Calculating the tax for foreign companies in the US is a complex issue that requires an in-depth understanding of American tax laws.
For Israeli companies operating in the US or holding shares in an American company, it is crucial to be familiar with the rules and requirements
of the US Internal Revenue Service (IRS) regarding Controlled Foreign Corporations (CFCs).
Our experience in supporting hundreds of Israeli companies shows that understanding the system in advance saves time, money, and unnecessary headaches.
In this article, we will explain in detail everything you need to know about the taxation of foreign companies in the US and explore how to navigate smartly with the tax authorities.
What is a Controlled Foreign Corporation (CFC)?
A company is classified as a CFC when more than 50% of its voting rights or the value of its shares are held by “substantial US shareholders.”
Tax experts in America frequently encounter cases where Israeli companies fall under this definition, requiring special and professional attention.
It is important to understand that this definition applies to companies incorporated outside the US, including Israeli companies, when US shareholders hold a significant portion of the company. US tax laws stipulate that a substantial shareholder is one who holds 10% or more of the voting rights in the company.
This means that a company can be considered a CFC even if there are multiple US shareholders,
each holding less than 50%, as long as their combined ownership exceeds 50% and each is a substantial shareholder.
MasAmerica specializes, among other things, in calculating taxes for foreign companies in the US.
The US Tax System and Its Impact on Foreign Companies
The US tax system is characterized by significant complexity, especially when it comes to foreign companies.
From our experience at MasAmerica, many of our clients are surprised to discover the extent of reporting and payment obligations imposed on them.
The system demands full transparency and detailed reporting of all business activities, with a particular emphasis on transactions between related parties.
Foreign companies operating in the US or held by US citizens are required to navigate a complex system of laws, regulations,
and guidelines aimed at ensuring fair tax collection and preventing tax avoidance.
This necessitates a deep familiarity with US tax laws, including an understanding of Subpart F rules, GILTI regulations, international tax treaties, and the implications of various tax reforms.
As a firm specializing in calculating taxes for foreign companies, we see how companies that receive early professional advice save time, resources, and avoid unnecessary complications down the road.
Detailed Reporting Requirements
The Filling Requirements in the US is comprehensive and requires special attention. The main requirements include:
- Filing a detailed annual Form 5471
- Reporting on ownership structure and changes therein
- Detailing transactions with related parties
- Declaring passive income
- Maintaining comprehensive documentation of all business activities
The Complete Tax Calculation Process
The process of calculating taxes for foreign companies in the US involves the following steps:
- Accurate identification and classification of income types
- Calculation of taxable income according to Subpart F rules
- Application of GILTI rules to global income
- Calculation of foreign tax credits
- Adjustments based on international tax treaties
The Impact of the 2017 Tax Reform
The 2017 US tax reform introduced significant changes in the treatment of CFCs.
The most notable change was the introduction of the GILTI (Global Intangible Low-Taxed Income) regime, which imposes a tax on the global income of controlled foreign corporations.
As part of the reform, changes were also made to corporate tax rates, which were reduced to 21%, along with adjustments to reporting and calculation rules.
At MasAmerica, we specialize in aligning our clients’ business strategies with these new requirements.
The reform also brought significant changes to the taxation of dividends from foreign companies,
introducing a partial exemption for certain dividends as part of the transition to a territorial tax system.
Additionally, new rules were introduced regarding the reduction of the tax base (BEAT – Base Erosion Anti-Abuse Tax), which affect transactions between related companies.
These changes have created a new tax reality, requiring foreign companies operating in the US or held by US citizens to reassess and reorganize their tax strategies.
Compliance with Reporting Requirements and Legal Obligations
Failure to comply with reporting requirements can lead to significant penalties.
Classifying a company as a CFC demands meticulous attention to detail, including adherence to deadlines, accuracy in reporting, and maintaining comprehensive documentation.
At MasAmerica, we observe that the most common errors occur in reporting transactions with related parties and declarations of passive income.
The US tax authorities are particularly stringent in auditing CFC reports, and the cost of errors in this area can be extremely high.
Fines can reach tens of thousands of dollars for each form that is not submitted on time or is filed incorrectly.
Moreover, in cases of severe violations or intentional false reporting, there may also be criminal consequences.
It is especially important to maintain organized documentation of all transactions and business decisions,
including evidence for determining transfer pricing and documentation of business considerations for significant decisions.
Potential Changes in a Dynamic World
The world of international taxation is undergoing constant change, particularly with regard to the taxation of foreign companies.
Changes in US administration may lead to significant shifts in tax policy, as seen with the 2017 tax reform.
Global trends such as digitalization and the evolution of the global economy pose new challenges to traditional tax systems.
At MasAmerica, we continuously monitor these developments and adjust our recommendations to clients accordingly.
It is particularly important to prepare for potential changes in corporate tax rates and international tax rules due to political or economic shifts.
Professional Expertise and Preparation for Audits
Our team of experts includes certified accountants and lawyers with extensive experience in handling CFCs.
We provide comprehensive consulting services, from strategic tax planning to preparation for tax audits.
Our experience shows that proper preparation in advance saves significant resources later on.
Classifying a company as a CFC and addressing the associated tax requirements demand professional expertise and close guidance.
The complexity of US tax laws, combined with frequent legislative changes, necessitates continuous updates and adjustments to tax strategies.
We at MasAmerica invite you to contact us for professional and comprehensive advice on calculating taxes for foreign companies in the US.
