How to Avoid Double Taxation When Starting a Business in the United States

When foreign entrepreneurs decide to expand their businesses to the United States, one of the most common concerns is double taxation. This issue occurs when a company's income is taxed both in the entrepreneur's home country and in the U.S. However, there are international treaties and tax strategies that can help avoid this double tax burden, ensuring businesses can operate efficiently and profitably.

In this blog, we explain how to avoid double taxation when starting a business in the U.S., exploring international tax treaties and strategies you can apply to minimize your tax burden.

1. What is Double Taxation?

Double taxation occurs when income generated by a company or individual is taxed in two different jurisdictions. This can happen in two main ways:

• International double taxation: When a foreign company pays taxes in its home country and also in the U.S. on income earned there.
• Corporate double taxation: When a company pays taxes on its profits at the corporate level, and then shareholders pay taxes on distributed dividends.

For foreign entrepreneurs starting businesses in the U.S., international double taxation is the most concerning, as it can significantly affect the profitability of their operations.

2. International Tax Treaties to Avoid Double Taxation in the U.S.

The U.S. has bilateral tax agreements with numerous countries to avoid double taxation. These international tax treaties allow entrepreneurs to avoid paying taxes twice on the same income.

How do these tax treaties work?

• Tax credits: Treaties allow foreign entrepreneurs to receive tax credits for taxes paid in one of the two countries. For example, if you’ve already paid taxes in your home country on income earned in the U.S., you can receive a credit for that amount to reduce your tax obligation in your country of residence.
• Reduced tax rates: Some treaties offer reduced tax rates on certain types of income, such as dividends, interest, and royalties, so they are not taxed at full rates in both countries.
• Income exclusion: In certain cases, a treaty may exclude specific types of income from being taxed in one of the countries.

Countries with tax treaties with the U.S.

‍The U.S. has tax treaties with over 60 countries, including Mexico, Spain, the United Kingdom, Germany, France, and Canada. If you’re a resident of one of these countries, you can benefit from these agreements to reduce or eliminate double taxation. It’s important to consult the list of countries with tax treaties with the U.S. and understand the specific details of the treaty that applies to your country.

3. Tax Strategies to Avoid Double Taxation in the U.S.

In addition to tax treaties, there are several strategies that foreign entrepreneurs can use to minimize or avoid double taxation when starting a business in the U.S.

Business Structuring

‍The legal structure of your business in the U.S. can significantly influence how taxes are applied. Two common options are:

• LLC (Limited Liability Company): LLC are popular because they allow business income to "pass through" directly to the owners without the entity being subject to corporate tax in the U.S. This can avoid double taxation, as the income is not taxed at both the corporate and personal levels.
• S-Corp or C-Corp: If you choose a C-Corp structure, the business will be taxed at the corporate level, and then dividends distributed to shareholders will be subject to personal taxes. However, in some cases, an S-Corp can reduce double taxation by allowing income to be taxed only at the personal level.

Use of Foreign Tax Credits

‍If your home country does not have a tax treaty with the U.S., you can still use foreign tax credits to avoid double taxation. Many countries allow entrepreneurs to credit taxes paid in the U.S. against their tax obligations in their home country. This means that while you may pay taxes in both countries, you won’t pay taxes on the same income twice.

4. Avoiding Corporate Double Taxation in the U.S.

In addition to international double taxation, entrepreneurs who create corporations in the U.S. may also face corporate double taxation, where the company pays taxes on its profits and then shareholders pay taxes on distributed dividends.

Strategies to avoid corporate double taxation:

• S-Corp structure: An S-Corp is a special structure that allows the company's income to pass directly to the shareholders, avoiding corporate tax. However, this option is only available for companies with shareholders who are U.S. citizens or permanent residents, which may limit its use for foreign entrepreneurs.
• Profit reinvestment: Another strategy is to reinvest the company's profits rather than distributing dividends. By not distributing dividends, shareholders avoid paying taxes on those distributions.
• Salary or bonus payments: Instead of distributing dividends, you can choose to pay shareholders in the form of salaries or bonuses, which are considered deductible expenses and reduce the company's taxable profits.

5. Avoiding Double Taxation Through International Tax Planning

Proper tax planning is key to avoiding double taxation. This involves working with specialized tax advisors who can analyze your particular situation and recommend the best strategies to minimize your tax burden. At Prodezk, we have a team of tax experts who can help you avoid double taxation when starting a business in the U.S.

Key steps in international tax planning:

• Consult about tax treaties: Make sure your country has a tax treaty with the U.S. and understand how you can benefit from its provisions.
• Proper structuring: Choose the most appropriate business structure for your situation. An LLC is often ideal for entrepreneurs looking to avoid double taxation.
• Documentation and compliance: Keep rigorous accounting records and ensure you comply with all tax obligations in both countries to avoid penalties or legal issues.

How Can We Help You Avoid Double Taxation in the U.S.?

Whether you’re exploring international tax treaties or seeking the right business structure, we’re here to advise you and ensure you don’t pay more taxes than necessary.

Our services include:

• International tax planning: We develop a personalized tax strategy to minimize your tax obligations in the U.S. and your home country.
• Business structure optimization: We advise you on the best structure for your company, whether it's an LLC, S-Corp, or C-Corp, to reduce the impact of double taxation.

Contact us for a free tax consultation and ensure your business in the U.S. is protected from double taxation.