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Key Takeaways
- Plan early and get expert advice to avoid costly tax and compliance surprises abroad.
- Understand local and U.S. reporting rules before hiring or opening accounts internationally.
Whether you reside in the U.S. or abroad, expanding your U.S. startup internationally is a major step to grow your business. It’s a chance to take your startup to the next level with new customers and new talent in new markets.
As an American, U.S. taxes follow you everywhere, and local taxes can kick in too, so even small oversights can create headaches you weren’t expecting.
The U.S. not only taxes globally but also has other reporting requirements that may apply. A contractor in Berlin, a bank account in Singapore or a few weeks working remotely from Lisbon can create new filing responsibilities you didn’t plan for.
Most of these issues are avoidable with preparation and some specialist advice, though. In this article, I’ll provide an overview of some of the main pitfalls to avoid when expanding your business overseas, so you know what to research and the right questions to ask.
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1. Overlooking tax residency and permanent establishment
Many entrepreneurs (understandably) assume that working abroad, whether temporarily or permanently, or hiring a local contractor in another country, is harmless.
However, many countries consider certain activities, such as signing contracts, hiring local employees or maintaining a workspace, to constitute a permanent establishment or branch in that country. These seemingly minor operations can therefore trigger corporate filings and local taxes abroad, even if your revenue or presence is minimal.
For example, consider an American entrepreneur living in Costa Rica who hires contractors in France. Even without incorporating locally, that arrangement can still lead French tax authorities to expect filings. So ensure you research local rules and seek advice before hiring employees in other countries, even if you have no plans to incorporate there.
For example, consider an American entrepreneur living in Costa Rica who hires contractors in France. Even without incorporating locally, that arrangement can still lead French tax authorities to expect filings.
2. Relying on tax treaties
U.S. tax treaties can be helpful, but they don’t automatically eliminate U.S. tax obligations. Most treaties include a saving clause that allows the U.S. to continue taxing its citizens and residents as if the treaty did not exist, with exceptions for certain types of income. Treaties typically determine which country has the primary taxing rights, and allow foreign tax credits to prevent double taxation.
If you have business activities in another country and owe local taxes, you generally still need to report that income to the IRS. Working with an expat Tax Professional can help you claim the right credits and avoid double taxation.
3. Forgetting about foreign bank accounts
When you expand your startup overseas, you may need to open local business accounts abroad to receive payments and pay local team members. As a U.S. Citizen, this may trigger FBAR and FATCA reporting. These requirements hinge on the combined balances of all the foreign accounts you control (for personal reporting), but an American-registered business with foreign accounts may also have to report them.
4. Underestimating VAT, GST and sales tax
Selling overseas creates local VAT, sales tax or GST (Goods and Services Tax) obligations. These liabilities often don’t depend on whether you have employees, an office, or a registered business in the country, just sales.
These taxes often trip up e-commerce business owners, particularly those with a minimal presence abroad. Seek advice from a local Tax Professional in countries where you have sales, or there may be VAT-compliant payment platforms or services that automate the process, depending on the country.
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5. Assuming U.S. state taxes disappear
Many American entrepreneurs with business interests overseas spend a lot of time outside the U.S., or may live abroad. Leaving the U.S. physically, however, doesn’t mean your state forgets about you. Every state has different rules, but some, such as California, are notoriously difficult to shake.
A business registration or place of business in the state, sales or even one remote team member can mean state filing requirements persist. It’s best to check rather than be caught out, and it may make sense to change a business registration to a state that definitely won’t tax you, if possible.
6. Hiring contractors or employees abroad without compliance
Paying an overseas employee is usually the easy part. The real complexity lies in ensuring the setup actually complies with local rules. Things can unravel quickly if a worker is misclassified or if local employment obligations are missed. In those cases, both the business and the individual can be exposed to unexpected risks.
It may make sense to hire a local payroll provider or Employers of Record to begin with, or when you have more overseas team members to pay, some companies handle international payroll for you.
7. Ignoring U.S. business reporting
If you own or control a foreign corporation, U.S. reporting rules apply. These include filing Form 5471 and, sometimes, the so-called GILTI tax reporting (Global Intangible Low-Taxed Income). Note that foreign LLC structures aren’t automatically considered pass-through income that can be reported on your personal tax return.
These rules often catch small founders off guard because they sound like requirements for big companies, but any foreign-registered business will have to be reported on your return.
8. Waiting until it’s too late to get help
The most common mistake Americans with overseas business interests make is waiting until they’ve already set up foreign business activities or encountered issues before seeking advice. A short conversation with a cross-border U.S. expat Tax Professional beforehand can let you set up in the most strategic and optimized way possible, and ensure you’re aware of the consequences of different approaches to your overseas expansion, giving you clarity to make the best decisions.
Most tax problems for American entrepreneurs with overseas businesses stem from a lack of strategic planning.
A bit of planning and the right advice, however, can give you confidence that you won’t face unexpected tax issues and let you focus on your core business and growth.
Key Takeaways
- Plan early and get expert advice to avoid costly tax and compliance surprises abroad.
- Understand local and U.S. reporting rules before hiring or opening accounts internationally.
Whether you reside in the U.S. or abroad, expanding your U.S. startup internationally is a major step to grow your business. It’s a chance to take your startup to the next level with new customers and new talent in new markets.
As an American, U.S. taxes follow you everywhere, and local taxes can kick in too, so even small oversights can create headaches you weren’t expecting.
