Do you dream of living overseas, working for yourself, or a foreign company, while you explore the world? Are you looking to grow your business, expanding into other countries?
Think you can avoid the high taxes in your country by working somewhere else?
Well, think again! If you’re not careful, you might find yourself paying taxes twice!
Read on to learn some basics about managing your overseas tax to help you protect yourself and your income when living abroad. A little knowledge could save you a lot of money on overseas tax bills.
Tax on Overseas Income for Individuals and Corporations
Most countries have an income tax on the worldwide income of its citizens/residents and corporations making money within its borders.
Some countries, like the United States, for example, will allow a ‘Foreign Tax Credit’ or ‘Foreign Earned Income Exclusion (FEIE)’ for individuals on taxes paid to other countries on income made in those other countries. The FEIE lets you exclude a certain amount of earned income from US tax.
But, keep in mind that these exclusions are only for foreign earned income. You are liable for the US tax on any income on pensions, interest, dividends, capital gains, etc.
If you are self-employed, the FEIE only applies to income taxes. You must still pay self-employment taxes even if your business is overseas or not. So you may need to file quarterly estimated tax payments throughout the year.
All countries tax income on multinational corporations that do business within their borders. While many countries exempt the foreign-income of their multinationals, some like the U.S. impose a minimum tax on their multinational corporations.
A U.S. company doing business worldwide must pay taxes on their worldwide income. However, the income made by a foreign subsidiary of a U.S. company may not be subject to U.S. tax if the income is from the active conduct of a business in a foreign country.
How do you know if this applies to your company? Your best bet is to find a tax- and accounting- service company in the countries your business is in. Whether you’re looking for company tax services for Singapore companies, Brazilian companies, Germany companies, or Saudi Arabian companies, make sure the tax service company you hire is familiar with the laws in your country of origin as well as where you are doing business.
Overseas Capital Gains Tax
If you buy stocks or bonds from an overseas company, you must pay taxes on the interest, dividends, and capital gains. Some countries, the U.S. included, requires withholding on the sale of real estate property.
While some countries do not have a capital gains tax (or, waive it for foreign investors) many do, so again, make sure you know the laws of the country you are purchasing the stocks/bonds in.
If you have paid overseas taxes, you should receive a 1099-INT or a 1099-DIV at the end of the year. These forms will show how much was withheld by the foreign government.
Filing Taxes on Overseas Income
In the United States, all citizens living and working in foreign countries must file an annual US Tax Return, even if you do not owe any taxes. Filing the return is how you report your income and show that you are eligible for the FEIE and/or foreign tax credit.
This applies to everyone: whether you have lived outside of the U.S. for several years or have never lived in the U.S.; whether or not all of your income is taxed by a foreign country. If you are married to someone who has income even if you do not, you are still required to file.
The only exception to filing is if your income was below a certain threshold. For the most up to date information be sure to review the international tax information for your country.
Overseas Withholding Tax
A withholding tax is when the income payer, and not the income recipient, pays the income that is due to the government. The tax is withheld (or deducted) from the income due to the recipient and paid to the government on their behalf.
You may be subject to withholding tax if:
• you are a resident of one country but have income or gains in another
• you are a resident of one country and receive income from abroad (including dividends, interest, royalties, pensions, or rental income)
• you are an incorporated company in more than one country
The withholding tax is a payment towards the recipient’s final tax liability. Depending on how much is withheld, the recipient may get a refund or owe more taxes when they file their return. As noted above, taxes withheld may be eligible for a foreign tax credit in the recipient’s home country.
Deadline for Overseas Tax Filing
Individual income taxes are due each year in the United States on April 15th. US citizens residing abroad have an automatic extension deadline to June 15th. It is possible to request an additional extension (Form 4868) but remember, interest will accrue on any taxes due, beginning April 15th.
Corporate taxes are due by July 15th. A company may request an extension (Form 7004) but will need to pay a deposit of their estimated taxes owed.
Make Sure You’re Paying Taxes Appropriately
Whether you are an individual living overseas or a corporation doing business in foreign countries, you want to make sure you are paying your overseas tax properly.
The safest and easiest way to do that is to understand the basic tax laws in each country and find a trustworthy professional to help you with your taxes and accounting. Explore more legal and business topics on our blog to keep your company profitable and growing!
