But there is a problem. The IRS denies the foreign tax credit and a deduction of a business loss to the privately owned businesses. Without the foreign tax credit, you will pay tax twice on the same profit. First in the foreign country and again in the USA.
England, Scotland, most of Europe, China and Mexico are restrictive in letting a foreign business into their country. America is not this way because states’ rights. These countries require you to incorporate in their country.
Back in 1996, the IRS issued the “check the box’ regulations which allow some foreign entities to elect to be treated like a domestic LLC. If the election is made, then the entities are disregarded if there is only one owner. With more than one owner they are partnerships. If elected before business begins, this is a good tax structure, but not the best legal structure for asset protection (in the United States).
However, most foreign corporation used in Europe, Asia and Latin America are often not eligible of the check the box election. These are known as “Per Se” corporations. Here is the cause of the double taxation, loss of tax losses and loss of the foreign tax credit.
The American business must file the complex Form 5471 reporting the controlled foreign corporation subpart F income. Few CPA’s are experts in this field. So, you may need a consultant, like me. The solution is to find a method to allow the foreign corporation to elect Sub Chapter S and file a simple Form 1120S and not the Form 5471.
These foreign corporations cannot elect Sub Chapter S. Thus, the foreign tax credit is trapped inside the corporate shell.
The Department of the Treasury now allows a dual resident corporation. Your foreign corporation can also be a domestic sub chapter S corporation. The complex Form 5471 is replaced by the simplifier Form 1120-S (the return for a subchapter S corporation).
Read more at: Tax Times blog