Tax Repatriation: What Multinational Business Owners Need to Know

As a US entrepreneur, expanding your business overseas can be an exciting and lucrative venture. However, when it comes to repatriating foreign earnings, navigating the tax implications can be a daunting task. In recent years, the tax rules regarding repatriation have changed, making it even more challenging for business leaders to keep up. But once you’re familiar with the regulations, you can employ strategies to reduce your tax bill and keep more of your hard-earning revenue when repatriating foreign income.

What is tax repatriation?

Tax repatriation is the process of transferring earnings from a foreign subsidiary or branch of a US-based company back to the US. Repatriating earnings involves paying taxes on foreign income to both the foreign country and the US. The US tax code requires all US persons to report and pay taxes on their worldwide income, including income earned from foreign sources.

Repatriation before the Tax Cuts and Jobs Act

Before the Tax Cuts and Jobs Act (TCJA) of 2017, US companies were incentivized to keep their foreign earnings offshore due to the high domestic tax rate on repatriated income. Repatriated earnings were included with the company’s income and taxed at a rate of 35 percent. To avoid this, US companies kept billions of dollars of foreign earnings in offshore tax havens.

Repatriation after the Tax Cuts and Jobs Act

The TCJA changed the way the US taxes foreign income by discouraging corporations from keeping earnings offshore. The new rules eliminated the ability to defer repatriation of foreign income for most US companies. But fortunately, it’s not all bad news. The TCJA also introduced reduced tax rates for repatriated income. Under the current rules, corporations pay a 15.5 percent tax rate on cash and other liquid assets, while non-cash assets are taxed at 8 percent.  

These tax rates apply to all US companies or shareholders that own 10 percent or more of a foreign subsidiary. However, the tax can be paid in installments over eight years interest-free.

The TCJA also introduced a new provision known as the Global Intangible Low-Taxed Income (GILTI) regime. GILTI requires US taxpayers to pay a minimum tax on certain foreign earnings, regardless of whether the earnings are repatriated to the US.

Which tax strategies to use when repatriating foreign income

When it comes to repatriating foreign earnings, there are various tax strategies US entrepreneurs can use to manage their tax liability.

One way to reduce your US tax bill is to use the foreign tax credit. US taxpayers can claim a credit for foreign taxes paid on income that is also subject to US taxation. The foreign tax credit is available to both individuals and corporations and can be claimed using Form 1116 for individuals or Form 1118 for corporations.

In certain cases, tax treaties can also help reduce taxation on repatriated income. Tax treaties are bilateral agreements that provide rules for the allocation of taxing rights between two countries. These treaties can help prevent double taxation, reduce tax rates, and provide other benefits to US taxpayers doing business in foreign countries.

The method you choose for repatriating income to the United States can also impact your tax rates. For instance, distributing funds as dividends, loans, or royalty payments may reduce your US taxes.

Under Section 245 DRD of the Internal Revenue Code, if dividends are distributed from a foreign corporation to its US corporate shareholder entity, the domestic corporation can deduct 100% of the dividend.

Another option is for a US parent company to loan money to a foreign subsidiary. This allows the foreign entity to repatriate overseas income in the form of principal and interest, which can help reduce tax rates in some cases.

Royalty payments are a third option for repatriating foreign earnings. Royalties are payments made by a foreign subsidiary to its US parent company for the use of intellectual property, such as patents or trademarks.

Choosing the strategy that’s best for your business

Navigating the tax implications of repatriating foreign earnings can be a complex and challenging task. However, with careful planning and professional tax advice, you can manage your tax liability and maximize your after-tax earnings. Utilizing tax credits and treaties, as well as choosing the right method for repatriating earnings can help reduce your tax liability while making the most of your global expansion.