Monday, June 2, 2014

Owning a Spanish company as an American

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.


Anonymous said...

I have been also looking into this, if I want to be part of a "Sociedad Limitada", where the other owners are non-US (Spaniards), wouldn't the most straight forward way of reporting taxes to the IRS be to elect "check the box" and claim the new treaty protocol amendment of Jan 2013?


santcugat said...

What exactly are you going to claim from the new tax treaty?

I'd be very careful about doing a check-the-box on a company that has other partners. This would mean that the company would be treated as a foreign partnership, you'd have to file a separate 1065 return for the partnership, and send K1s to all US partners (ie you).

As long as you stay away from Subpart F income, it's probably easier to do this as a CFC.

Anonymous said...

Thanks for the response, I'm a little bit confused by this definition though "A controlled foreign corporation is one in which U.S. shareholders own more than 50 percent,
by vote or value, of the foreign corporation. "

What if the SL is owned by four Spaniards and 1 US citizen (me)? Can I still file taxes as a CFC?


santcugat said...

If you only have a minority stake (including adding your family members), then you don't need to declare anything in the US, unless the company has too much passive income and could run afoul with the PFIC rules. This can be an issue in the first year of the startup if you have interest income, but nothing else.

Of course, if your company declares a dividend or you sell your shares, then you'd have to report that.

You may need to report company bank accounts you have signing authority for in your FBAR.

You could still choose to treat the company as a transparent entity for US taxes (eg if the company has losses that you can to deduct from your US taxes), but then you have to do all the bookkeeping twice, since many of the rules for depreciation, etc are different.

Anonymous said...

I see, makes sense.

Keep posting, I'm learning so much with your blog (and having fun too).