Many expats have moved overseas, only to become entrepreneurs. From a tax perspective, there is a big difference between having your business incorporated in the US or in your country of resident. Recently, Ryan, came to Greenback Expat Tax Services for help, as he was running a company incorporated in the US and needed help filing his complicated US tax returns.
Ryan is single and enjoying the expat lifestyle in Thailand. It was his first time living abroad and he couldn’t be happier with his choice to move abroad. However, he had concerns about the business he owns and how it would be taxed by the US and Thailand.
Ryan began with a consult and asked many questions, including:
- How is my income taxed?
- Am I eligible for any exclusions or deductions?
- Do I file as a business or an individual?
Ryan initially incorporated in the US because that is where the business was started and were he had the majority of his business contacts. It made sense for him to incorporate in the US at the time. As an entrepreneur, he could continue to operate his business and have the freedom to reside wherever he chose. After lengthy discussions with his Greenback accountant, he decided it would be most advantageous to have Greenback prepare his returns.
The advantage of incorporating in the US is that the tax situation is much more simple. There are no foreign entity reporting requirements. Most of the forms for foreign entities have steep penalties if you don’t file and some have criminal consequences for not filing.
Another advantage is that the laws aren’t as foreign to the taxpayer and are fairly easy and straightforward.
Incorporating abroad can be tricky. Some countries have capital limitations, shareholder laws, local reporting requirements and other requirements. If you are not familiar with local taxes, this can be a scary decision.
In this case, Ryan could have possibly saved money incorporated abroad if he had done it years ago. Now, the US is clamping down, as they don’t care for that overseas set-up. That is why the reporting process for businesses incorporated abroad is far more complicated.
The business structure that Ryan has with the incorporation in the States is a good structure for tax purposes, which he was pleased to hear! His business is primarily online—his home is in Thailand and is rendering services there as well. He qualifies to incorporate abroad but there is no reason to and no point, because then, in addition to the complex US tax forms, he would likely have to deal with local taxes and laws.
There are advantages and disadvantages to every business structure, whether you are incorporated in the US or abroad. If you are starting a business and are unsure where you should incorporate it, we highly recommend you speak with a tax professional who can advise you on the best structure from a tax perspective.
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