You’re a US citizen and you own a company abroad

You live in Spain, or Mexico, or the UAE. You built a business there. It is a local company, incorporated locally, with local customers, local employees, and a local accountant who files everything correctly under local law.

The United States considers it a US reporting obligation, and in some cases taxes you personally on money the company has not paid you.

This is the single most expensive area for Americans abroad, and it is almost always missed, not because anyone was careless, but because the domestic US accountant filing your 1040 has never seen a foreign operating company, and your local accountant has no reason to know US law exists.

The rules turn on control. Broadly, a foreign company is a controlled foreign corporation where US shareholders, each owning 10% or more, together own more than 50% by vote or value.

Two things trip people up. Attribution: you are treated as owning shares held by certain family members and related entities. A company you own 40% of, with your US citizen spouse owning another 20%, is not a 40% holding for these purposes.

And sole ownership is the common case. Most people reading this own 100% of a small operating company. That is a CFC, unambiguously, and everything below applies.

The penalty applies whether or not the company was profitable and whether or not you owed any US tax. It is a reporting penalty and it stands alone.

There are several categories of filer with different schedules required, and which one you fall into determines how much of the form you complete. A 100% owner of an operating CFC generally files close to all of it.

The practical burden is the accounting. Your local books are prepared under local GAAP, in local currency, on local rules about what is deductible and when income is recognised. Form 5471 wants them under US principles, in dollars, with the translation done correctly. If nobody has been maintaining that through the year, it is a reconstruction project every filing season, and it is the reason these engagements cost what they cost.

Reporting is the floor. The tax is where it gets serious.

Under the GILTI rules, a US shareholder of a CFC includes in their own income the company’s profits above a routine return on its tangible assets, in the year those profits are earned, whether or not a single dollar is distributed.

Read that again if it hasn’t landed. Your company earns €400,000 and you leave it in the business to fund next year’s growth. The US taxes you personally on most of that this year.

For a services business, consulting, agency, software, anything without much equipment, the routine return on tangible assets is close to nothing, so essentially all the profit is caught.

And by default, an individual shareholder gets the worst version of it: the income is taxed at ordinary individual rates reaching 37%, with no credit for the corporate tax the company already paid abroad. Corporations get a deduction and a credit for foreign taxes on GILTI. Individuals filing without an election get neither.

That is how a profitable company in a country with a perfectly normal corporate tax rate produces a large US bill on top of it.

The main answer, and it is an election you make on the return.

A section 962 election lets an individual be taxed on these inclusions as though they were a US corporation: at the corporate rate, with a deduction against the GILTI inclusion and a credit for foreign corporate taxes the company paid.

For someone operating in a country with a meaningful corporate tax rate, the election frequently reduces the current US tax to zero or near it.

The trade off is on the back end. Amounts previously taxed under 962 are, broadly, taxed again as a dividend when actually distributed to you, to the extent the distribution exceeds the US tax you paid on the inclusion. So it is partly a deferral rather than a pure saving, and whether it helps depends on the foreign rate, your marginal rate, and whether you intend to take money out.

It is a calculation, and it has to be run. Making it by default is as wrong as ignoring it.

• The high tax exception. Where the CFC’s income is taxed abroad above a threshold rate, an election can exclude it from GILTI entirely. Available where you operate somewhere with a genuinely high corporate rate. Not available in a zero tax jurisdiction, which is the irony that catches people who moved somewhere tax free.
• Check the box. An eligible foreign entity can elect to be treated as disregarded or as a partnership rather than a corporation. That eliminates the CFC and GILTI machinery and puts the profit directly on your return, better or considerably worse depending on your local tax and how you take money out. It also changes the reporting form from 5471 to 8858 or 8865, and it is not reversible on a whim.
• Paying yourself properly. Salary reduces the company’s profit, which reduces the GILTI inclusion, and is usually deductible locally, but creates its own US treatment and local payroll obligations. The right mix of salary and retained profit is one of the more valuable pieces of ongoing advice available to you.
• Foreign tax credits. Tax you pay abroad personally can offset US tax, but the rules put GILTI in its own basket, with restrictions, and unused credits there generally cannot be carried forward.

If your foreign company transacts with anything else you own, another company, a US entity, yourself, those transactions must be priced as they would be between unrelated parties.

The common pattern: a founder with a US LLC billing their foreign operating company a management fee, set at whatever number seemed convenient. That is a related party transaction on both sides of a border, and where it is not defensible it invites adjustment in either country. Document the basis at the time, not three years later under examination.

• Confirm CFC status, including attribution from family members.
• Check whether Form 5471 has been filed for every year since you acquired or formed the company. This is where the exposure usually sits.
• Get the accounting onto a US standard footing through the year rather than reconstructing it each spring. It is cheaper and the numbers are better.
• Run the 962 election as a calculation, with your actual foreign rate and your actual marginal rate.
• Decide the salary versus retention question deliberately, before the year ends rather than after.
• If years are missing, deal with them together and voluntarily. Where the failure was nonwillful, the streamlined procedures can close prior years with the penalties waived, and that route is only open while you go first.

If you own an operating company outside the US, a consultation will tell you what’s been missed and what the GILTI position actually costs you.

This article is general information, not tax or legal advice. Rates, thresholds, and elections change, and whether any of this applies depends on your specific facts and the tax system where you operate.