A License - Service Split Companies?

[zacb]

Here is what I was thinking: could you split a finance company into two parts, one being the actually service company that offers the product or service, and earn 30% of all proceeds from the sale of something, while there is a license company that licenses the trademarks and receives 70% of all proceeds from the sales by the service company? And company B would own the majority of share of company a, and not owe one iota of US taxes (assuming the latter company was foreign while the first is not) ? Would it be treated as a majority shareholder, or as an actual owner, and thus make company A a subsidiarity of the first? Would company B technically have operations in the US, or would it merely be a shareholder? Thanks!

[Jester]

In most countries, licensing income paid to a nonresident is taxed even when other income isn't always taxed.

Best way to earn U.S. income is as a person paying US taxes, a private human being. Even if you live abroad. Especially if you live abroad.

All you owe is self-employment tax.

Till you expatriate. Then you owe more. 30% off the top.

If you reall hate taxes to the U.S., sell to foreigners, move abroad, then expatriate. No U.S. income tax once you expatriate.

[zacb]

Even if they don't charge taxes on foreign income? For instance, lets say I have insurance agencies in the US, and they are incorporated in the US. Then I had a company in Panama, and it own the trademark the agencies used, and a majority stake in the service comapny. Would the license company be charged US (since it was a shareholder of a company that had operations in the US operations in the US?)or Panamanian (since it was exempt from the tax exempt status) taxes ?

[Jester]

Even if they don't charge taxes on foreign income? For instance, lets say I have insurance agencies in the US, and they are incorporated in the US. Then I had a company in Panama, and it own the trademark the agencies used, and a majority stake in the service comapny. Would the license company be charged US (since it was a shareholder of a company that had operations in the US operations in the US?)or Panamanian (since it was exempt from the tax exempt status) taxes ?

Your Panamanian would pay the U.S. a 30% final withholding tax on the gross amount of all licensing revenues received from U.S. sources. Right off the top, before the money gets to Panama.

Then, of any profits are left in the U.S. company, it pays regular income tax in the U.S.

Then, if the U.S. company pays a DIVIDEND out of remaining aftertax profits (out of whatever profits are left after the licensing fee), this is ALSO subject to U.S. withholding tax. U.S. corporations don't pay much tax on dividends received, but I'm pretty sure nonresidents do. Not sure of the rate, just google "income tax withholding dividend nonresident" Might be less than 30%.

Then, IF you are majority owner of the Panama corporation (it's a formula for ownership, but basically majority), ithen the Panama company gets classified as a CFC (closely-held foreign corporation), and you have to file U.S. taxes on its income from U.S. sources. A complete corporate tax return. The licensing income will get taxed at this point. You will get credit for the 30% you already paid though. As far as the dividends being paid into the foreign corporation, that might be OK, not taxed again, just the withholding tax when it gets paid. Not sure.

Then, you have to make sure that the licensing revenue and dividend revenue does not transform your Panamanian CFC into a Personal Holding Company (God help you), or give you something called SubPart F income. These are difficult areas, but basically anytime your making money in a CFC from a sweetheart deal or an asset you control in the U.S., they lump the Subpart F income into your personal income and tax it at some artificially high rate.

PLUS, all foreign bank accounts you control get disclosed on FBAR of course. On time or else they will take (up to) all the money plus a stiff fine.

[Jester]

I think OutWest had pointed out some time ago that some folks with foreign wives or family do business with a corporation that that foreign family member owns. This might avoid the CFC problems, but there would still be withholding on licensing and dividends at waters edge.