11 ms·

I am an international tax lawyer and this stuff is my day job. Consider this comment an AMA. For smaller companies, the bureaucratic cost of international tax

I am an international tax lawyer and this stuff is my day job. Consider this comment an AMA. For smaller companies, the bureaucratic cost of international tax systems is insane. For US citizens abroad ... I will just say that my biggest area of growth is helping people shed their US citizenship and tax paperwork/penalties is the number 1 reason. Anyway. If you are in a position like The One and Only Netai -- or don't want to be -- AMA.

STRML 13y ago
It's something I've considered. As a now resident of Hong Kong, I was surprised - and delighted - with how incredibly easy it was to handle my taxes. Front-to-back, I could do the whole thing, including payment, in less than an hour and understand the whole system. Unfortunately, it is nowhere near so simple in the US, and they have no regard for expats. The US treats its expats worse than any other country in the world. The forms are atrocious. And I could go on about being taxed heavily for services I don't use. Unfortunately, relinquishing citizenship is just not possible for most, including me. With family and obligations, it's just not realistic. But it is appealing.
- philiphodgen 13y ago
  I think it is Clay Shirky who said something to the effect that bureaucracies have every incentive to not solve problems. Otherwise the reason for the bureaucrats' existence would cease. We won't see solutions from the US government. Ever. Yes the tax stuff is painful but as in your case there are reasons to keep the citizenship.
  - M2Ys4U 13y ago
    The bureaucracy expands to meet the expanding needs of the bureaucracy.
  - bayesianhorse 13y ago
    Actually bureaucracy was invented to battle corruption. But back then you really couldn't call it corruption, because without bureaucracy there were no rules or laws that could be faithfully executed or their faithful execution monitored. Kleptocracy and outright feudalism was the norm. So in essence, without bureaucracy there is no corruption just as there is no shadow without the light. Whenever bureaucracy has to be simplified, keep in mind that the potential for abuse usually increases unless the legislators take very much care.
  - acchow 13y ago
    Tried to find this quote but failed. Any chance you could dig it up? I love it :)
  - saalweachter 13y ago
    I think blaming bureaucracy in general is giving a free pass to Congress. A lot of the federal government is fully aware of their problems, and knows solutions, but they are not authorized dictate policy (except in small, limited ways) or otherwise enact solutions ... they are following their mandate set up by Congress. Congress sets up the bureaucracy to fail, and then blames it for failing. The classic example is the USPS, which is micromanaged by Congress and then berated when the micromanagement produces the expected failure. So blame Congress.
  - Terr_ 13y ago
    That's like saying that programmers have no incentive to solve buggy systems, because otherwise their reason to exist would disappear. Sure, there are probably a nonzero number of folks making their own job-security out there, but in both cases you'll find plenty of people who would be happy to have the system work better and who have some professional pride in it.
- rayiner 13y ago
  You have to understand, the incentives and concerns of the two places are quite different between the U.S.A. (a place where expats come from), and Hong Kong (a place where expats go to). The U.S. has little incentive to facilitate Americans taking their capital and leaving. Hong Kong has a lot of incentive to facilitate that process.
- _delirium 13y ago
  Unfortunately, it is nowhere near so simple in the US, and they have no regard for expats. The US treats its expats worse than any other country in the world. The forms are atrocious. And I could go on about being taxed heavily for services I don't use. As a U.S. expat, I haven't noticed this. The forms aren't as easy as the Danish forms (which are fully automatic and done for you), but not too complex in my situation of just having a regular salaried job. I paid a CPA $200 or something to do it the first time, because I wasn't sure I would do it correctly myself. But the result was pretty readable and basically what I had thought I was supposed to do. Unnecessarily many pages, but simple enough ones. And due to the foreign-tax credit there's no double taxation. I compute my U.S. tax obligation, subtract Danish taxes paid, and the result is always $0, since U.S. taxes are comparatively low.
  - philiphodgen 13y ago
    You are one of the lucky few. :-) Be sure not to invest your savings in mutual funds. Form 8621. Be sure to avoid the local equivalent of an IRA if you want to do retirement savings. The IRS might not think it is a tax-free pension. And they might think that employer contributions are taxable income to you. Don't own stock in a foreign corporation. Don't become an officer with signature power over the corporation's bank account. Be sure to report all of your bank accounts and investment accounts on FinCen 114 (the new FBAR). Don't forget Form 8938 as well, if it applies to you. I'm not saying you can't have a simple tax life as an American abroad. I'm just saying that you have to have a simple life in order to achieve it. The problem is not with the U.S. tax liability. As you said, the foreign tax credit will take care of that. You won't pay U.S. income tax. The real problem is with the paperwork and the penalties for screwing things up.
    - sosborn 13y ago
      >The real problem is with the paperwork and the penalties for screwing things up. When I lived abroad I just used a competent CPA. I'm not disagreeing with your statement, I'm just pointing out a viable solution.
    - tricolon 13y ago
- jonmrodriguez 13y ago
  By the way, if you hate the US's horrible tax forms, you should boycott the company Intuit (makers of Mint.com, QuickBooks, TurboTax, and more). Intuit spends a huge amount of money every year lobbying to make sure that tax forms are as complicated as possible: http://techcrunch.com/2013/03/27/turbotax-maker-funnels-millions-to-lobby-against-easier-tax-returns/ http://techcrunch.com/2013/03/27/turbotax-maker-funnels-mill... So evil!!!
  - falconfunction 13y ago
    You are so right, they should be undercutting the bidders for building it for the government and really becoming the primary developers. Why can't I deal with Intuit every day?
  - lstamour 13y ago
    I would point out that Mint.com was a startup at first, and I can't see how it or Intuit can prevent further competitors, e.g. personal capital. So... While I do prefer free tax filing tools over QuickTax, I'm not sure Mint is to blame. If anything, by using a free service, aren't you costing them money? Edit: I might be mistaken as in Canada (where I am) it's not as easy as pay what the Government says you owe, but in turn the system does let you login to view your (bigger company) tax forms, your last return results; other relevant forms haven't been too hard for me to get ahold of digitally. Digital deposits are quick and there's multiple competing Windows and web-based clients that are both free (not just for low incomes) and certified as compatible by the CRA for each year's tax season. This has pushed more than one company to offer their products free or at a discount, but I actually really like one of the Windows clients so I'll use it next time.
    - _dark_matter_ 13y ago
      ...that's like saying that by using Facebook and Twitter, you're costing them money. They'll figure out another way to make money, you're just not the customer. That's why I don't use Mint.
  - swayvil 13y ago
    Intuit strives to keep tax forms unintuitive. Well if that isn't Orwellian then I don't know what is.
- rurban 13y ago
  I heard Germany and Italy had many double taxation issues also, besides Australia, but they have at least treaties to avoid such. They only other state which goes after their people living abroad is Ethiopia, but they have double taxation treaties with at least Israel, Italy and South Africa. So yes, US tax laws are the worst.
halostatue 13y ago
I'm an expat in Canada, and I'm considering shedding my U.S. citizenship over FBAR/FATCA. I don't really want to do so, however, as long as my parents are alive. I will probably do so very quickly after they pass because holding onto my citizenship is providing me no benefit other than being able to see them without hassle. What I am looking for now is someone who can help me catch up on my U.S. taxes (I'm a few years behind, but I think I might qualify for the catch-up amnesty if I get it done for this year) without costing me an arm and a leg.
- philiphodgen 13y ago
  For catching up, your risk depends on your income and the kind of stuff going on in your life (owning businesses, etc.). Here are the category of choices: 1. Just prepare the tax returns and file them. Good for regular people; the likelihood of you owing any U.S. taxes is low. You have risks of penalties (undisclosed bank accounts = FinCen 114 form filled in online -- that's the biggest one). If you are a very small potato floating in the stew pot of life, that's probably fine. You either start now and ignore the past, or you go back in time and file. Usually three years is sufficient, sometimes six. 2. Search for "Streamlined Procedure" via your favorite search engine and you'll find the IRS official "Come to Jesus" program for US taxpayers abroad who are "low risk." Like most bureaucratic endeavors to write rules controlling all humans, the procedure is contradictory. If your income tax is under $1,500 you are probably safe. If your income tax is even slightly above $1,500 in any one year, the program's FAQs say it's OK but the questionnaire you have to fill out says you are not eligible for a "no penalties, just file" solution to the problem. Find the questionnaire, look at question 2, then look at the paragraph below question 3. 3. If your situation is more complicated (higher income, or you own stock in Canadian corporations -- like your business!) etc., you need a more nuanced analysis. Here your primary risks are undisclosed financial accounts (heavy penalties for not filing FinCen Form 114, IRS Form 8938), Form 5471 (you own stock in a foreign corporation), Form 8621 (you--God Forbid!--bought regular Canadian mutual funds as an investment), or you have a Canadian tax-free account that is not an RRSP or RRIF. You need someone to tell you the best way to jump back into the pond. 4. You have gobs of money and high income. In that case you look attractive as a mugging candidate for the IRS. There's money to be made here for the government, and they like to threaten you with life-altering penalties (300% of your bank accounts is something I have seen as an opening bargaining position) and prison. You really shouldn't Come to Jesus on your own here. You need the Pope and St. Peter to guide you. :-) The problems that The One and Only Netai (I love that, by the way) complained of in the business context apply equally in the individual context. So take care in how you choose a solution. Shoot me an email and perhaps I can connect you with someone in Canada who can help you. I will be in Toronto next Tuesday, FWIW.
Dogamondo 13y ago
Wow I'm really interested in this, but your reply from the get-go offers nothing. Why not actually deliver something meaningful for the HN audience off the bat instead of passing yourself off as an AMA celebrity while not really contributing to any of the points that the OP has made?
- philiphodgen 13y ago
  So now that you've had an hour to see me in action, answering questions, what's your question?
waldohatesyou 13y ago
Hi, I just wanted to know if all companies not in the US have to go through the same process? For example, if I owned a company in Canada and wanted to incorporate in the US would I face the same difficulties as the company in the blog post?
- philiphodgen 13y ago
  The answer is yes. You will face some variation on the problems that OP described in his post. The level of paperwork and pain you will face depends on (1) where you are "doing business" (and that is a nuanced phrase); (2) what type of business you are doing; and (3) the humans who are doing the work -- U.S. residents or nonresidents. The problems arise from the multiple government entities that have the ability to impose tax on a business. From the top: - income tax from the Federal government, (most) State governments, and (a few) cities. - various employment taxes to fund government retirement benefits, unemployment relief, medical care for the elderly, etc. etc. This is Federal and State. Solve that problem by handing the whole f-ing problem off to a company that specifies in payroll services. Hint: despite marketing promises to the contrary, all payroll services are alike, except for the ones that steal your money. Buy services from an established, reputable payroll services company. - sales tax. There are a maddening number of jurisdictions nationwide that impose sales tax at a maddeningly different set of rates. Some things are taxed in one place and not in another. My experience with the California bureaucracy that administers this tax is that they are the second-lowest level of Dante's hell. (The lowest level of hell is reserved for the employment tax bureaucracy). - City business licenses. It never ceases to astonish me how stupid local governments can be. The City of Los Angeles imposes a tax on the privilege of running a business within the City limits. It is a percentage of gross revenue, FFS. Yet adjacent cities (I'm in one--Pasadena) charges a vastly smaller tax, based on number of employees. A business can save tens of thousands of dollars simply by putting its offices in the correct place. Then the City of Los Angeles has budget woes and wonders why. Oh, well. The immediately former Mayor has his name in big-ass letters in the international terminal at LAX. C-o-r-r-u-p-t-i-o-n. But I do not judge. And I am not bitter. :-) Having said all of that, it IS possible to create an outpost in the United States and keep the paperwork and tax burden semi-sane. Assuming your business generates some kind of software, I would do the following: 1. Choose your base of operations in the USA on purely business grounds. Where are your potential employees? Where are your potential customers. Let's say it's California. 2. Next, examine carefully the different municipal governments in your target area to see which cities have the best city business license set-ups. You might find that these places are popular and rent is expensive. Go figure. 3. Next set up the business entity you need. If your company in Canada is a corporation, you almost certainly will use a corporation in the USA. (Hint: ignore everyone who tells you about LLCs. CRA treats U.S. LLCs as corporations for tax purposes. Just set up a corporation). First preference is to set up the corporation in the State where you are actually doing business. It saves you money and paperwork. Success in business is all about avoiding paperwork. 4. The U.S. corporation should probably be owned by your Canadian corporation. 5. Staffing the U.S. corporation with employees. If you are coming across the border you will need a visa. Look at the TN visa or the L-1A visa categories as the easiest way to be here, work, and live. If you are hiring locals, you don't need a visa for them, obviously. 6. F-ing payroll taxes. Hire a giant-ass payroll services company. I have used one after another and they have all f'd up my payroll at one point or another. F-ing Intuit's f-ing QuickBooks Payroll is the worst. "Oh, we really can't track that $120,000 and can't really tell you where it went." But I am not bitter. Really. Not much, anyway. :-) 7. Hyper hyper critical for you coming across the border and working here: payroll taxes. You have to contribute to the U.S. Social Security system with your taxes even though you will never get a penny of benefits here. There is a treaty with Canada. Look for "totalization agreement" in your favorite search engine. You can eliminate U.S. Social Security taxes for 5 years using that method. 8. Your business SHOULD -- for certain definitions of "should" -- pay income tax to the Federal government and the State of California. If you have a sufficiently high level of business activities in other states, they will want to impose income tax on your profits, too. Strive to avoid those activities in the other states. That's where you need guidance. I hope that helps. My email is in my profile.
mildtrepidation 13y ago
Thanks for doing this! I'm an American planning to live in Japan for 1-2 years starting later this year (I'll be studying the language and working for my existing small US business). I won't be working for (or, likely, doing any business with) Japanese companies. I assumed I'd be best off hiring an accountant who could take care of whatever inane forms come with paying taxes in this situation (I do also pay quarterly estimated taxes, if that matters)... aside from the cost of retaining this person, are there any gotchas or pitfalls I should be aware of and/or worried about?
- aet 13y ago
  Yes - to qualify for the Foreign Earned Income Exclusion you have to be out of the U.S. for 330 days each year, in which case you can write off roughly $100k
- philiphodgen 13y ago
  The magic form you need to remember is Form 2555. This is the "foreign earned income exclusion" form. The first "close to $100,000" (the amount changes annually for inflation) of income you earn abroad is free of income tax in the USA. The hard part is knowing whether you qualify for this or not. You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky), or be a "bona fide resident" of the other country. Look at the instructions on the form to help you here. Most people fail on this point, and this is the first vector of attack by the government to try and tax you. CAUTION CAUTION CAUTION. I see any number of Americans abroad who work as self-employed independent contractors. Oh, hypothetically, software engineers living in Thailand and working. They successfully spend 330 days out of the USA. They use Form 2555 to eliminate income tax on their Schedule C self-employment income. But Form 2555 _does_ _not_ _eliminate_ the self-employment tax -- the equivalent of Social Security tax for self-employed people. See Schedule SE. Sorry for using all caps and fakey-fake underlining to emphasize this problem. It happens all the time. I saw it yesterday. You think you have no tax liability and you end up owing $16,000 for self-employment tax. Not fun. At all. The next magic form to remember is Form 1116. This is the foreign tax credit. If you earn a dollar of income in Japan and pay Japanese income tax on it, Uncle Sam will give you credit on your U.S. tax return for the Japanese income tax you paid. This is usually the better way for Americans abroad to go when they live in high-tax countries. This is why Americans in Europe pay many thousands of dollars to have a tax return prepared but never give Uncle Sam a nickel of tax. If you are an American abroad working for a foreign employer, you don't have to pay U.S. Social Security. You should look at the totalization agreement between the USA and Japan to see if you can eliminate the need to contribute to the Japanese old age pension schemes since you aren't going to retire and die in Japan.
ma2rten 13y ago
I have a loosely related question, which I hope you might consider as well. I am a startup employee in the US with stock options on a standard 4 year vesting schedule. I am not an American citizen. In my home country, if I exercise the stock options I would not be liable for taxes. Can I avoid paying taxes, if I move outside of the US for that tax year where I excise my startup options?
- philiphodgen 13y ago
  Generally the U.S. tax system likes to tax options based on whatever makes the most money for the U.S. tax system. :-) Until I know more about the specific stock option program you have, you should assume that the U.S. will want to tax you if (1) the option grant occurred while you were employed in the USA; or (2) the options vested while you were employed in the USA; or (3) both; or (4) you saw a picture of a U.S. tourist landmark on television when you were 8 years old. I'm just kidding about #4. The date of exercise of options -- and where you are living when you exercise the options -- is usually unimportant. Meta point. The people who REALLY care about taxation of options are the people who run the company you work for. Your employer is going to bend over backwards to sacrifice you to the Almighty Tax Gods if it is going to protect the company from potential tax liability, even if it costs you money. Just sayin'. This is what I've seen.
  - ma2rten 13y ago
    Thanks, I guess in the back of my mind, I knew already it wouldn't be so easy.
- acchow 13y ago
  Most countries (the U.S. included) follow fairly similar standards when it comes to taxation of stock options - if they have a vesting period, taxation is proportioned accordingly with where you spent that vesting period. So, if they vested over 4 years and you spent 2.5 years of that in the U.S., it doesn't matter that you moved back home for a year to exercise. 2.5-years worth of stock options are considered U.S.-sourced and you owe taxes to USA when exercising them.
wavesounds 13y ago
Seeing as there are more lawyers than ever with more influence in Washington than ever, do lawyers have any motivation to fix this system? It seems to me with taxes, patents, immigration, regulation, healthcare and criminal justice the laws are purposefully hard to follow precisely because the lawyers who wrote them like it that way. Do you believe there are too many lawyers in this country (we have the highest per capita in the world by far http://wiki.answers.com/Q/What_country_in_the_world_has_most_lawyers_per_capita http://wiki.answers.com/Q/What_country_in_the_world_has_most... ) and if so what can we do as a tech community do to replace most of them with simple laws and web applications?
- philiphodgen 13y ago
  Laws are like sediment dropping to the bottom of the lake. Eventually there is no lake. I see no appetite for the wholesale dredging needed to fix the problem. To the contrary -- everyone is looking for government to help. See Tesla's experience in New Jersey yesterday, for instance. For what it is worth, what I see in the tech community (in only a few situations at the moment, admittedly) is people opting out by renouncing U.S. citizenship and establishing their companies in more amenable climates. This is one solution. The other solution is to not be part of the problem. Don't be one of those people who want Auntie Sam to help you win some sort of competitive advantage, and resist efforts by people (like the car dealers against Tesla) who attempt to screw things up. And if Gov. Christie attempts to run for President, remember Tesla. Vote well.
wiradikusuma 13y ago
This is probably the most stupid question you ever heard: I'm from Indonesia, working in Malaysia. Mid of last year I incorporated a C-Corp in Delaware. The reason is so I can use Stripe to accept CC payments. Apparently to open bank account in the US, I need to be there in person, so I'm now stuck with a "sleeping" company (because I don't have time to go to US just to open a bank account, not to mention the expenses). I have paid the franchise tax through my registered agent. Is that all? Extra bonus if you can give me direction to get out from this stupid situation.
- lstamour 13y ago
  Hmm. All I can offer is that I know of at least one instance where Canadians were able to open bank accounts in the US so long as the bank in question was Canadian-owned. It's not standard-practice so it usually involves being a good customer for the bank or having a special paid plan. Here's a thread where people had the same issue: https://forum.lowyat.net/topic/1300881/all https://forum.lowyat.net/topic/1300881/all
- nedwin 13y ago
  I managed to open a US account with HSBC without being in the US but it was incredibly painful. It involved getting a solid introduction to a client manager and relentlessly following him up over the course of 2 months to make it happen. Incredibly painful when we were waiting for an account to put our investment capital into. If I had to do it again I would likely fly out - so long as I could tack on some business development in the process.
- deleted 13y ago
  [deleted]
- philiphodgen 13y ago
  My experience with this is yes that you need to be in the USA to open the bank account for the US corporation. It MAY be possible to work something out if you deal with one of the multinational banks like Citi or HSBC but don't count on it. To keep this sleeping corporation alive: 1. File the paperwork in Delaware every year and pay the fees there. 2. File a Form 1120 (the corporate income tax return) with zero income and zero expense. Technically a corporation has to file a return even if it has zero profit. Don't forget Form 5472 (foreign shareholder of US corp) if it applies to you. Solution from this mess? Find a US partner who can co-own this thing with you. Then you have a US-based human as an officer/director who can do the footwork to open the bank account. Meta solution to this mess: someone can start one of these things as a service for 10,000 people like you. This carries thermonuclear risk of course, which is probably why no one has done it.
toomuchtodo 13y ago
> AMA I'm a US citizen but am absolutely tired of dealing with IRS paperwork over the course of several businesses; where would you suggest I obtain citizenship (EU preferred).
- mbesto 13y ago
  US Citizen here! Unfortunately, it won't end! First, you have to fill out personal taxes every year for foreign income, regardless of whether you live in the US or not. All income globally is treated in the eyes of the IRS as income. Second, you have to declare FBAR if you hold foreign accounts of over $10,000. Third, you have to "open your books" for any foreign corporations you are the director (or have ownership) of. Check IRS forms 5471 and 5472. Yaaa! Land of the free! Source: American with a business in the UK, lived and worked in the UK. Not a lawyer, or an accountant.
  - philiphodgen 13y ago
    Yes, mbesto is right. Acquiring a second citizenship will not relieve you from the full boat of U.S. tax laws. No matter where you live, no matter how many other passports you carry, if you have the magic blue passport with the eagle on it, you are a U.S. taxpayer.
    - joseph 13y ago
      Supposing one does not want a second citizenship and is willing to renounce their US citizenship entirely, which country would you recommend switching to? How difficult is it and what are the consequences?
      - mbesto 13y ago
        For what it's worth - Derek Sivers chose Singapore: https://news.ycombinator.com/item?id=3944339 https://news.ycombinator.com/item?id=3944339 http://www.guidemesingapore.com/incorporation/introduction/singapore-incorporation-advantages http://www.guidemesingapore.com/incorporation/introduction/s... AFAIK, you can always change to another country. However, I can't see the US taking it very lightly that you've denounced your citizenship. In other words, I would assume they would try to make your life a living hell if you wanted anything to do again in the US. (Have no idea, just assuming based on preconceptions about the way the US already treats it's citizens who live outside of it already) Derek seems pretty open, might be worth trying to reach out to him.
fizz_and_buzz 13y ago
At my work we are considering to open an office and incorporate in the US (We are based in Germany). Are there states that easier to set up an office? Delaware? Our costumers are manly in the Chicago area and the north east.
- philiphodgen 13y ago
  Set up your office (and form the corporation) in the location that is useful for business purposes. There are many locations in the United States that are more business friendly than Chicago (or Los Angeles, for that matter). I would suggest that if you need to be in the Chicago area you look at other municipalities other than the City of Chicago itself. But if you have made a decision that you need to have your business offices in Illinois, set up an Illinois corporation. Don't bother with Delaware unless there is an overwhelming business need for this.
whyleyc 13y ago
Thanks for this. We are a UK-based company and want to have a US "presence" as we have found that charging US customers from a UK payment processor results in greater than expected numbers of declined payments due to the "international" element of the transaction [1] Our plan was to get an EIN number for the business so that we can open a dollar bank account and register with a US payment processor to resolve this issue. We have no plans to hire in the US. My two questions are: (a) Is this a reasonable approach, or is there a better way ? (b) What unforeseen implications (tax, bureaucratic or otherwise) might we be opening ourselves up to by doing this ? [1] https://blog.recurly.com/2013/12/international-decline-rates/ https://blog.recurly.com/2013/12/international-decline-rates...
- philiphodgen 13y ago
  Your approach is sane. Here is what I would do: start from the back end. You know the saying "When Mama's happy, everybody's happy"? Your payment processor is Mama. Talk to your payment processor and see what they want, then do that. My guess is that they will want a U.S. business entity of some kind, with a U.S. tax ID number. Then they will want to believe :-) that this is more than a mere Post Office Box arrangement where money flows through a pipe. They'll want a physical address at a bare minimum. Once you are convinced that your payment processor will work with you, then you set up the company in the U.S. For tax purposes you treat this company as a processing agent. It is essentially a bookkeeper. Operate it and manage the net profit of this U.S. corporation so it shows a slight profit. E.g., your UK corporation pays the US corporation a 3% override on payments processed. The US corporation uses this money for its overhead and whatever is left over is taxable net profit. The net profit is likely to be small so the tax cost is palatable. Again, this is more a "make Mama happy" problem than it is a tax problem. Your criteria for a good solution are (1) payment processor happy; (2) paperwork and overhead and brain damage and distraction minimized; (3) tax cost.
apa-sl 13y ago
We're running a startup incorporated in European Union and planning to incorporate c-corp in Delaware as our mother company. C-corp will simply buy-out 100% shares in our European company which will be still hiring our employees (located and working in Europe). From what we've checked we shouldn't have any hassle (event the c-corp bank account will be opened in European bank) or are we missing something?
- philiphodgen 13y ago
  Do not transfer IP to the US mother ship before you have thought it out. You can transfer IP into the USA but once you have done that all of the profit generated from that IP worldwide will be subject to US tax. And if you ever want to transfer the IP out of the USA it will be treated as a sale. The worst I ever saw was one of those online poker sites. To move out of the USA they had to move their IP to a new foreign corporation. The appraised value of the domain name was $6,000,000. That's a $6,000,000 income item. Pay tax on that at 34%, baby. For day-to-day business operations you will have the normal level of business brain damage. Complexity is a mathematical constant.
  - mahyarm 13y ago
    So where should the non-us company be registered if you want to avoid IP headaches? Canada? Ireland? BVI?
    - JacobAldridge 13y ago
      The company I license my IP from is registered in Iceland - where the major markets of Europe and North America meet.
  - warrenm 13y ago
    by "IP", do you mean "Internet Protocol" or "Intellectual Property"?
    - apa-sl 13y ago
cinquemb 13y ago
Thank you for taking the time to answer questions here. Reading all the information you have posted so far makes me glad to be apart of this thing we call the internet. Now my question: - Me and a friend started a company in the US two years ago (both US citizens), and we run a consumer web app and in the near future will also provide SaaS. We just started to generate revenue 2 months ago and I was wondering how difficult it would be to incorporate again but in a more friendly place tax wise - What are our options to that?
- philiphodgen 13y ago
  It is easy to form a new company in a friendlier tax jurisdiction. Singapore. Hong Kong. Etc. You--because you are a US citizen--will have a metric shit-ton of paperwork to file every year. E.g., if you don't file Form 5471, it is an automatic $10,000 penalty, then you shovel snow uphill in Hell in the summertime to see of you can get the penalty removed. The second--and bigger--problem is that when you transfer ownership of IP from your US corporation to the new foreign corporation, that is treated as a sale and you pay tax on it. So. You wrote some software all by yourself. Now you're up and operating and generating revenue. What's the software worth? (Well, who the F knows, right?) Hire an appraiser to get a random person's opinion, just to keep the IRS mollified. That person's random opinion is that your software is worth $2,000,000. Guess what? You "bought" that IP at $0 and just "sold" it at $2,000,000 and have to pay tax on that profit. Internal Revenue Code Section 367(a). That's why in these circumstances it is better (for tax purposes) to start an IP-heavy company outside the US and license the right to use the IP in the USA to a US corporation. Don't do a startup in the USA then expand outwards.
rayiner 13y ago
"Federalism" was the founder's way of guaranteeing employment for lawyers.
- philiphodgen 13y ago
  Lawyers as politicians are the way that guaranteed employment is generated for lawyers. :-)
quellhorst 13y ago
What do you think about an offshore corporation for Bitcoin startups? Considering the regulatory environment in the USA, is it better to incorporate in someplace like Panama or Switzerland?
- philiphodgen 13y ago
  The intersection of bitcoin and business and tax is an interesting place to be. Governments will, I think, want to reach out and smother Bitcoin with a pillow. How you prepare for that is an interesting question. He said. :-) In choosing where to form a corporation you have to think about the protection that the country offers you. My prediction is that after the USA has beaten Swiss banks into a pulp they will start marching through the Carribean. What is a tiny country going to do when Uncle Sam's minions land with a thud?
- driverdan 13y ago
  If you are a US citizen it doesn't make a difference. You'll still need to register it as a foreign entity within the US and US laws will still apply. If you're not a US citizen you're lucky.
sgdesign 13y ago
Thanks so much for doing this! Here's my situation: I've been working on a pretty successful project with a friend (selling eBooks), and we're thinking about incorporating (up to now we've been taking in income separately through our own personal companies). Given that I live in Japan, and he lives in Australia, does it make more sense to incorporate in the U.S., in one of those two countries, or somewhere else (Hong Kong)? The main advantage I can see to incorporating in the U.S. is being able to use Stripe or other similar services. But I don't know if that alone is worth the trouble? For a company that only sells digital products and doesn't need an office in the U.S., is there any benefit to incorporating there?
- philiphodgen 13y ago
  I think the question of where you incorporate depends on two factors. First is citizenship. Are you (or your friend) U.S. citizens? If so you have a bunch of tax hobbles that will slow you down. Second is where your customers are. This is both a tax question (you want to pay less tax) and a business question (you want to collect more money more easily). If you need Stripe or its equivalent, you dance to the tune they play. Organize in the USA and bend to their will. If your customers are in the USA you have to look at whether you have "U.S. source income" -- a defined technical jargon-y concept. If so, it doesn't matter where or what you (or your company) happen to be. The U.S. wants tax. You have to look at brain damage, complexity, and cost. Don't focus so much on financial cost when thinking about your business structure. Think about opportunity cost. An hour spent thinking about this is an hour you did not spend writing books or marketing them. Until the stakes are high -- several million a year of revenue -- don't get too complicated. Yeah Apple 'n Google do fun stuff. But they have billions of dollars and you (and I) don't. :-) Keep it simple. Don't optimize for tax too early. You'll make more in building your business fast than you will spending the same amount of time and thinking on tax strategies.
  - sgdesign 13y ago
    Neither of us are U.S. citizens. I'm French and my partner is Australian. And we have about half of our customers in the U.S., and half outside. And I hear you about not over-thinking this. But even if we want to choose the simplest route, it's still not obvious which solution to pick just yet…
simonebrunozzi 13y ago
An international tax lawyer who knows what an AMA is? I love you already.
pbreit 13y ago
Is much of what is written in this post actually the case? Do they need to charge sales tax for a service? Is employing people remotely really that difficult?
deleted 13y ago
[deleted]
nickpp 13y ago
My situation is reversed. Foreign citizen, lived in US 10 ys ago. Bought stock options, paid bunch of US taxes on them. Now, 10ys later, if I sell that stock, to whom do I pay taxes on them? How do I take out taxes already paid in US when I bought said stock? Thanks!
hkphooey 13y ago
Do you think bureaucracy and regulations make it (deliberately) hard for US residents to invest in seed stage companies abroad? For example, if a California resident Bob injects capital into a foreign company, say $20,000 for 1% of the brand new company as it is formed in the UK, and receives preferred stock and passes voting power by proxy onto other investors, what are the personal tax and filing implications? My understanding is that any tax impact is only when the preferred stock is converted to ordinary stock and sold for a capital gain or loss. No different from buying and selling regular stocks from ETrade. Regarding filing, form 5471 does not apply, as Bob would have <10% of the company, and the voting power is only %1 and has been granted by proxy to somebody else. On the other hand, if either equity ownership or voting power was >10% then Bob would need to file 5471 and translate the accounts of the foreign company which is a major pain (and accounting expense thus reducing the return on investment) In a nutshell, US residents should only invest small amounts in any foreign companies and make sure equity ownership and voting power is minimal? p.s. Thanks in advance.
- gamblor956 13y ago
  No. While Congress tries to limit the outbound movement of capital from the U.S., generally contributing to a foreign company is not much of a tax issue unless you're using deferred earnings (i.e., you're making the investment through a corporation you own) that haven't yet been subject to tax. If you contribute post-tax earnings its usually a very simple event. Depending on your ownership stake, you have some information reporting, i.e., Form 5471, Form 926, but that's about it. If you don't have to deal with Form 5471 because you own a very small stake in the company, you'll want to have an accountant look into PFIC reporting, especially if the foreign company is engaged in "passive" activities like renting, licensing, investing, etc. People are scared of Form 5471, but it's really not a big deal. It's also not very expensive, in the scheme of things. If paying roughly $100-$250 for a Form 5471 is too great an expense, you probably don't have the financial leeway to be making the foreign investment in the first place. Also, Translating accounts is not very difficult. You simply apply the appropriate exchange rate (the average rate, or the year-end spot rate, depending on whether you are translating the income statement or the balance sheet). It takes at most a few minutes if you use any sort of organized accounting system or software.
jeffgeorge 13y ago
Best threadjacking ever! I may form a corp which would have many casual, occasional, remote (often lesser-developed country) individual contractors. The US IRS requirement to get an ITIN is a big burden on them, so I, a US citizen, am considering an overseas incorporation. Are there any countries worth researching for low complexity and low paperwork when using overseas contactors? (I'd happily pay more in local payroll or withholding if it could free the contractors themselves from worries about faraway-country compliance issues.)
gamblor956 13y ago
Conversely, in the exact same field, one of my biggest areas of growth in new business...is people wanting to acquire US citizenship. I've had 4 this year, and so far they've already created about 100 jobs between them. I also disagree that the international tax system is insane. It's about as complex as dealing with multi-state tax issues and (with regards to US+foreign setups, like US+China, or US+Australia) its far less complex than trying to manage a multi-national corporation in the EU. It's not simple, by any means, but it's definitely not the worst place to be located.
karangoeluw 13y ago
Any ideas on how it would work if I inc in India, but operate in the US (I'm in the US on F1 visa) I'm an Indian citizen
maxk42 13y ago
If I'm in the US and I want to start a corporation, would it be wiser to incorporate in another country? Would this invite additional scrutiny from the IRS or other governmental institutions?
remylebeau 13y ago
Thanks for doing this! I am a US citizen considering starting a company (possibly with 1 or 2 others) to do sports betting (illegal in US). I'm happy to live abroad (likely in Europe where sports betting is legal/popular) and potentially hop around from country to country. I'm trying to figure out my options. My understanding is that in order to do the sports betting I will need to open up a bank account abroad regardless (likely in the UK.) Any help on the follow questions would be greatly appreciated! 1) Be a self-employed nomad or incorporate? My understanding is that with the former option I would have to change countries every 3-6 months since I would be staying places under a travel visa -- is this correct? 2) If I incorporate... A) where should I do it? - Is it legal to do it in the US? The income would be going into a foreign bank account, if that matters. Could I then supply my own work visa to stay abroad in the same country for longer? - Can I incorporate in someplace like the UK? Does this carry tax benefits over being self-employed? Would this affect how long I am able to live in one country at a time? B) what type of corporation? - in US -- LLC? C-Corp? - in UK -- LTD? - other? Please excuse my lack of legal knowledge, I'm very new to all of this. Thanks again!

STRML 13y ago

It's something I've considered. As a now resident of Hong Kong, I was surprised - and delighted - with how incredibly easy it was to handle my taxes. Front-to-back, I could do the whole thing, including payment, in less than an hour and understand the whole system. Unfortunately, it is nowhere near so simple in the US, and they have no regard for expats. The US treats its expats worse than any other country in the world. The forms are atrocious. And I could go on about being taxed heavily for services I don't use. Unfortunately, relinquishing citizenship is just not possible for most, including me. With family and obligations, it's just not realistic. But it is appealing.

philiphodgen 13y ago
I think it is Clay Shirky who said something to the effect that bureaucracies have every incentive to not solve problems. Otherwise the reason for the bureaucrats' existence would cease. We won't see solutions from the US government. Ever. Yes the tax stuff is painful but as in your case there are reasons to keep the citizenship.
- M2Ys4U 13y ago
  The bureaucracy expands to meet the expanding needs of the bureaucracy.
- bayesianhorse 13y ago
  Actually bureaucracy was invented to battle corruption. But back then you really couldn't call it corruption, because without bureaucracy there were no rules or laws that could be faithfully executed or their faithful execution monitored. Kleptocracy and outright feudalism was the norm. So in essence, without bureaucracy there is no corruption just as there is no shadow without the light. Whenever bureaucracy has to be simplified, keep in mind that the potential for abuse usually increases unless the legislators take very much care.
- acchow 13y ago
  Tried to find this quote but failed. Any chance you could dig it up? I love it :)
- saalweachter 13y ago
  I think blaming bureaucracy in general is giving a free pass to Congress. A lot of the federal government is fully aware of their problems, and knows solutions, but they are not authorized dictate policy (except in small, limited ways) or otherwise enact solutions ... they are following their mandate set up by Congress. Congress sets up the bureaucracy to fail, and then blames it for failing. The classic example is the USPS, which is micromanaged by Congress and then berated when the micromanagement produces the expected failure. So blame Congress.
- Terr_ 13y ago
  That's like saying that programmers have no incentive to solve buggy systems, because otherwise their reason to exist would disappear. Sure, there are probably a nonzero number of folks making their own job-security out there, but in both cases you'll find plenty of people who would be happy to have the system work better and who have some professional pride in it.
rayiner 13y ago
You have to understand, the incentives and concerns of the two places are quite different between the U.S.A. (a place where expats come from), and Hong Kong (a place where expats go to). The U.S. has little incentive to facilitate Americans taking their capital and leaving. Hong Kong has a lot of incentive to facilitate that process.
_delirium 13y ago
Unfortunately, it is nowhere near so simple in the US, and they have no regard for expats. The US treats its expats worse than any other country in the world. The forms are atrocious. And I could go on about being taxed heavily for services I don't use. As a U.S. expat, I haven't noticed this. The forms aren't as easy as the Danish forms (which are fully automatic and done for you), but not too complex in my situation of just having a regular salaried job. I paid a CPA $200 or something to do it the first time, because I wasn't sure I would do it correctly myself. But the result was pretty readable and basically what I had thought I was supposed to do. Unnecessarily many pages, but simple enough ones. And due to the foreign-tax credit there's no double taxation. I compute my U.S. tax obligation, subtract Danish taxes paid, and the result is always $0, since U.S. taxes are comparatively low.
- philiphodgen 13y ago
  You are one of the lucky few. :-) Be sure not to invest your savings in mutual funds. Form 8621. Be sure to avoid the local equivalent of an IRA if you want to do retirement savings. The IRS might not think it is a tax-free pension. And they might think that employer contributions are taxable income to you. Don't own stock in a foreign corporation. Don't become an officer with signature power over the corporation's bank account. Be sure to report all of your bank accounts and investment accounts on FinCen 114 (the new FBAR). Don't forget Form 8938 as well, if it applies to you. I'm not saying you can't have a simple tax life as an American abroad. I'm just saying that you have to have a simple life in order to achieve it. The problem is not with the U.S. tax liability. As you said, the foreign tax credit will take care of that. You won't pay U.S. income tax. The real problem is with the paperwork and the penalties for screwing things up.
  - sosborn 13y ago
    >The real problem is with the paperwork and the penalties for screwing things up. When I lived abroad I just used a competent CPA. I'm not disagreeing with your statement, I'm just pointing out a viable solution.
  - tricolon 13y ago
jonmrodriguez 13y ago
By the way, if you hate the US's horrible tax forms, you should boycott the company Intuit (makers of Mint.com, QuickBooks, TurboTax, and more). Intuit spends a huge amount of money every year lobbying to make sure that tax forms are as complicated as possible: http://techcrunch.com/2013/03/27/turbotax-maker-funnels-millions-to-lobby-against-easier-tax-returns/ http://techcrunch.com/2013/03/27/turbotax-maker-funnels-mill... So evil!!!
- falconfunction 13y ago
  You are so right, they should be undercutting the bidders for building it for the government and really becoming the primary developers. Why can't I deal with Intuit every day?
- lstamour 13y ago
  I would point out that Mint.com was a startup at first, and I can't see how it or Intuit can prevent further competitors, e.g. personal capital. So... While I do prefer free tax filing tools over QuickTax, I'm not sure Mint is to blame. If anything, by using a free service, aren't you costing them money? Edit: I might be mistaken as in Canada (where I am) it's not as easy as pay what the Government says you owe, but in turn the system does let you login to view your (bigger company) tax forms, your last return results; other relevant forms haven't been too hard for me to get ahold of digitally. Digital deposits are quick and there's multiple competing Windows and web-based clients that are both free (not just for low incomes) and certified as compatible by the CRA for each year's tax season. This has pushed more than one company to offer their products free or at a discount, but I actually really like one of the Windows clients so I'll use it next time.
  - _dark_matter_ 13y ago
    ...that's like saying that by using Facebook and Twitter, you're costing them money. They'll figure out another way to make money, you're just not the customer. That's why I don't use Mint.
- swayvil 13y ago
  Intuit strives to keep tax forms unintuitive. Well if that isn't Orwellian then I don't know what is.
rurban 13y ago
I heard Germany and Italy had many double taxation issues also, besides Australia, but they have at least treaties to avoid such. They only other state which goes after their people living abroad is Ethiopia, but they have double taxation treaties with at least Israel, Italy and South Africa. So yes, US tax laws are the worst.

halostatue 13y ago

I'm an expat in Canada, and I'm considering shedding my U.S. citizenship over FBAR/FATCA. I don't really want to do so, however, as long as my parents are alive. I will probably do so very quickly after they pass because holding onto my citizenship is providing me no benefit other than being able to see them without hassle. What I am looking for now is someone who can help me catch up on my U.S. taxes (I'm a few years behind, but I think I might qualify for the catch-up amnesty if I get it done for this year) without costing me an arm and a leg.

philiphodgen 13y ago
For catching up, your risk depends on your income and the kind of stuff going on in your life (owning businesses, etc.). Here are the category of choices: 1. Just prepare the tax returns and file them. Good for regular people; the likelihood of you owing any U.S. taxes is low. You have risks of penalties (undisclosed bank accounts = FinCen 114 form filled in online -- that's the biggest one). If you are a very small potato floating in the stew pot of life, that's probably fine. You either start now and ignore the past, or you go back in time and file. Usually three years is sufficient, sometimes six. 2. Search for "Streamlined Procedure" via your favorite search engine and you'll find the IRS official "Come to Jesus" program for US taxpayers abroad who are "low risk." Like most bureaucratic endeavors to write rules controlling all humans, the procedure is contradictory. If your income tax is under $1,500 you are probably safe. If your income tax is even slightly above $1,500 in any one year, the program's FAQs say it's OK but the questionnaire you have to fill out says you are not eligible for a "no penalties, just file" solution to the problem. Find the questionnaire, look at question 2, then look at the paragraph below question 3. 3. If your situation is more complicated (higher income, or you own stock in Canadian corporations -- like your business!) etc., you need a more nuanced analysis. Here your primary risks are undisclosed financial accounts (heavy penalties for not filing FinCen Form 114, IRS Form 8938), Form 5471 (you own stock in a foreign corporation), Form 8621 (you--God Forbid!--bought regular Canadian mutual funds as an investment), or you have a Canadian tax-free account that is not an RRSP or RRIF. You need someone to tell you the best way to jump back into the pond. 4. You have gobs of money and high income. In that case you look attractive as a mugging candidate for the IRS. There's money to be made here for the government, and they like to threaten you with life-altering penalties (300% of your bank accounts is something I have seen as an opening bargaining position) and prison. You really shouldn't Come to Jesus on your own here. You need the Pope and St. Peter to guide you. :-) The problems that The One and Only Netai (I love that, by the way) complained of in the business context apply equally in the individual context. So take care in how you choose a solution. Shoot me an email and perhaps I can connect you with someone in Canada who can help you. I will be in Toronto next Tuesday, FWIW.

Dogamondo 13y ago

Wow I'm really interested in this, but your reply from the get-go offers nothing. Why not actually deliver something meaningful for the HN audience off the bat instead of passing yourself off as an AMA celebrity while not really contributing to any of the points that the OP has made?

philiphodgen 13y ago
So now that you've had an hour to see me in action, answering questions, what's your question?

waldohatesyou 13y ago

Hi, I just wanted to know if all companies not in the US have to go through the same process? For example, if I owned a company in Canada and wanted to incorporate in the US would I face the same difficulties as the company in the blog post?

philiphodgen 13y ago
The answer is yes. You will face some variation on the problems that OP described in his post. The level of paperwork and pain you will face depends on (1) where you are "doing business" (and that is a nuanced phrase); (2) what type of business you are doing; and (3) the humans who are doing the work -- U.S. residents or nonresidents. The problems arise from the multiple government entities that have the ability to impose tax on a business. From the top: - income tax from the Federal government, (most) State governments, and (a few) cities. - various employment taxes to fund government retirement benefits, unemployment relief, medical care for the elderly, etc. etc. This is Federal and State. Solve that problem by handing the whole f-ing problem off to a company that specifies in payroll services. Hint: despite marketing promises to the contrary, all payroll services are alike, except for the ones that steal your money. Buy services from an established, reputable payroll services company. - sales tax. There are a maddening number of jurisdictions nationwide that impose sales tax at a maddeningly different set of rates. Some things are taxed in one place and not in another. My experience with the California bureaucracy that administers this tax is that they are the second-lowest level of Dante's hell. (The lowest level of hell is reserved for the employment tax bureaucracy). - City business licenses. It never ceases to astonish me how stupid local governments can be. The City of Los Angeles imposes a tax on the privilege of running a business within the City limits. It is a percentage of gross revenue, FFS. Yet adjacent cities (I'm in one--Pasadena) charges a vastly smaller tax, based on number of employees. A business can save tens of thousands of dollars simply by putting its offices in the correct place. Then the City of Los Angeles has budget woes and wonders why. Oh, well. The immediately former Mayor has his name in big-ass letters in the international terminal at LAX. C-o-r-r-u-p-t-i-o-n. But I do not judge. And I am not bitter. :-) Having said all of that, it IS possible to create an outpost in the United States and keep the paperwork and tax burden semi-sane. Assuming your business generates some kind of software, I would do the following: 1. Choose your base of operations in the USA on purely business grounds. Where are your potential employees? Where are your potential customers. Let's say it's California. 2. Next, examine carefully the different municipal governments in your target area to see which cities have the best city business license set-ups. You might find that these places are popular and rent is expensive. Go figure. 3. Next set up the business entity you need. If your company in Canada is a corporation, you almost certainly will use a corporation in the USA. (Hint: ignore everyone who tells you about LLCs. CRA treats U.S. LLCs as corporations for tax purposes. Just set up a corporation). First preference is to set up the corporation in the State where you are actually doing business. It saves you money and paperwork. Success in business is all about avoiding paperwork. 4. The U.S. corporation should probably be owned by your Canadian corporation. 5. Staffing the U.S. corporation with employees. If you are coming across the border you will need a visa. Look at the TN visa or the L-1A visa categories as the easiest way to be here, work, and live. If you are hiring locals, you don't need a visa for them, obviously. 6. F-ing payroll taxes. Hire a giant-ass payroll services company. I have used one after another and they have all f'd up my payroll at one point or another. F-ing Intuit's f-ing QuickBooks Payroll is the worst. "Oh, we really can't track that $120,000 and can't really tell you where it went." But I am not bitter. Really. Not much, anyway. :-) 7. Hyper hyper critical for you coming across the border and working here: payroll taxes. You have to contribute to the U.S. Social Security system with your taxes even though you will never get a penny of benefits here. There is a treaty with Canada. Look for "totalization agreement" in your favorite search engine. You can eliminate U.S. Social Security taxes for 5 years using that method. 8. Your business SHOULD -- for certain definitions of "should" -- pay income tax to the Federal government and the State of California. If you have a sufficiently high level of business activities in other states, they will want to impose income tax on your profits, too. Strive to avoid those activities in the other states. That's where you need guidance. I hope that helps. My email is in my profile.

mildtrepidation 13y ago

Thanks for doing this! I'm an American planning to live in Japan for 1-2 years starting later this year (I'll be studying the language and working for my existing small US business). I won't be working for (or, likely, doing any business with) Japanese companies. I assumed I'd be best off hiring an accountant who could take care of whatever inane forms come with paying taxes in this situation (I do also pay quarterly estimated taxes, if that matters)... aside from the cost of retaining this person, are there any gotchas or pitfalls I should be aware of and/or worried about?

aet 13y ago
Yes - to qualify for the Foreign Earned Income Exclusion you have to be out of the U.S. for 330 days each year, in which case you can write off roughly $100k
philiphodgen 13y ago
The magic form you need to remember is Form 2555. This is the "foreign earned income exclusion" form. The first "close to $100,000" (the amount changes annually for inflation) of income you earn abroad is free of income tax in the USA. The hard part is knowing whether you qualify for this or not. You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky), or be a "bona fide resident" of the other country. Look at the instructions on the form to help you here. Most people fail on this point, and this is the first vector of attack by the government to try and tax you. CAUTION CAUTION CAUTION. I see any number of Americans abroad who work as self-employed independent contractors. Oh, hypothetically, software engineers living in Thailand and working. They successfully spend 330 days out of the USA. They use Form 2555 to eliminate income tax on their Schedule C self-employment income. But Form 2555 _does_ _not_ _eliminate_ the self-employment tax -- the equivalent of Social Security tax for self-employed people. See Schedule SE. Sorry for using all caps and fakey-fake underlining to emphasize this problem. It happens all the time. I saw it yesterday. You think you have no tax liability and you end up owing $16,000 for self-employment tax. Not fun. At all. The next magic form to remember is Form 1116. This is the foreign tax credit. If you earn a dollar of income in Japan and pay Japanese income tax on it, Uncle Sam will give you credit on your U.S. tax return for the Japanese income tax you paid. This is usually the better way for Americans abroad to go when they live in high-tax countries. This is why Americans in Europe pay many thousands of dollars to have a tax return prepared but never give Uncle Sam a nickel of tax. If you are an American abroad working for a foreign employer, you don't have to pay U.S. Social Security. You should look at the totalization agreement between the USA and Japan to see if you can eliminate the need to contribute to the Japanese old age pension schemes since you aren't going to retire and die in Japan.

ma2rten 13y ago

I have a loosely related question, which I hope you might consider as well. I am a startup employee in the US with stock options on a standard 4 year vesting schedule. I am not an American citizen. In my home country, if I exercise the stock options I would not be liable for taxes. Can I avoid paying taxes, if I move outside of the US for that tax year where I excise my startup options?

philiphodgen 13y ago
Generally the U.S. tax system likes to tax options based on whatever makes the most money for the U.S. tax system. :-) Until I know more about the specific stock option program you have, you should assume that the U.S. will want to tax you if (1) the option grant occurred while you were employed in the USA; or (2) the options vested while you were employed in the USA; or (3) both; or (4) you saw a picture of a U.S. tourist landmark on television when you were 8 years old. I'm just kidding about #4. The date of exercise of options -- and where you are living when you exercise the options -- is usually unimportant. Meta point. The people who REALLY care about taxation of options are the people who run the company you work for. Your employer is going to bend over backwards to sacrifice you to the Almighty Tax Gods if it is going to protect the company from potential tax liability, even if it costs you money. Just sayin'. This is what I've seen.
- ma2rten 13y ago
  Thanks, I guess in the back of my mind, I knew already it wouldn't be so easy.
acchow 13y ago
Most countries (the U.S. included) follow fairly similar standards when it comes to taxation of stock options - if they have a vesting period, taxation is proportioned accordingly with where you spent that vesting period. So, if they vested over 4 years and you spent 2.5 years of that in the U.S., it doesn't matter that you moved back home for a year to exercise. 2.5-years worth of stock options are considered U.S.-sourced and you owe taxes to USA when exercising them.

wavesounds 13y ago

Seeing as there are more lawyers than ever with more influence in Washington than ever, do lawyers have any motivation to fix this system? It seems to me with taxes, patents, immigration, regulation, healthcare and criminal justice the laws are purposefully hard to follow precisely because the lawyers who wrote them like it that way. Do you believe there are too many lawyers in this country (we have the highest per capita in the world by far http://wiki.answers.com/Q/What_country_in_the_world_has_most_lawyers_per_capita http://wiki.answers.com/Q/What_country_in_the_world_has_most... ) and if so what can we do as a tech community do to replace most of them with simple laws and web applications?

philiphodgen 13y ago
Laws are like sediment dropping to the bottom of the lake. Eventually there is no lake. I see no appetite for the wholesale dredging needed to fix the problem. To the contrary -- everyone is looking for government to help. See Tesla's experience in New Jersey yesterday, for instance. For what it is worth, what I see in the tech community (in only a few situations at the moment, admittedly) is people opting out by renouncing U.S. citizenship and establishing their companies in more amenable climates. This is one solution. The other solution is to not be part of the problem. Don't be one of those people who want Auntie Sam to help you win some sort of competitive advantage, and resist efforts by people (like the car dealers against Tesla) who attempt to screw things up. And if Gov. Christie attempts to run for President, remember Tesla. Vote well.

wiradikusuma 13y ago

This is probably the most stupid question you ever heard: I'm from Indonesia, working in Malaysia. Mid of last year I incorporated a C-Corp in Delaware. The reason is so I can use Stripe to accept CC payments. Apparently to open bank account in the US, I need to be there in person, so I'm now stuck with a "sleeping" company (because I don't have time to go to US just to open a bank account, not to mention the expenses). I have paid the franchise tax through my registered agent. Is that all? Extra bonus if you can give me direction to get out from this stupid situation.

lstamour 13y ago
Hmm. All I can offer is that I know of at least one instance where Canadians were able to open bank accounts in the US so long as the bank in question was Canadian-owned. It's not standard-practice so it usually involves being a good customer for the bank or having a special paid plan. Here's a thread where people had the same issue: https://forum.lowyat.net/topic/1300881/all https://forum.lowyat.net/topic/1300881/all
nedwin 13y ago
I managed to open a US account with HSBC without being in the US but it was incredibly painful. It involved getting a solid introduction to a client manager and relentlessly following him up over the course of 2 months to make it happen. Incredibly painful when we were waiting for an account to put our investment capital into. If I had to do it again I would likely fly out - so long as I could tack on some business development in the process.
deleted 13y ago
[deleted]
philiphodgen 13y ago
My experience with this is yes that you need to be in the USA to open the bank account for the US corporation. It MAY be possible to work something out if you deal with one of the multinational banks like Citi or HSBC but don't count on it. To keep this sleeping corporation alive: 1. File the paperwork in Delaware every year and pay the fees there. 2. File a Form 1120 (the corporate income tax return) with zero income and zero expense. Technically a corporation has to file a return even if it has zero profit. Don't forget Form 5472 (foreign shareholder of US corp) if it applies to you. Solution from this mess? Find a US partner who can co-own this thing with you. Then you have a US-based human as an officer/director who can do the footwork to open the bank account. Meta solution to this mess: someone can start one of these things as a service for 10,000 people like you. This carries thermonuclear risk of course, which is probably why no one has done it.

toomuchtodo 13y ago

> AMA I'm a US citizen but am absolutely tired of dealing with IRS paperwork over the course of several businesses; where would you suggest I obtain citizenship (EU preferred).

mbesto 13y ago
US Citizen here! Unfortunately, it won't end! First, you have to fill out personal taxes every year for foreign income, regardless of whether you live in the US or not. All income globally is treated in the eyes of the IRS as income. Second, you have to declare FBAR if you hold foreign accounts of over $10,000. Third, you have to "open your books" for any foreign corporations you are the director (or have ownership) of. Check IRS forms 5471 and 5472. Yaaa! Land of the free! Source: American with a business in the UK, lived and worked in the UK. Not a lawyer, or an accountant.
- philiphodgen 13y ago
  Yes, mbesto is right. Acquiring a second citizenship will not relieve you from the full boat of U.S. tax laws. No matter where you live, no matter how many other passports you carry, if you have the magic blue passport with the eagle on it, you are a U.S. taxpayer.
  - joseph 13y ago
    Supposing one does not want a second citizenship and is willing to renounce their US citizenship entirely, which country would you recommend switching to? How difficult is it and what are the consequences?
    - mbesto 13y ago
      For what it's worth - Derek Sivers chose Singapore: https://news.ycombinator.com/item?id=3944339 https://news.ycombinator.com/item?id=3944339 http://www.guidemesingapore.com/incorporation/introduction/singapore-incorporation-advantages http://www.guidemesingapore.com/incorporation/introduction/s... AFAIK, you can always change to another country. However, I can't see the US taking it very lightly that you've denounced your citizenship. In other words, I would assume they would try to make your life a living hell if you wanted anything to do again in the US. (Have no idea, just assuming based on preconceptions about the way the US already treats it's citizens who live outside of it already) Derek seems pretty open, might be worth trying to reach out to him.

fizz_and_buzz 13y ago

At my work we are considering to open an office and incorporate in the US (We are based in Germany). Are there states that easier to set up an office? Delaware? Our costumers are manly in the Chicago area and the north east.

philiphodgen 13y ago
Set up your office (and form the corporation) in the location that is useful for business purposes. There are many locations in the United States that are more business friendly than Chicago (or Los Angeles, for that matter). I would suggest that if you need to be in the Chicago area you look at other municipalities other than the City of Chicago itself. But if you have made a decision that you need to have your business offices in Illinois, set up an Illinois corporation. Don't bother with Delaware unless there is an overwhelming business need for this.

whyleyc 13y ago

Thanks for this. We are a UK-based company and want to have a US "presence" as we have found that charging US customers from a UK payment processor results in greater than expected numbers of declined payments due to the "international" element of the transaction [1] Our plan was to get an EIN number for the business so that we can open a dollar bank account and register with a US payment processor to resolve this issue. We have no plans to hire in the US. My two questions are: (a) Is this a reasonable approach, or is there a better way ? (b) What unforeseen implications (tax, bureaucratic or otherwise) might we be opening ourselves up to by doing this ? [1] https://blog.recurly.com/2013/12/international-decline-rates/ https://blog.recurly.com/2013/12/international-decline-rates...

philiphodgen 13y ago
Your approach is sane. Here is what I would do: start from the back end. You know the saying "When Mama's happy, everybody's happy"? Your payment processor is Mama. Talk to your payment processor and see what they want, then do that. My guess is that they will want a U.S. business entity of some kind, with a U.S. tax ID number. Then they will want to believe :-) that this is more than a mere Post Office Box arrangement where money flows through a pipe. They'll want a physical address at a bare minimum. Once you are convinced that your payment processor will work with you, then you set up the company in the U.S. For tax purposes you treat this company as a processing agent. It is essentially a bookkeeper. Operate it and manage the net profit of this U.S. corporation so it shows a slight profit. E.g., your UK corporation pays the US corporation a 3% override on payments processed. The US corporation uses this money for its overhead and whatever is left over is taxable net profit. The net profit is likely to be small so the tax cost is palatable. Again, this is more a "make Mama happy" problem than it is a tax problem. Your criteria for a good solution are (1) payment processor happy; (2) paperwork and overhead and brain damage and distraction minimized; (3) tax cost.

apa-sl 13y ago

We're running a startup incorporated in European Union and planning to incorporate c-corp in Delaware as our mother company. C-corp will simply buy-out 100% shares in our European company which will be still hiring our employees (located and working in Europe). From what we've checked we shouldn't have any hassle (event the c-corp bank account will be opened in European bank) or are we missing something?

philiphodgen 13y ago
Do not transfer IP to the US mother ship before you have thought it out. You can transfer IP into the USA but once you have done that all of the profit generated from that IP worldwide will be subject to US tax. And if you ever want to transfer the IP out of the USA it will be treated as a sale. The worst I ever saw was one of those online poker sites. To move out of the USA they had to move their IP to a new foreign corporation. The appraised value of the domain name was $6,000,000. That's a $6,000,000 income item. Pay tax on that at 34%, baby. For day-to-day business operations you will have the normal level of business brain damage. Complexity is a mathematical constant.
- mahyarm 13y ago
  So where should the non-us company be registered if you want to avoid IP headaches? Canada? Ireland? BVI?
  - JacobAldridge 13y ago
    The company I license my IP from is registered in Iceland - where the major markets of Europe and North America meet.
- warrenm 13y ago
  by "IP", do you mean "Internet Protocol" or "Intellectual Property"?
  - apa-sl 13y ago

cinquemb 13y ago

Thank you for taking the time to answer questions here. Reading all the information you have posted so far makes me glad to be apart of this thing we call the internet. Now my question: - Me and a friend started a company in the US two years ago (both US citizens), and we run a consumer web app and in the near future will also provide SaaS. We just started to generate revenue 2 months ago and I was wondering how difficult it would be to incorporate again but in a more friendly place tax wise - What are our options to that?

philiphodgen 13y ago
It is easy to form a new company in a friendlier tax jurisdiction. Singapore. Hong Kong. Etc. You--because you are a US citizen--will have a metric shit-ton of paperwork to file every year. E.g., if you don't file Form 5471, it is an automatic $10,000 penalty, then you shovel snow uphill in Hell in the summertime to see of you can get the penalty removed. The second--and bigger--problem is that when you transfer ownership of IP from your US corporation to the new foreign corporation, that is treated as a sale and you pay tax on it. So. You wrote some software all by yourself. Now you're up and operating and generating revenue. What's the software worth? (Well, who the F knows, right?) Hire an appraiser to get a random person's opinion, just to keep the IRS mollified. That person's random opinion is that your software is worth $2,000,000. Guess what? You "bought" that IP at $0 and just "sold" it at $2,000,000 and have to pay tax on that profit. Internal Revenue Code Section 367(a). That's why in these circumstances it is better (for tax purposes) to start an IP-heavy company outside the US and license the right to use the IP in the USA to a US corporation. Don't do a startup in the USA then expand outwards.

rayiner 13y ago

"Federalism" was the founder's way of guaranteeing employment for lawyers.

philiphodgen 13y ago
Lawyers as politicians are the way that guaranteed employment is generated for lawyers. :-)

quellhorst 13y ago

What do you think about an offshore corporation for Bitcoin startups? Considering the regulatory environment in the USA, is it better to incorporate in someplace like Panama or Switzerland?

philiphodgen 13y ago
The intersection of bitcoin and business and tax is an interesting place to be. Governments will, I think, want to reach out and smother Bitcoin with a pillow. How you prepare for that is an interesting question. He said. :-) In choosing where to form a corporation you have to think about the protection that the country offers you. My prediction is that after the USA has beaten Swiss banks into a pulp they will start marching through the Carribean. What is a tiny country going to do when Uncle Sam's minions land with a thud?
driverdan 13y ago
If you are a US citizen it doesn't make a difference. You'll still need to register it as a foreign entity within the US and US laws will still apply. If you're not a US citizen you're lucky.

sgdesign 13y ago

Thanks so much for doing this! Here's my situation: I've been working on a pretty successful project with a friend (selling eBooks), and we're thinking about incorporating (up to now we've been taking in income separately through our own personal companies). Given that I live in Japan, and he lives in Australia, does it make more sense to incorporate in the U.S., in one of those two countries, or somewhere else (Hong Kong)? The main advantage I can see to incorporating in the U.S. is being able to use Stripe or other similar services. But I don't know if that alone is worth the trouble? For a company that only sells digital products and doesn't need an office in the U.S., is there any benefit to incorporating there?

philiphodgen 13y ago
I think the question of where you incorporate depends on two factors. First is citizenship. Are you (or your friend) U.S. citizens? If so you have a bunch of tax hobbles that will slow you down. Second is where your customers are. This is both a tax question (you want to pay less tax) and a business question (you want to collect more money more easily). If you need Stripe or its equivalent, you dance to the tune they play. Organize in the USA and bend to their will. If your customers are in the USA you have to look at whether you have "U.S. source income" -- a defined technical jargon-y concept. If so, it doesn't matter where or what you (or your company) happen to be. The U.S. wants tax. You have to look at brain damage, complexity, and cost. Don't focus so much on financial cost when thinking about your business structure. Think about opportunity cost. An hour spent thinking about this is an hour you did not spend writing books or marketing them. Until the stakes are high -- several million a year of revenue -- don't get too complicated. Yeah Apple 'n Google do fun stuff. But they have billions of dollars and you (and I) don't. :-) Keep it simple. Don't optimize for tax too early. You'll make more in building your business fast than you will spending the same amount of time and thinking on tax strategies.
- sgdesign 13y ago
  Neither of us are U.S. citizens. I'm French and my partner is Australian. And we have about half of our customers in the U.S., and half outside. And I hear you about not over-thinking this. But even if we want to choose the simplest route, it's still not obvious which solution to pick just yet…

simonebrunozzi 13y ago

An international tax lawyer who knows what an AMA is? I love you already.

pbreit 13y ago

Is much of what is written in this post actually the case? Do they need to charge sales tax for a service? Is employing people remotely really that difficult?

deleted 13y ago

[deleted]

nickpp 13y ago

My situation is reversed. Foreign citizen, lived in US 10 ys ago. Bought stock options, paid bunch of US taxes on them. Now, 10ys later, if I sell that stock, to whom do I pay taxes on them? How do I take out taxes already paid in US when I bought said stock? Thanks!

hkphooey 13y ago

Do you think bureaucracy and regulations make it (deliberately) hard for US residents to invest in seed stage companies abroad? For example, if a California resident Bob injects capital into a foreign company, say $20,000 for 1% of the brand new company as it is formed in the UK, and receives preferred stock and passes voting power by proxy onto other investors, what are the personal tax and filing implications? My understanding is that any tax impact is only when the preferred stock is converted to ordinary stock and sold for a capital gain or loss. No different from buying and selling regular stocks from ETrade. Regarding filing, form 5471 does not apply, as Bob would have <10% of the company, and the voting power is only %1 and has been granted by proxy to somebody else. On the other hand, if either equity ownership or voting power was >10% then Bob would need to file 5471 and translate the accounts of the foreign company which is a major pain (and accounting expense thus reducing the return on investment) In a nutshell, US residents should only invest small amounts in any foreign companies and make sure equity ownership and voting power is minimal? p.s. Thanks in advance.

gamblor956 13y ago
No. While Congress tries to limit the outbound movement of capital from the U.S., generally contributing to a foreign company is not much of a tax issue unless you're using deferred earnings (i.e., you're making the investment through a corporation you own) that haven't yet been subject to tax. If you contribute post-tax earnings its usually a very simple event. Depending on your ownership stake, you have some information reporting, i.e., Form 5471, Form 926, but that's about it. If you don't have to deal with Form 5471 because you own a very small stake in the company, you'll want to have an accountant look into PFIC reporting, especially if the foreign company is engaged in "passive" activities like renting, licensing, investing, etc. People are scared of Form 5471, but it's really not a big deal. It's also not very expensive, in the scheme of things. If paying roughly $100-$250 for a Form 5471 is too great an expense, you probably don't have the financial leeway to be making the foreign investment in the first place. Also, Translating accounts is not very difficult. You simply apply the appropriate exchange rate (the average rate, or the year-end spot rate, depending on whether you are translating the income statement or the balance sheet). It takes at most a few minutes if you use any sort of organized accounting system or software.

jeffgeorge 13y ago

Best threadjacking ever! I may form a corp which would have many casual, occasional, remote (often lesser-developed country) individual contractors. The US IRS requirement to get an ITIN is a big burden on them, so I, a US citizen, am considering an overseas incorporation. Are there any countries worth researching for low complexity and low paperwork when using overseas contactors? (I'd happily pay more in local payroll or withholding if it could free the contractors themselves from worries about faraway-country compliance issues.)

gamblor956 13y ago

Conversely, in the exact same field, one of my biggest areas of growth in new business...is people wanting to acquire US citizenship. I've had 4 this year, and so far they've already created about 100 jobs between them. I also disagree that the international tax system is insane. It's about as complex as dealing with multi-state tax issues and (with regards to US+foreign setups, like US+China, or US+Australia) its far less complex than trying to manage a multi-national corporation in the EU. It's not simple, by any means, but it's definitely not the worst place to be located.

karangoeluw 13y ago

Any ideas on how it would work if I inc in India, but operate in the US (I'm in the US on F1 visa) I'm an Indian citizen

maxk42 13y ago

If I'm in the US and I want to start a corporation, would it be wiser to incorporate in another country? Would this invite additional scrutiny from the IRS or other governmental institutions?

remylebeau 13y ago

Thanks for doing this! I am a US citizen considering starting a company (possibly with 1 or 2 others) to do sports betting (illegal in US). I'm happy to live abroad (likely in Europe where sports betting is legal/popular) and potentially hop around from country to country. I'm trying to figure out my options. My understanding is that in order to do the sports betting I will need to open up a bank account abroad regardless (likely in the UK.) Any help on the follow questions would be greatly appreciated! 1) Be a self-employed nomad or incorporate? My understanding is that with the former option I would have to change countries every 3-6 months since I would be staying places under a travel visa -- is this correct? 2) If I incorporate... A) where should I do it? - Is it legal to do it in the US? The income would be going into a foreign bank account, if that matters. Could I then supply my own work visa to stay abroad in the same country for longer? - Can I incorporate in someplace like the UK? Does this carry tax benefits over being self-employed? Would this affect how long I am able to live in one country at a time? B) what type of corporation? - in US -- LLC? C-Corp? - in UK -- LTD? - other? Please excuse my lack of legal knowledge, I'm very new to all of this. Thanks again!