If you are American and own a company in Spain, there are two main routes you can take in declaring your company taxes to the IRS:
“Controlled Foreign Corporation” (CFC) Regime: In this case, you need to worry about “Subpart F” income which consists of:
- “Foreign base company income,” which covers certain dividends, interest, rents, royalties, gains and notional principal contract income; income from certain sales involving related parties; income from certain services performed outside the CFC’s country of incorporation, for or on behalf of related parties; and certain oil related income;
- Income connected with certain sanctioned countries;
- Income from operations in which there is cooperation or participation in an international boycott of Israel; and
- Illegal payments made to a foreign government or agent.
So basically, you can’t use your Spanish company to defer taxes or do much with passive income. (Subpart F income does not include income (“High Tax Exclusion” that is subject to foreign taxes imposed at an effective tax rate equal to at least 90% of the highest U.S. corporate income tax rate (currently 35%). In other words, if the foreign tax rate imposed on the income of a CFC is at least 31.5%, the High Tax Threshold is met and there is no Subpart F income. Unfortunately, since the Spanish tax rate is only 30%, it won’t work unless the tax rates change.)
Bottom line is that if you are running an active business entirely inside Spain, with no funny related-party transactions, and you are not digging for oil, you’re probably ok. However, it’s a really good idea to work out the details with a US-based tax advisor before starting on a business venture. The exact mechanics of avoiding Subpart F income is an art unto itself, and don’t try this at home.
The other alternative is the total opposite, called “check-the-box”, where you chose to treat the Spanish company as a transparent entity via form 8832. This only applies to some types of corporations.
The advantage of this approach is that your company’s income ends up on your Schedule C, so if it is an active business, losses can count against your overall income, and you get the advantages of all the deductions that regular people can make.
The downside of this approach is that instead of the CFC, where you keep Spanish stuff in Spain, now you have to do everything twice, since for the sake of the US taxes, the company does not exist. So you have to do all your accounting over again (this time in USD) and figure out your taxes the US way.