This is an intro to tax and incorporation issues faced by people who are involved in cross-national business. This page is not intended to be a substitute for a tax or legal specialist, but is intended to help you ask the right questions concerning taxes and legal issues.
Your tax situation can be done by a decision tree:
- On the grid or off the grid
The tax authorities of the world have created a network of enforcement systems. The first question you have to ask is do you want to be on the grid or off the grid
- Off the grid
If decide to be off the grid, you want to absolutely minimize or eliminate any linkage between you and funds. You do not want to have any bank accounts or corporations or anything else in your name, and everything you own should be in a name of another person, perhaps a trusted family member. Do not trust banks or shell corporations. In the age of the internet, any sufficiently motivated government can trace the money once you have money in any corporation entity or bank.
The easiest way of remaining off the grid is by not having enough money for anyone to care that you are not on the grid. The costs of being off the grid can be quite high. Not only does being off the grid mean that you all your financial transactions are extremely inefficient, but you are not protected. Not only have you no legal recourse if someone runs away with your money, but you open yourself to risk of getting scammed. Before going off the grid, it may be a good idea (assuming that you are doing nothing else criminal) to see how much it really will cost you to stay on the grid.
- On the grid
If you are on the grid, then the key deciding issue is whether you are a US tax resident (i.e. US citizen or permanent resident) or not. The United States is special because it is the only major country that taxes people for worldwide income regardless of whether they are residing in the country or not. In addition, the United States is the only major country that can get foreign banks to turn over information for tax purposes.
- If you are not a US tax resident
If you are not a US tax resident and you have global income, you may consider incorporating your business offshore in a low tax region such as BVI, Caymans, or Hong Kong. Incorporating the business offshore simplifies the taxes because it means that the taxes are mostly levied in the location where the business is sourced.
- If you are a US tax resident
Then the decision tree will be whether you are physically residing in the US or not.
- If you are physically residing in the US
Then you have to conduct your business as if it was situated in your current location. The standard tax and small business guides are those issued by Nolo Press. You can create an S-corporation and then deduct business expenses, but your situation will be pretty much the same as if you were a domestic business.
The one situation were you may be able to claim some tax relief is if there is a double taxation treaty with the country you are doing business with.
One situation is that if you are physically residing in the US, then there are required reporting forms under FBAR with very low thresholds. You will be required to report all of your foreign bank accounts, and the IRS will compare those numbers with the numbers that the banks give them. If you are a US physical resident, then there are huge risks and compliance costs associated with opening an offshore corporation, and it is likely that you will spend more money on tax lawyers than on taxes if you go this route.
- If you are not physically residing in the US
In this situation, you can claim a foreign resident exclusion on earned income and on housing expenses. Also, if you open an offshore corporation and it is not a shell corporation, then the IRS will be less likely to audit, and you are less likely to trip up on passive income rules. In addition while you will still be required to fill out FBAR reports, the threshold for reporting is much higher, and a report of a foreign account is less likely to result in an audit.