News

Foreign-Owned U.S. Operations – Repatriation of Earnings

One of the keys to inbound tax planning is dealing with the repatriation of earnings. From a U.S. tax perspective, inbound investment refers to a foreign person or company establishing U.S. operations. The goal of tax planning for foreign-owned operations is, of course, to minimize the total tax cost. Every foreign-owned U.S. operation should consider the tax implications of repatriating earnings, in other words, how to send money earned in the U.S. back to the foreign parent company.

This article considers various methods of repatriation. The best method or combination of methods will vary for each operation. Some general concepts to consider are the foreign company’s tax rate in their home country, the U.S. corporate tax rate (21%), and the U.S. withholding tax (30%, unless reduced by treaty).

Dividends

Dividends are one of the most common methods for repatriating earnings. A dividend is a distribution of the earnings and profits of the U.S. company. The payment of a dividend cannot be utilized as a tax deduction for the U.S. company, so the full 21% U.S. corporate tax rate will apply. When profits are distributed to the foreign parent, they are subject to U.S. withholding tax of 30%. This rate may be reduced by treaty, so the ultimate tax treatment of this method will depend on the countries involved.

Debt

Utilizing debt instruments is another avenue for repatriating earnings. A loan can be made from the foreign company to the U.S. company. Interest payments made on the loan may be deductible for the U.S. company, reducing its U.S. taxable income. The interest paid to the foreign company is subject to withholding tax. When using debt for repatriation, careful attention must be paid to ensure the debt financing structure is not treated as equity under U.S. law and that the interest payment qualifies as interest under U.S. law.

Royalties

The foreign company may allow the U.S. company to utilize intangible property, such as patents, trademarks, copyrights, and know-how. The foreign company can license these assets to the U.S. company in exchange for royalties. Royalties are treated similarly to interest. The royalty payments can be used to reduce the U.S. company’s taxable income, but they are subject to U.S. withholding tax.

Management/Service Fees

Charging management fees for services provided by the foreign parent company to its U.S. subsidiary is another way to repatriate earnings. The service fees may be used by the U.S. company to reduce its taxable income. Unlike the methods discussed above, the services fees are not subject to U.S. withholding tax provided that the services are performed outside the U.S.

Transfer Pricing

Transfer pricing refers to the prices of goods and services that are exchanged between related companies. There are elements of transfer pricing when dealing with debt, royalties, management fees, and other goods and services. A general principle of transfer pricing is that the goods and services must be priced at arm’s length. By altering transfer pricing policy, a foreign company may change the allocation of its worldwide profits. For example, a foreign company may charge a higher price for the inventory it sells to its U.S. subsidiary, which decreases the profit of the U.S. company and increases the profit of the foreign company. This can change the allocation of income if the increased price of the inventory is within the range of arm’s length prices.

In conclusion, repatriating earnings from foreign-owned U.S. operations involves navigating the tax laws of two or more countries and implementing strategies to minimize tax liabilities. Whether through dividends, debt arrangements, royalty payments, management fees, or transfer pricing, careful planning and adherence to relevant regulations are essential for optimizing the repatriation of earnings. Seeking guidance from tax professionals with expertise in international taxation can help companies achieve their repatriation objectives while maintaining compliance with applicable laws.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

Latest Post

SINGAPORE

12 Marina View #23-01
Asia Square Tower 2
Singapore 018961
+65 8648 3995

SAN DIEGO 

3465 Camino Del Rio South, Suite 400
San Diego, CA 92108
619.980.4476

TIJUANA

Centro Corporativo Dayco
Blvd. General Gustavo Salinas #11050
Suite 602, Col. Aviacion
22014 Tijuana, B.C., Mexico
+52 (664) 504 6415

Entering the U.S. Business Market

Download Our Free Guide

Foreign investors: Learn about options for opening a business and tax compliance in the U.S.