5 Ways to Avoid Double Taxation for Expat Entrepreneurs

For most governments in the world, taxes are a vital source of funding for public services. However, the concept of this resource often comes off in a negative light when you have to file and pay for them out of your own pocket every month.

Due to taxation laws, not many workers are exempt from paying this fee, especially if you are a foreign entrepreneur. Worse case scenario, you may get taxed twice by mistake and lose more of your hard-earned income.

What is Double Taxation?

Double taxation is when an individual pays income tax twice from the same source of income. This can occur at both corporate and personal levels. Double taxation may also occur with international trades or investments where the income is taxed by two countries.

Types of Double Taxation

There are two main types of double taxation that foreign entrepreneurs commonly experience.

1. Corporate Double Taxation

In this type of taxation, corporate earnings are taxed twice from two different levels that come from the same income. This type of taxation is common in the United States and many other countries in the world. However, many people argue that this method of taxation is unfair and unnecessary.

Corporate double taxation occurs when an organization’s net income is taxed under the label of corporate tax. Once the same income has been distributed to its shareholders as a dividend, it is taxed a second time.

2. International Double Taxation

This type of taxation primarily involves multinational entities that often operate in two different countries. Additionally, this can affect the income you earn from foreign countries while you are working there.

International double taxation can occur when your foreign income is taxed in both the country where it is derived and the foreign country you came from. This increased tax burden can often discourage cross-border investments and capital movement because it violates the principle of tax fairness.

How to Avoid Double Taxation

There are several methods you can use as a foreign entrepreneur to avoid the inconvenience of double taxation. However, it should be noted that not all of these methods can apply to you as they depend on the type of business you have.

1. Pass-through taxation

This first method requires you to structure your business as a sole proprietorship, partnership, limited liability company (LLC) or any other type of pass-through entity. With this method, dividends don’t need to play a factor in taxation because the profits are shared among owners or partners. Small businesses or organizations can use this.

2. Absence of dividend payments

The lack of dividend payments while retaining profits can work for start-up organizations and small businesses during their growth phase. During this time, shareholders can also gain stable cash flow from mature companies with little expected dividend compensation.

3. Make your employees be shareholders (for start-ups)

Instead of paying dividends, you can start paying higher salaries to all the shareholders who work for your business. Through this method, the income is taxed at a personal rate and can be deductible as a necessary expense of the company.

Salaries can also be negotiated between parties which allows you to budget your finances better. However, you would still need to justify these salaries with the IRS.

4. Add shareholders to payroll as members of the board of directors (for corporations)

Larger businesses typically do not have shareholders who work for the company and are not entitled to additional employee compensation, such as salaries and fringe benefits. You can call them consultants or members of the board of directors, so their services are counted as a business expense instead of dividends.

5. Talk to a tax expert

If you want to avoid double taxation, consider speaking with a tax professional regarding this issue. Financial experts can give you more insights into what strategies you can use to avoid getting taxed twice. Additionally, it can be an excellent way to improve your strategy as your business grows over time.

Getting the Right Taxes

Managing your finances can be a challenge while working as an entrepreneur in another country. Double taxation is a common occurrence worldwide, which often leaves business owners frustrated with losing more of their hard-earned money.

Tax assistance services are an easy solution that can help you better understand how to manage your personal and professional finances with ease.

With Tax Samaritan, you’ll be working with U.S. expat tax experts who know how to resolve the all-too-common problem of double taxation for good. Get a free tax quote today!