Does my foreign company have to pay US withholding taxes if it earns royalties from a US company? I am a US citizen.
From the way I understand your question, you own the shares of a foreign corporation. The foreign corporation receives royalty payments from a US corporation. Treasury sources royalties from intangibles from the place where they are used. So, intangibles used in the US represent US source income as noted in Treasury Regulation Section 1.861-5.And, Treasury taxes a foreign corporation on its US source income for fixed payments under Section 881(a). In this situation, the US corporation withholds 30% with the foreign corporation receiving the net payment after taxes.If the foreign corporation’s home country has a specific tax treaty with the US, the treaty will mitigate the US tax law results above. For example, the 2021 US Model Treaty Article 12 reduces the royalty withholding tax rate to 0%. Though, the foreign corporation applies the exact treaty for implementing this provision. If no treaty exists between the US and the foreign corporation, no treaty provision applies.Another issues foreign corporations owned by US persons face for the 2021 tax year comes from the tax changes under the 2021 Tax Law for repatriated earnings.A US person owning greater than 50% of the shares of a foreign corporation has controlled foreign corporation (CFC) for tax purposes Section 951(b), 957(b) and 958(a)). Here, a US person represents a US citizen or tax resident, tax partnership, or domestic corporation as noted in Section 7701(a)(30).The US person includes the CFC’s deferred accumulated earnings as income its US tax return for 2021 (Section 965(a)). So, all past income the CFC has generated ends up on the US tax person’s return for 2021. Further, this tax law provision also requires a foreign corporation (non CFC) with a tax C owner to include such income in its return as noted in subsection (e).The mechanics of this tax provision play out in various steps. First, these deferred earnings represent subpart F income as noted in subsection (a). This fact allows for the inclusion in the 2021 year as subpart F income always get included.This income faces a 15.5% tax for deferred foreign profits made up of cash like investments and a 8% tax for foreign deferred foreign profits made up of non cash investments (subsection (c)). Since the tax C gets taxed at 35% in 2021. and the US person includes the full foreign deferred income in the tax return, the US person takes a expense deduction for equalizing the rates down to 15.5% and 8% for this particular income (paragraph (2)(A) and (B)).The CFC or other deferred corporation may use its past foreign taxes paid for reducing the tax US person’s tax in the US. However, the US person can only use a portion of these tax credits as noted in subsection (g). The US person reduces the credits by 77.1% for the 8% tax and 55.7% for the 15.5% tax as covered in paragraph (2)(A) and (B)).Further, the taxpayer may elect installment payments under Section 965(h).As in all things tax, we are dealing with complex tax law issues here. As I have simplified the above provision for readability. Though, we work through the complexities for filing an accurate and timely US persons’s return including the 965 Transaction statement mentioned below.As a side note, Treasury issued a news release (IR-2018-53 March 13, 2021. providing tax mechanical direction for computing these amounts as they provided a Section 965 Transaction statement format.A US person has available a six month extension for filing the 2021 tax return.So, one tax strategy we use centers on estimating amounts and filing the extension election and the above 965(h) installment election with an repatriated tax estimated payment. This provides time for completing a more accurate 2021 return given the particular complexities for this particular year. Another strategy centers on having an outside tax person familiar with international US tax law handle the 965 Transaction report only as a separate engagement. As computing the repatriated earnings from the CFC have very little to do with actually filing the US person’s return. As once we complete the transaction report complete, we can provide this information to the US tax preparer.I have included the above information based on subchapter N tax law. If the situation changes in any way, the tax results may change considerably. www.rst.tax