Outbound Transactions

Outbound Transactions for International Tax

Outbound Transactions for International Tax: When it comes to international tax and the IRS, the two main categories are: inbound transactions and outbound transactions. An inbound transaction occurs when a nonresident alien (or foreign entity) invests into the United States. Conversely, an outbound transaction occurs when a US Person such as a US Citizen, Lawful Permanent Resident or Foreign National who meets the Substantial Presence Test invests abroad — outside of the United States. The focus of this article will be on outbound transactions and how the tax system works. It is important to note that international tax is very complicated and requires the analysis of several moving parts working simultaneously — in order to pinpoint the specific tax implications and consequences of certain outbound transactions. 

Worldwide Income

From a baseline perspective, the United states taxes US Persons on their worldwide income. That means that for US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test — the US taxes their worldwide income. Therefore, when a US person is considering an outbound transaction, it is important that they keep in mind that just because the income will be generated from overseas does not mean it is not taxable or reportable in the United States. In addition, the United states has significant Offshore Reporting requirements which requires US persons to disclose information about their foreign assets, accounts, and investments.

Let’s take a look at five (5) common outbound transaction investments — and the potential tax complications.

Foreign Bank Interest/FD/CD/TD

In most countries outside of the United States, Taxpayers are able to generate significantly better returns for interest income related investments from bank and other foreign financial institutions. Some common terminology includes Fixed Deposits (FD), Term Deposits (TD), and Certificates of Deposit (CD). Even if the income is only accruing — and the income in the account and not being distributed, it is still taxable as it accrues — even if it is tax-deferred overseas.

Foreign Mutual Funds & SICAV

Foreign Mutual Funds and other equity funds can be a great source of investment for US persons making outbound transactions. One important thing to keep in mind is that while it may be a great investment for the US person, the Internal Revenue Service is not a big fan. Therefore, the IRS developed the PFIC rules — which essentially equate to a tax penalty — and amounts to upwards of whatever the highest tax bracket is for excess distributions from the investment.

Foreign Business that is a CFC

Another solid investment and outbound transaction for US persons is investing in a foreign business. Under the TCJA, the landscape for international tax on Foreign Corporation income has changed and morphed into something completely different. For US persons, one of the biggest concerns is whether or not the foreign Corporation is coined a Controlled Foreign Corporation (CFC) under the US international tax laws (noting, most countries have their own version of CFC rules). Certain income, such as Subpart F income and GILTI is not tax deferred — even though the income may not have been distributed yet to the US person.

Foreign Life Insurance

In many foreign countries, life insurance or life assurance investments are very popular. While there may be an aspect of the investment which relates to a death benefit, these types of policies are oftentimes associated with underlying equity and other investment funds. As a result, and since the investment is not a pure life insurance policy they are very complicated rules involving how foreign life insurance policies are taxed and treated.

Outbound Transactions & Offshore Reporting Requirements: FBAR, FATCA & More

Beyond the tax consequences of outbound transactions by US persons, there are the looming offshore reporting requirements — which is generally required by US persons who have ownership or interest in any of the aforementioned type of foreign or overseas assets. Depending on the type and category of asset, along with its value –the reporting can range from the relatively simple to the absolutely complicated. in addition, the IRS has been known to issue staunch penalties against taxpayers who failed to properly report and disclose their foreign accounts and assets.

Outbound Transactions Should Be Evaluated Before Making the Investment

In conclusion, with the globalization of the U.S. economy, now more than ever US persons are investing across the globe in different countries and different types of assets. the way that some of these assets are treated for tax purposes is much different than how it would otherwise be taxed if it was located in the United states. due to the tax consequences and implications – along with the reporting and disclosure requirements — it is important for US persons making outbound transactions to try to stay in compliance from the get-go or get into compliance before it is too late.

About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax and specifically, IRS offshore disclosure.

Contact our firm for assistance.