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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7407
Experience:  15years with H & R Block. Divisional leader, Instructor
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Hi, Im a PA to a Russian citizen, who wants to relocate to

Resolved Question:

Hi, I’m a PA to a Russian citizen, who wants to relocate to Florida and start an S corp there. We have a few questions related to that.

My boss owns a BVI company, which owns a web service (web site), which generates revenue from the users of the site (paypal and credit cards) and also from running ads. The current revenue generated by this web service is around $1.5mln/year. Now my boss wants to relocate to Florida and run the web service from there with the help of the local employees, who will be employed by his S corp (not incorporated yet). The idea is to assign the web service ownership rights to the existing BVI company while a newly created Florida S corp will be paid a fee by the BVI for agent services (collecting money from the US customers for the BVI company) and also for software development and administration.

The full cashflow picture is the following: US customers pay to Florida S corp $1.5mln. Florida S corp takes an agent fee of 5% ($75000) from this amount and transfers money to the web service owner i.e. to the BVI company. BVI company pays $0.75mln to Florida S corp for software development and administration. Out of this money around $400k is spent as salaries for local employees + $100k will be a salary of my boss who is going to be the CEO of S corp and who will be actively involved in running it. S corp’s profit is therefore $0.25mln. BVI company’s profit is ~ $0.7mln and all of it will be distributed as dividends with my boss being the only shareholder.

What will be the full tax implications for my boss? Could you give a detailed breakdown?

Is there a slightest chance of IRS claiming that $0.75mln of foreign income is not in reality a foreign income, but an income received by Florida S corp?

Thanks
- Alex
Submitted: 11 months ago.
Category: Tax
Expert:  Robin D. replied 11 months ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
The relocation to US and the incorporating of a US business (S corp) would mean that all the income of the S corp would be US sourced and profits passed to the shareholders.
Your boss as a US person (resident alien) would be taxed on worldwide income.
The expenses of the S corp (wages included) would be allowed prior to profit that is passed to shareholder. US customers pay to Florida S corp $1.5mln That full amount is reportable by the S corp as income. The wages paid (and it is good your boss will be getting a salary because that is a requirement) and expenses of the running of the business would reduce the income. S-Corporations, like regular C-Corporations, can decide to retain their net profits as operating capital, but all profits are considered as if they were distributed to shareholders.

Robin D. :

Foreign affiliates or subsidiaries that are majority owned U.S. owned are referred to as controlled foreign corporations, or CFCs, and many of these related firms are wholly owned.

Robin D. :

U.S. multinationals are not taxed on income earned by foreign subsidiaries until it is repatriated to the U.S. parent as dividends, although some passive and related company income that is easily shifted is taxed currently under anti-abuse rules referred to as Subpart F.
The income of the US S corp is not repatriated it is income from the beginning.

Robin D. :

Is there a slightest chance of IRS claiming that $0.75mln of foreign income is not in reality a foreign income, but an income received by Florida S corp?

In your scenario I see it all as US sourced because the income is directly to the US S corp.

Customer:

The internet service (the web site) belongs to the BVI company. Let's forget for a second that BVI company wants to contract US S corp to do software development and administration. Let's consider a scenario in which the only role of the S corp is a role of an agent, which collects payments from end customers and charges BVI company a fee for that. All the services to the customers are provided by the BVI company. Is it possible that IRS treats ALL cash paid by the customers and collected by S corp merely as an agent as S corp income??!

Customer:

Good example would be Skype, which is a foreign (Luxembourg) company. They developed a complicated product and had very high development costs. Now they want to sell their services to the US customers and contract some agent for money processing. Surely IRS can't treat the US agent as the service provider and say that ALL the money paid by the customers are earned by an agent.

Customer:

I would understand if they tax BVI company on US sourced income. But they can't say that US company earned it.

Robin D. :

In the Skype scenario the agent is providing a service and most likely not owned by the same owner of Skype.

Robin D. :

The problem with your scenario is that the same person owns both and if they are a US person (resident alien).

Customer:

Our idea (which could be absolutely wrong) was that if ownership rights belong to BVI, then my boss, as a US person, will pay 23,8% qualified dividends tax on dividends distributed by BVI instead of 39,5% ordinary income tax if the service is owned by a US S corp. And we can prove that the service was running before my boss relocated to the US. Wrong?

Robin D. :

Once your boss becomes a US resident alien they are taxed on their worldwide income. Any income they receive is subject to US taxation.
Your boss (or you) would want to go over the Subpart F rules in US tax law as well.
http://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-N/part-III/subpart-F

Robin D. :

Their ownership of the foreign company and passing income from the US company to the foreign is too tricky.

Robin D. :

What he is really going to need is a CPA that is internationally experienced.

Customer:

ok, thanks for your help! we will study the link

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7407
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 3 other Tax Specialists are ready to help you

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