Many business owners and entrepreneurs face complex tax and financial challenges when they contemplate residing in a high-tax jurisdiction like the United States for an extended period while maintaining their international business interests. In this blog post, we will explore the tax implications and potential strategies for non-US citizens with a small business and a Controlled Foreign Corporation (CFC) who wish to study in the US for five years while managing their cash flow efficiently.
Understanding the CFC and Taxation
Controlled Foreign Corporations (CFCs) are foreign entities controlled by US shareholders, and they can have intricate tax consequences. The US taxation of CFCs typically includes Subpart F income, which is currently subject to US corporate tax. To avoid double taxation, you may need to pay over 90% of the current US corporate tax in your foreign jurisdiction.
Dealing with Accumulated Retained Earnings
If you can wait to access your CFC's profits for five years, it's essential to consider the tax implications of accumulated retained earnings. In the US, C Corporations with accumulated earnings above $250,000 without a valid purpose may face additional taxes. However, the treatment of CFCs can differ from domestic corporations. Consulting with a tax professional who specializes in international tax planning is crucial to determine how this would impact your specific situation.
Avoiding the 20% US Tax on Qualified Dividends
If you require immediate access to your CFC's profits during your stay in the US, you may want to explore strategies to avoid the 20% US tax on qualified dividends. One potential approach is to secure a loan using your CFC's unlisted stocks as collateral.
Utilizing Unlisted Stocks as Collateral
Securing a loan with unlisted stocks can be a complex but viable option. Publicly traded stocks are more commonly used as collateral, but unlisted stocks can also be valuable assets. Here's how you might proceed:
- Purchase Publicly Traded Stocks: Initially, you could have your CFC purchase publicly traded stocks or ETFs. This can help diversify your holdings and increase the appeal of using these assets as collateral.
- Corporate Split: After purchasing these publicly traded stocks, consider a corporate split. Create two entities: CFC A (the original) and CFC B (which holds the public stocks). CFC B should ideally generate minimal expenses and profits to maintain a tax-neutral position.
- Use CFC B as Collateral: Approach lenders with CFC B's public stocks as collateral. Lenders may assess this as a lower-risk transaction since CFC B primarily holds low-risk assets. Your intuition about the lower risk of such holdings is valid.
Minimum and Typical Loan Values and Interest Rates
The minimum and typical loan values for loans secured by unlisted stocks can vary significantly depending on the lender, your financial standing, and the assets you offer as collateral. In most cases, lenders may not be interested in small-scale transactions and could prefer loan amounts in the range of $500,000 to $1 million or more.
Interest rates for loans secured by unlisted stocks are likely to be higher than those secured by publicly traded stocks. While it's challenging to provide precise figures, interest rates could be roughly three times higher due to the perceived risk involved in unlisted stocks.
Navigating the complexities of international taxation and financing can be challenging, and it's essential to consult with tax professionals, financial advisors, and legal experts who specialize in international business and tax law. Additionally, exploring other financial strategies, such as investment opportunities or alternative methods to access funds during your stay in a high-tax jurisdiction, may provide more flexible options.
In summary, while using unlisted stocks as collateral for loans is a feasible option, it's just one piece of the puzzle. Tailoring your strategy to your specific situation, seeking expert advice, and exploring alternative approaches will help you achieve your financial and educational goals while abiding by tax regulations.