U.S. expatriates generally must follow the same rules for the payment of self-employment tax as US residents. Self-employment tax is the social security and Medicare tax on net earnings from self-employment of at least $400.
Therefore it is possible owe zero U.S. income tax (due to the foreign earned income exclusion) but owe a substantial amount of self-employment tax. For this reason there are many U.S. expats who have considered incorporating their business in their country of residence.
However, before taking this leap it is important to look at your personal circumstances and consider the following.
Does my country of residence have Totalization Agreement with the U.S.?
The US has entered into many social security agreements with foreign countries to coordinate coverage and taxation. These agreements are typically called Totalization Agreements and under these agreements taxpayers generally only have to pay self-employment taxes in one country. You can get more information on Totalization Agreements on the Social Security Administration’s website (https://www.ssa.gov/international/agreements_overview.html).
It is important to note that totalization agreements only prevent double-taxation if it is properly applied so consult with a professional.
Additional filing requirements
Incorporating your business will not eliminate U.S reporting requirements. U.S. expats who are officers, directors, or shareholders of certain foreign corporations are required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form is complex and substantial penalties exist for not filing.
Incorporating a business abroad can be a complex endeavor. Corporations must comply with local income tax laws and generally pay taxes. Also keep in mind that only foreign earned income is excluded for U.S. tax purposes, dividends are not. It is important to look at the rules and tax rates in your country of residence and compare the corporate and payroll rates with those of the U.S.
If you are considering incorporating a business overseas, contact a qualified expat tax professional, who can help you choose the best corporate structure, as well as advise you on the tax implications of wherever you choose to live.
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