Tax Implications for Foreign Corporations
If you are a US shareholder of a foreign corporation, then you likely know that it can come with some complex issues that may be difficult to understand. This article will address some of these issues by discussing what it means to be a US shareholder of a foreign corporation as well as some of the tax implications of being a US shareholder of a foreign corporation. Some other relevant considerations, although not covered under this article, may include special rules for shareholders of passive foreign investment companies.
What does it mean to be a US shareholder?
There are a number of ways in which a shareholder can be considered a US holder. Most people know that US citizens and US national shareholders are considered US shareholders for tax purposes. What may not be as obvious is that a foreign individual shareholder may also be considered a US shareholder if the individual is a lawful permanent resident (the green card test) or if the individual has been physically present in the US for a number of days (the substantial presence test). US shareholders can also be US domestic corporations, US domestic partnerships, and US domestic trusts.
What do shareholders pay taxes on?
Generally, shareholders pay taxes on two types of income: capital gains and dividends. This is true for shareholders of foreign corporations and shareholders of US corporations.
Dividends are earnings that a company distributes to its shareholders. This can be in the form of money or stock.
A capital gain refers to earnings from an investment that was sold for a higher price than what the investor originally purchased it for. So, if a shareholder were to sell its shares at a higher price than what the holder purchased it for, then the profit made from the sale will be taxed as a capital gain.
Taxation on US Shareholders of Foreign Corporations
It is important to remember that there does not need to be an actual dividend payment for a US holder of a foreign corporation to be taxed. Under the Tax Cuts and Jobs Act, retained earnings that are not paid out as dividends are also subject to tax as if they were distributed to the owner. Also, there are different types of foreign business entities, so tax rules may vary depending on the type of foreign business entities. Contact us today for a consultation if you would like additional information on what kind of tax rules may apply to your company.
Dividends
Generally, US shareholders of foreign corporations pay taxes on the total profits made from dividends. Whether the dividends paid to a US holder are in US dollars or in foreign currency does not necessarily matter, because the US holder will pay taxes based on the US dollar value of the dividend.
Dividends can be eligible for qualifying dividend consideration. Being considered as a qualifying dividend allows for a lower tax rate. If the dividends are not eligible for qualifying dividend consideration, they will be taxed at the ordinary income tax rates.
Capital Gains
Generally, capital gains for individual US shareholders are taxed at different rates depending on how long the holder has owned the shares. Shareholders who have owned their shares for at least one year are taxed at a lower rate as this is considered long-term capital gains. Shareholders who have owned their shares for less than one year typically pay the short-term capital gains rate.