If you live in the United States but run a company in another country, there are several factors that you must consider, including how to correctly pay taxes. Business taxes are complicated in and of themselves, and they can be even more complex when you're running a company outside of the U.S. Here are a few things you must understand about your tax responsibilities as a business operating outside the U.S. if you want to fulfill your tax obligations.
Foreign Subsidiaries and Taxes
In most cases, the company that you're running outside of the U.S. will be a foreign subsidiary. This means that the company is its own distinct entity, but it is either controlled or owned by another business entity within the U.S., which is known as the parent company.
The parent company located in the U.S. is typically required to keep the financials of foreign subsidiaries on its records and must comply with other filing requirements and disclosures, depending on the type of company. For example, if the foreign subsidiary is a partnership, the income from the partnership will flow to the parent company. On the other hand, with foreign corporations, the finances of the foreign subsidiary and the parent company are separate.
The form that you file for your foreign subsidiary will depend on whether it's a corporation or a partnership. A U.S. entity that owns a foreign partnership must file Form 8865, and U.S. entities that own a subsidiary corporation in another country should file Form 5471.
What About Social Security and FICA Taxes?
Another factor to consider when running a business outside of the U.S. is whether you're still required to pay Social Security and FICA taxes. The answer to this question is somewhat complicated and will largely depend on how you've structured the partnership.
If you've structured your company as a sole proprietorship, which means you and your company are considered one and the same for tax purposes, then you probably will need to pay FICA taxes, even though your money is earned in another country. Social Security and FICA taxes may not apply if your business is based outside of the United States. The exception is if the country in which your business is based has entered into a tax treaty with the U.S.
How to Handle Foreign Bank Accounts
If you're running a business in another country, then it's likely that you have foreign bank accounts, which can complicate your business taxes even further. If your company has a financial interest in a foreign bank, such as a bank account or a mutual fund, you'll need to file a Report of Foreign Bank and Financial Accounts.
Regardless of the name on the account, you'll need to file an FBAR if the funds in the account belong to the company and the company has signature authority, meaning it can withdraw money from the account for operational expenses.
If you're running a company in a foreign country such as Mexico, help from a professional can make Mexican tax management a lot easier. A professional can help you learn the tax laws in the country in which your business will operate and will also make it easier to comply with U.S. laws.