A little over a year ago, I needed to start an overseas company for the first time. I had previously setup a couple of companies in the US, but setting up an overseas company is a bit different, and along the way, I had a few surprises...

Setup is easy

Starting an overseas business is an extremely simple two step procedure. First pick a foreign country with favorable tax and compliance laws for your business. Next, get an agent in that country to create the business. For a few thousand dollars, you can have a working corporation in a matter of days. Now the tough and expensive part is keeping the corporation without running into tax problems in your home country.

Filing taxes is extremely complicated

Owning a tax free, foreign corporation might seem like a dream come true but there are a lot of tax compliance issues that take the fun out and some of the profit out of the business. Before you take this route, take the time to learn about the laws that will impact you.

First are the rules on "Controlled Foreign Corporations", (CFC), which limit the deferral of taxes. Most countries have these rules. For the US, a CFC is any corporation where US citizens and resident aliens own more than 50% of the stock. The CFC rules basically keep you from retaining profit in the CFC and not paying taxes on it in the US. There are special rules for passive income that remove any tax advantage over just directly owing the asset. Some examples of passive income are investment income or rent.

For the US, one of the only advantages is if the CFC has active non-US income. That is you are making sales from the CFC to a non-US entity. If you don't have that, you might want to reconsider the creation of the corporation.

In the US, a CFC or even significant ownership or control of a foreign corporation means that you will have to fill out and file the extremely complicated Form 5471. Failure to file is a $10,000 fine. You may also need to file a bunch of other tax forms related to the 5471. You will need a good accountant.

Report any foreign accounts

As a US citizen, if you have any kind of foreign bank account or investment account for the company, you must do an FBAR and/or Form 8938 filing. The fines for missing this can be even more than the Form 5471 filing. More info on these forms can be found here:

https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

jamie