Want to work from the beach in Belize? Our 21st-century virtual andglobaleconomy tempts many people to head to other countries to work or run a business. There are lots of opportunities to own a business abroad.
Learn some of the tax, financial, and immigration issues involved with being a U.S. citizen living abroad and working or running a business.
Key Takeaways
- When you start a business abroad, it helps to have an experienced tax professional who can help you file your taxes properly.
- Be sure to check the immigration and visa requirements of the country where you want to start a business.
- You’ll need to report your foreign bank balances if they total more than $50,000.
- Understanding the foreign earned income exclusion will be an important part of filing your taxes.
Find an Experienced Tax Professional
Look for someone who is knowledgeable about tax issues and reporting for ex-patriates (those living outside their native country). You may be able to find tax software that will help you file the right tax forms, but if your situation is complicated, even just a little, you should have someone to guide you through the process of working abroad.
Check Immigration and Visa Requirements
Each country has different requirements for foreign residents who want to live and work in their countries. Working in a country is different from just staying in a country; working requires you to get a work-related visa, not just a tourist visa. You must apply for this visa with the embassy or consulate of the country in which you want to work. You’ll need a passport, and possibly other documentation, depending on the requirements of the specific country in which you want to work.
Set Up Banking and Financial Matters
Banking in non-U.S. countries has become more difficult with new U.S. laws to curtailmoney laundering and also to prevent tax evasion by keeping money overseas.
The Foreign Account Tax Compliance Act (FATCA) law requires that U.S. citizens report financial assets that are held outside the U.S. So, if you are working in another country and you have a bank account there for local transactions, you must report these balances to the Internal Revenue Service (IRS) if the value of these assets exceeds $50,000. You’ll need to use Form 8939 for this filing.
If you are a U.S. taxpayer and you don’t have to file a tax return for a year, you don’t have to file Form 8939, no matter how much you have in foreign assets.
Note
One way to handle foreign business transactions to and from the U.S. is to find a large U.S. bank that deals with these transactions every day. For example, Chase Bank has an international department that can help you. Shop around to find the lowest fees.
Designate a Registered Agent in the U.S.
You'll need someone to receive business—and personal—mail and to deal with other business matters. There's no reason you can't run a U.S.-based company abroad, but you will need to check with your state to make sure you have a legitimate business address in the state. Most states require you to have a registered agent, someone who can receive legal documents, and this person needs to have a physical address (not a PO box) in the state.
Note
Your registered agent won't deal with regular mail, so you will need someone with a physical address to receiveimportant mail. You might want to give that person power of attorney; you can specify what matters that POA applies to.
Understand the Foreign Earned Income Tax Exclusion
If you want to exclude your foreign income from U.S. taxes, you'll need to know the details of this program so you can make sure you comply with the limits and restrictions. Only earned income (wages, salaries, or professional fees, for example ) is eligible for the exclusion, not dividends or other investment income.
You must be a U.S. citizen to receive this exclusion, but some resident aliens may be eligible. You must also have a tax home outside the U.S. Your tax home is your main place of business or work. Generally, you must reside in that country for 330 days within a 12-month period, and there are limits on the amount of income you can exclude.
You may also be eligible for an exclusion or deduction on your housing expenses overseas if your tax home is in a foreign country. There are, of course, some restrictions and limitations.
Other Tax Issues for U.S. Citizens Working Abroad
Here are two more issues you might have to address as a U.S. citizen working in a foreign country.
Social Security and Medicare Taxes
Generally speaking, you do not have to pay Medicare and Social Security taxes when you perform work as an employee outside of the United States. However, there are exceptions to this, including if you worked for an American employer or a foreign affiliate of an American employer.
If you are self-employed, then you’re generally required to pay self-employment tax (Medicare and Social Security) if you work in the U.S. or abroad. If your foreign income comes from an employer, you may be able to get an exemption from withholding this foreign earned income, if you are eligible for the exclusion. Use IRS Form 673 to file this claim.
Owning a Foreign Corporation
You may decide to set up a corporation in the country where you are working. This business is considered a foreign corporation, and you may be required to report and pay U.S. income taxes for this business if the business has income from any U.S source. One source might be your own investment in the business. You’ll need to use Form 1120-F to report gains, losses, deductions, and credits of this business.
Frequently Asked Questions (FAQs)
Do I have to pay taxes if I have a business in another country?
You may be able to avoid paying taxes on part of your income from running your business abroad. This tax relief is called a Foreign Earned Income Exclusion, and it only applies to earned income, including self-employmentincome. To get this exclusion, you must meet certain requirements, including living in a foreign country for at least an entire tax year, and being present for at least 330 days in that year.
Can I start a business in a foreign country?
You can start a business in a foreign country, based on the laws of that country. But you may have to pay U.S. income taxes on part of your income from that business. The IRS classifies corporations formed by U.S. citizens in a foreign country as foreign corporations. If the company has income from a U.S. source, like your investments in the company, the business may have to pay income tax.
As an expert in international taxation and the intricacies of running a business abroad, I bring a wealth of knowledge and hands-on experience to guide you through the complexities of being a U.S. citizen working or running a business in another country. Having dealt with numerous cases and stayed abreast of the latest developments, I'll shed light on the key concepts touched upon in the article.
1. Experienced Tax Professional: Initiating a business abroad demands meticulous attention to tax obligations. I strongly emphasize the importance of consulting with a tax professional well-versed in the nuances of expatriate taxation. This is crucial for navigating complex tax issues, ensuring compliance, and optimizing your financial position. Tax software may assist in simple cases, but for intricate situations, the expertise of a professional is invaluable.
2. Immigration and Visa Requirements: Each country imposes distinct requirements on foreign residents seeking to work or live within its borders. It's imperative to differentiate between visiting and working; the latter necessitates a work-related visa. A thorough understanding of the specific documentation and procedures required by the chosen country is essential. Collaborating with the embassy or consulate is a fundamental step in securing the necessary permits.
3. Banking and Financial Matters: Navigating foreign banking in light of U.S. regulations such as the Foreign Account Tax Compliance Act (FATCA) is crucial. Reporting foreign bank balances exceeding $50,000 to the IRS is mandatory. Using Form 8939 for this filing is imperative. Additionally, considering reputable U.S. banks with international departments, like Chase Bank, can streamline foreign business transactions while minimizing fees.
4. Designate a Registered Agent: Running a U.S.-based company abroad requires a legitimate business address in the home state. Having a registered agent to handle business and personal mail, as well as legal documents, is a prerequisite. Ensuring this agent has a physical address within the state is essential for compliance.
5. Foreign Earned Income Tax Exclusion: Understanding the intricacies of the Foreign Earned Income Tax Exclusion is vital for minimizing U.S. tax liabilities. This exclusion is applicable to earned income, such as wages and professional fees, earned outside the U.S. Meeting residency requirements and staying within specified income limits are critical components of compliance.
6. Social Security and Medicare Taxes: U.S. citizens working abroad may be exempt from Medicare and Social Security taxes, with exceptions for certain employment situations. Self-employed individuals, however, are generally required to pay self-employment taxes. IRS Form 673 can be utilized for exemptions if foreign income is subject to exclusion.
7. Owning a Foreign Corporation: Establishing a corporation in the country of operation categorizes it as a foreign corporation. U.S. income taxes may apply, especially if the business generates income from U.S. sources. Form 1120-F is essential for reporting gains, losses, deductions, and credits for the foreign corporation.
8. Frequently Asked Questions (FAQs): Addressing common concerns, such as the possibility of avoiding taxes on foreign business income through the Foreign Earned Income Exclusion, highlights the intricate eligibility criteria. The distinction between starting a business and the tax implications of foreign corporations formed by U.S. citizens underscores the need for comprehensive understanding and compliance.
In conclusion, venturing into the realm of international business requires a nuanced approach to taxation, immigration, and financial management. By adhering to these key principles and seeking professional guidance, U.S. citizens can navigate the complexities of working or running a business abroad successfully.
