management and control is being exercised domestically, the tax authority reserves the right to tax that foreign company as if it were local. Because if you are the key decision maker within the borders that has tax consequences for the company, obviously for you, but for the company as well, which is why the whole remote working thing, you know, we always tell people, you need to take advice because they are, they always the usually implications once you cross national borders.
So, okay. I’m just moving up. Oh, this is a long question. All right. Go to easier one for us, a shorter one. So as a US expat, working W2 and, or 1099 remotely for a US company and living in a country, a country that does not tax the ex-pat on the income earned outside of that country and does not meet the three 30 day residency tests. Is there any difference on the 10 40 than if the individual lived in the US the whole year? Okay. So, if it is you, okay, so whether you’re a W2 or a 1099, you’re in one of those restrictions.So for example, I mean, aside from like Emirates, there are certain visas. For example, Bobby, those is pretty popular with some of, some of our clients. It’s a jurisdiction where they give you a year long visa, then quite a number of jurisdictions, but I think Bermuda, Brazil, several European countries, but what stands out about Barbados is that you are relieved of responsibility for paying taxes under the local tax regime. So as a result of getting that a visa to come in, how does that affect you as an American expats.For example, in Barbados, it was just as an example, right? Just to make it more tangible. Yes. Your tax return would look different from if you had remained in the us, how well you would enjoy what I mentioned before that section nine 11 foreign earned income exclusion, just based on physical presence test. So you are physically outside of the us for most of the year, and you’re not in the U S for more than, let’s say, 30 days. And you may benefit from the physical presence test and enjoy that Foreign Income Exclusion. So you get to exclude, it moves on inflation, but it’s around 112 right now, plus the housing deduction. So it can definitely work to your benefit. So I know people are playing the arbitrage within the US so you move from New York or California to Florida or Texas, and you save obviously on the state taxes, but if you move outside of the US the big win as an employee or an independent contractor, is that section 9 11, 500 in income exclusion, plus housing deduction, that’s a big win. So yes, hope that helps.
Someone else is asking if you missed reporting a foreign account to the IRS, let me fill that. Is there a way to start reporting a lot of penalty? So I’m not sure what you mean, but if it is that you were required to report it on the FBARS,the FinCen 114 that we mentioned before, and you didn’t, then you should really speak to a tax professional about filing retroactively and getting it straight, because remember that the most countries have signed a bilateral agreement with the United States, which is commonly known as FATCA, the Financial Account Tax Compliance Act. This is since I think it was like 2011 or so. Yeah, I think it was around end 2009. I think it’s 2011. So, basically the US has gone around the world signing bilateral agreements with most countries, countries that you did not expect to sign up sign. So I’m talking about like Russia and China has signed. So what it means is that all of these jurisdictions that sign with the US they have waived their local bank secrecy laws and the FATCA, and all registered financial institutions within their borders are legally required to look at their account holders. And if any of them, they suspect to being us exposed, even if you like your duel and you show another passport or identity document to open that account, but that financial institution suspects that you are US exposed, they are legally required to report you to the US government. And we help financial institutions do that. So we know it’s a pretty easy process. It’s an XML. And so it’s almost like an electronic transfer of data. So one assume, I don’t know, but at one would assume that on the other side, when it gets a rise of treasury, there’s some sort of reconciliation where if you see that you don’t have any accounts in Hong Kong and yet a Hong Kong financial institution reports that you do all, or let’s say in Singapore and the Singapore in financial institution, reports that you do, then it creates some sort of like a mismatch, right? So the point is that you’d want the IRS to hear from you on will treasury. You know, whether it be the IRS or FinCEN to hear from you first, rather than from a financial institution that has custody of your accounts. So you’d want to speak to a us tax team about filing retroactively. The streamlined is the option. If your non-compliance is deemed to be non willful, if your compliance is deemed to be willful, then you’d have to look at some other options which require more legal support. So, yeah, so I think just remaining silent is probably not the best option or just, you know, I know some people online just recommend go forward, forget the patches, go follow it again. I recommend when it comes to the IRS and the federal government, you don’t want to mess with them, you know, just it’s just disclosure, right? They just want to know what you have to tell them what you want to have, right. With what you have. You know, there’s no downside really by being 100% straight with them. So hope that helps moving. Okay. This is a long one. So I have an electric scooter company I’m launching in Bermuda. My app developer said that due to technical reasons, I can’t use a local remittance provided in my country for payment processing and set up to go through Stripe Atlas, which requires me to set up a Delaware company. I’m doing that. Sorry. The language is a bit weird. Okay. So given the option of doing an LLC or C Corp, which would be better for me also, what taxes will I have to comply with or pay as I’m not American. And the only thing I’m doing is processing payments with this us company. My thought process is to charge a management fee, IP licensing usage fee from the, maybe the company to the Delaware company and charge 99%, a hundred percent fee on their earnings. What are my options or best advice that you have to legally avoid minimize taxes do. Okay. Now that’s a tricky one.
If it is, you said you’re not American. And assuming that you have no US nexus, and you just want US payment processing in this scenario, I don’t necessarily necessarily see any US tax consequences, assuming that you open a bank account as well. Then if it is, you have a balance and there’s interest earned on the account, that interest will be subject to a 30% F bap. Withholdings will be subject to withholding that’s the us tax consequence there. So from a purely us perspective, just opening an LLC for the purpose of payment processing, shouldn’t trigger any tax consequences. But I think you’d want to have, again, sit down with a tax professional because you’d need to consider the Bermuda perspective. And then you asked whether in the LLC, or C Corp, again, that depends. So we’ve had clients that have gone through similar situations. Now it’s not typically, I don’t know that, you know, are you okay? Are you using strike? Sometimes the payment processor may require that there be a us person, if it’s a foreign company experiences that they may require that you onboard a us citizen or resident. So basically someone is tax resident in US to act as the responsible person. So I don’t know whether that’s the case with in your scenario. So if that, but we’ve seen it happen with other clients. If that is the case, then it gets a bit complicated and the structure needs to be really well thought of, but on the surface, based on the limited of info information that you, shit, I don’t see any U S tax consequences, but I think a proper sit down with a tax team may be necessary because you want to consider the cross water effect, putting IP, creating when Swartz IPS introduced that creates a layer of complexity. So if you put IP in the US definitely is going to be a consequence of that because, you know, it needs to be valued. It you’ll have a transfer pricing agreement because it’s a related party transaction. The royalty would be subject to withholding of that is fixed determinable annual and periodic. So, it was basically a withholding tax on money that leaves the US to go to a foreign person, legal or natural. So it gets a bit complicated. You better off sitting with someone and getting them getting proper advice, but on the surface, based on what you’ve described, I don’t see any US tax consequence scrolling. Okay. I didn’t hear response to mind. Did I miss it as I email it and I put it in the chat. Okay. I don’t know what question. Yes. We did a long question before, but I don’t know whether this was your, sorry. Okay. So you’re saying that Bermuda is tax-free. Okay. Well then you don’t need to worry Bermuda. You just need to worry about the US but if you’re going to put, so this are you the same person with a scooter company? Yes, you are. Okay. So then you should have no problems once you just do payment processing, but again, it gets complicated. If you need to have a us person to act as a responsible person for the payment processing, or if you intend to put IP in the US, but on the surface, it’s just keeping it a super simple, just an LLC, simply for payment processing. It should not trigger any tax consequences scrolling down. I’m a non US person with investments in the UK and the EU residents in Portugal, because it’s a popular jurisdiction destination for Americans, obviously Portugal a resident in Portugal because I hold a US bank account. I’m asked by my bank to fill a w eight Ben to continue banking with a bank and any concerns. Okay. So the W forms are they’re kind of controversial, even though they’re meant to be simple. First of all, they don’t go to the IRS. They held the held by the financial institution and requested as a sort of indemnification. So it’s way you declare your tax status. Like, how are you being taxed if it is that you are not a US person, then you correct. It will be a w eight Ben, or if it is that your banking through a company that you own and control, it might be a W-8BEN-E for entity. So yes. the W-8BEN-E it should not create any, no, it should not create any US tax liability. If a US bank account is asking you for a W-8BEN-E, so I’ll leave it there. It shouldn’t right. Again, I don’t know the nature of the bank account. Is it like an investment account? Is it, you know, is it a trading account? So it really depends, but assuming that it’s a normal checking or savings account, you just want to keep it in us dollars, then they should be no us tax consequences for your soul doing all right. Hope that helps. Okay. All right.
Somebody saying they in Costa Rica, okay. Within a year to do losses in a foreign owned company, such as lease payments. So building costs, et cetera, offset capital gains and equities or American real estate. So, right. So you have different buckets or different categories of income. It’s, it’s not automatic that you can offset one against the other. So if you have, you know, an ordinary loss, you can’t necessarily offset that against a capital gain, for example. So does loss, okay. So if it’s a foreign company, so lease payments and billing costs that foreign company needs to prepare financials in line with the rules of the jurisdiction in which is incorporated, right? So I don’t know where they Costa Rica. I don’t know what part of the world you were in, but the, the, the company needs to follow, follow the laws of that jurisdiction in which is incorporates and in which is operating right and needs to follow domestic groups now. And those domestic rules would see what is allowable, what can be deducted from revenue. So you need to follow those rules. Normally the rules are comply. I don’t know what part of the world you are, but there are international accounting standards. So they don’t really vary that much. Sometimes they do, but in terms of, for tax calculations, but in terms of just the preparation of that income statement or profit and loss account and the balance sheet, it tends to be pretty standard. So you need to follow those rules now, in terms of the US tax consequences of it, I’m assuming that you are a US person, then it’s can get complicated, of course, but it, you attacks to the extent that you receive a distribution from that company, whether it’d be in the form of salary or consulting fee or dividends, then that is reported in your returns and you pay tax. Now, there are some deemed distribution rules, depending on the nature of your company. You may trigger something called PFIC rules, Passive Foreign Investment Company Rules, and may trigger the GILTY rules. Global Intangible Low Tax Income Tax you’ve may trigger a Subpart F. So there are some deemed distributions, which mean that you can be taxed to your personal US tax return for a company you control. Even if you did not receive a distribution, you are deemed to receive a distribution and therefore you didn’t get the cast. So you paying taxes on Phantom income to the IRS. So that can happen. So you want to get advice to make sure you don’t fall into that situation, or if you do fall into that situation, that of mitigating and managing it. But other wise, if it is you have a company, a foreign owned company corporation, as you’ve said, that corporation will prepare its financials in line with domestic regulations. I hope that helps.
Next question. Hi, I’m an American living outside of the US. My source of income is from US-based companies for performing marketing consulting services. Do you recommend registering an LLC in my home state, in the us to protect my personal assets will be taken away in case I get sued? If so, I need to pay state taxes and federal corporate tax on my earnings. So, great question. And it’s a small question because you know, which is something that a lot of people misunderstand, right? That having an LLC is not a tax play. It’s not a tax benefit is usually no benefit from a tax perspective of having an LLC, an LLC, and a US is a limited liability company. And it does what it says. It limits your liability in the event that there’s some sort of dispute or there’s some sort of lawsuit, right? It’s to protect you and to protect your assets from any problems that may arise. So it’s about asset protection, not tax optimization, generally speaking. So if it is you performing the services outside of the us, then the question is, will you performing those services, right? Because when you have a cross border situation like that, remember we spoke earlier about management and control. So even if you were let’s hypothetically say that you were to form that LLC in the U S but you sit in Singapore management and control has been exercised in Singapore. If you do it in Malaysia, Bali, or Australia, wherever it is, if management and control is being done domestically within those jurisdictions, even though the company is incorporated elsewhere, the local tax authority has the right to tax it as if it were a local. So, you know, in coming up with what’s the best tax strategy for you from a tax optimization perspective, as well as asset protection, we need to understand more about the business model, particularly where are you? And do you ever, do you do it all yourself as a marketing consultant? Do you have a team? Where’s your team, but let’s assume that you’ll one person show and you sit in London, let’s say Singapore, so I’ve done a way anywhere, right? So then you’d probably want to speak to an advisor who understands both the U S and domestic grooves, but chances are, they will probably say, you know what? You need to incorporate a company in Singapore, in London, in the UK, wherever it is, you are. No, if it is, I know I have some clients that do that sort of work. And then the problem they have is that their clients in the US like dealing with an LLC for a number of reasons, whatever. So then what you could perhaps discuss with your advisor is you form a company in wherever you are like London or Singapore, to be compliant with local rules. But then that company that you formed can have a subsidiary in the US so you can form an LLC as a subsidiary of that company. So you can have that type of conversation so that, you know, you get your asset protection, you get your tax optimization, you can, of course, there’s compliance. You comply with local rules, which is important. You don’t wanna get kicked out of wherever you are, and then you, you, your clients are feel happy and comfortable that they’re dealing with a U S LLC. So that that’s the sort of conversation I’d encourage you to have with your tax team.Okay.
Just scrolling down. Okay. Yes. Do all members of a foreign earned multi-member LLC have to get an item to file US taxes, only the responsible party or members of the LLC off foreigners to file your taxes. Okay. If it is a multi-member LLC, like you’ve said, and if there is no nexus with the US and all the members or individuals, and there’s no corporate member, then this company may not have to do a 1065. It may not have to do a partnership return. So maybe a tax return may not be necessary, but even though attach the chain is not necessary. You may want to talk to your tax advisor when doing a protective return, where you file a basically filing no return. So it has the advantage of, you know, should in the future that tax authorities in the US take the position that a tactic tune should have been filed. At least you preserve your rights. So, you won’t be accused of never having filed a return. So at least you preserve the rights to then properly file one. If they deemed, for whatever reason that you should have filed. And then you get to deduct the expenses and, you know, see the tax on the net rather than the gross. So, anyway, so on the surface, if it is that you have no us nexus and all of you, your colleagues, or fellow partners in the business outside of the US,there is none. But if it is that you do have us source income, maybe have all invested in rental properties or whatever the case may be, then you have your source of income on a tax return is due then yes, you probably want to get an ITin. It probably want to get an ITin because as you know, the LLC is a pastor, or it’s like a weird American thing. It’s a hybrid entity because you obviously, you’re not American. So the equivalent in another common law jurisdiction would be like a partnership, like a limited partnership. That’s the closest conceptually. So it is a pass-through. So if it is that LLC does have US sourcing income has to file a 1065 partnership return. It files a return, but it produces a statement called a K1. Which you, as an individual partner, you may have to then file your own return. Now, there is some, there’s an option for something called a composite return where a return can be filed in all the states for you as foreign partners. But that gets a bit complicated. But bottom line is that, yes, you guys may need to get iTunes because you guys may need to file us tax returns. If it is your foreign partners in this LLC, and this LLC has US source income. Hope that helps.
Moving on. Yes, you can book a session with us. So I think you, would’ve got you guys, would’ve gotten an email from Hannah, so you can just email her, or I emailed, yeah. We had like a hundred RSVPs or so, I would have emailed some of you guys last night as well, or yesterday, depending on which time zone you’re in. If you want to set up a consult with us, we do offer pay consult with zoom. So please just reply to that email and we can set something up. That’s no problem at all. Okay. So you’re welcome. Is there a difference? Yes, we can discuss that. Okay. So you move around three months in Brazil, three months in Mexico, for example. So this is the marketing consultant. We probably be best having a consult, right. So, okay. I just need to move on to the next, because we have a lot of questions and I know we cannot answer all the questions and I’m going to apologize in advance. You know, we do these live streams every week and every week we have more questions than we have time for. But again, it’s not about giving you answers. It’s about giving you principles that you can take to your own advisors to create an actionable plan for yourself.
So moving on. So, Lee is asking my questions are from the perspective of a Singaporean who is considering moving to the US since CPF accounts, accrue interest annually is the interest taxable. Assuming that I don’t make any withdrawals from my CPF account since I’ve not reached retirement age, but in another way, it is CPF only taxable upon withdrawal.Similarly, for investments that have in SRS funds, which is a supplementary retirement scheme, which is designed free time. And these gains capital growth and dividends, taxability of the money is not withdrawn. And SRS aacount and we deal with this all the time as well. So, you know, CPF, the MPF, they are associated with retirement plans from Singapore, Malaysia, Hong Kong, Japan, of course, it’s super, as superannuations in Australia, we, we deal with them to answer your question specifically. The CPF is normally declared on your Schedule B, so you’re correct. So, any interest, so I know quest no calls right now. So any interests that would you do as you pull your CPF statement, you download it from the government portal, the annual January to December one, and it shows what interest has been earned. And that’s reported on your schedule. B as well as, remember we mentioned bank accounts need to report it or financial accounts. So that goes into your app, pause as well. And if you trigger an 89 38, it goes there as well. The SRS, same thing, any gains, the fully taxable bottom line is that once you enter the us for as a green card holder, permanent resident, or on what you would, the company, the company’s relocating you, then yes, you will be subject to taxes on your worldwide income. So that means when you rent out your condo in Singapore, yes, it will be subject to US taxes. If you were to sell your condo, you have to pay capital gains on that as well. Everything you earn, if you have any likes and other investments, maybe you have shares in a restaurant or bar or whatever in Singapore, whatever that needs to be declared as well, that you know, your interest in that company. So everything becomes taxable and portable when you move to the U S. So what we do is we advocate a pre-migration planning. So sitting with a tax team who had assumed, understands both in your case, Singapore and the US, and what we, when we do it, we go through line by line. You, you give me like a balance sheet, tell me what, like normally get like a spreadsheet. And we look at it on zoom, and we go to one by one, what will be the tax implications of your move to the US if it is you, you happy with that, thumbs up, leave it as is, if it is you don’t like what the tax consequences are. We can perhaps look at some planning opportunities, some ways of mitigating what the tasks consequences would be. So I advocate before you make that big move to the us big move, because, you know, in Singapore was spoiled and that, you know, taxes are relatively light. So when he moved to the US it’s the complete opposite, you’re going to be taxed on everything. So you would want to get a strategy session in with a tax team understands both. Hope that helps.
Next question, moving down. Okay. So foreigner’s setting up an LLC only to facilitate Stripe payments. Okay. So this is someone else asking what payment processing I noticed. It’s a big deal. If I heard correctly, you mentioned that if your bank account earns interest and the interest is taxable, invest correction, foreigner, straits, and show all earnings. Okay. So again, it really depends on, so for those who go in who have this payment processing angle, you’re not American, but, you know, you want access to the American banking and payment processing infrastructure, a lot more options, and many other countries, right? So I get that. It really depends. Yes. But yes, any interest that is earned on a bank account in the US will be subject to withholding, right? So as to whether that means that you should minimize the balances, normally you need to work with whoever your payment processor is because they may stipulate a minimum balance that you need to keep a minimum balance, need to float, or of whatever in a US account, you need to appoint a us person to be the responsible person. And it really depends, but just generally speaking, keeping it super simple, if it is that you have a bank account in the U S and you are not a us person, the interest will be subject to withholding tax, but we in a relatively low interest rate environment. So hopefully the balance that you need to maintain isn’t that high. So therefore the tax burden wouldn’t be not aggressive either. Okay. Switching away from zoom and looking at other questions and other platforms. I know we just have five minutes. Okay. I’m sorry. Right. So someone is not American, and they were married to a us person who had financial investment accounts in the US and the US person has passed away. And I’m sorry for your loss. So yes, this is something we deal with pretty regularly, unfortunately, because I wrote an article on how the, so the estate would need in order for you, because the bottom line is that you, as the non-American spouse, you find that you cannot have access to your departed spouses, financial assets in the US on US platforms, unless you get something called a clearance certificate from the internal revenue service. Again, this, you know, estate planning is a bit of a moment topic, but we are really big on estate planning because there, the process takes a long time. You have to file a Form 706 , for you to access that and then it has to go to the IRS and you have to get a clearance certificate on a Form 5173 to the entire process sometimes takes more than a year, or even we have cases where someone may have worked in the USA. For example, the person from Singapore is going to USR work assignment. They may have invested in something, you know, a retirement plan or whatever, just an investment account. They leave the US and they leave it behind, right? And then when they pass, their spouse has a hard time getting to it because this entire process of getting a transfer certificate, Ashley’s taking more than a year now. So, it’s not easy at all. You know, I wrote, we wrote an article, which is why we get a lot of these inquiries that apparently Google scores, the article pretty highly. So have a look at the article that it’s on our website, HTJ.tax. We have like nearly 2000 articles, all free and international tax issues. And we have over a thousand videos on our YouTube channel as well. So have a look in and search, pick up the stuff that’s relevant to you. You can read if it is that you would like us to help you with the Section 6NE or the 5173 to get the transfer certificate. So you can get access to your late spouse’s account just reach out and just let us know.
I’m sorry, next question. Where should I set up an offshore company? I don’t know. I guess, you know, people it’s natural because every time, like if you watch some spidey or some show, some movie, they talk about offshore accounts and offshore companies and Dodge and tack. Well, people think that you just set up an account and with a company that’s incorporated in some far-flung island, and you automatically are going to get some sort of tax benefit because of the something called economic substance and then permanent establishment. And it doesn’t work like that perhaps historically did, like back in the eighties and nineties, it was a thing you could do that. Definitely not now. And I know movies glamorize it, but really doesn’t work that way anymore. So in order for us to advise or anybody, not just us, anybody to advise you on setting up an offshore company, I guess, presumably just a company in a jurisdiction other than the one in which you reside, we need to understand the business model, really to understand the supply chain, you know, where your employees, where you, where you’re warehousing, was your data processing, where you as a key decision maker, and we can recommend a structure that is compliant with the rules, and hopefully it will be tax optimized. But the idea, especially if you’re a US person, it’d be very, very hard for you to pay zero taxes. It’s possible. I’ve seen it. I have clients that do clients that pay as much they choose to, but it, as a result of a lot of tax planning and, you know, I consider myself part of what would be called the income defense industry. So you need to get some really heavy hitters from the income defense industry to help you set something up like that, but I’ve seen it happen, but it’s not as simple as just going online, forming a company in Ireland, XYZ with a bank account. And today you’re going to be saving, no, especially as long as you have that us passport, it really doesn’t work that way. I spoke to you earlier about the assortment of deferral tools, tools of the IRS internal revenue service has for people who want to defer paying taxes in foreign companies. I mean, we have Subpart F since the 1950s and 60s and in the 1980s, the PFIC regime was created. And under President Trump, we have the GILTY regime. It’s not that easy. It’s super difficult. But anyway, we have come to the end of our hour, HTJ.tax We do these live streams every week, slightly different international tax topic every week. I think next week we do US/Australia cross border stuff. If you need to reach out to us, please just put HTH.tax, or you can reply to the email from Hannah, or you can email help@htj.tax. This is being recorded. It will be available on our website, on our YouTube channel, Spotify, iTunes, Amazon, wherever it is, you get your favorite podcasts. You will be able to get it as well. Thank you. Have a good evening day morning, depending on where you are. See you next time. Bye bye.
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