Navigating U.S. taxes as an American expat living abroad can be confusing, but it’s crucial to understand your obligations. 

The United States taxes its citizens and resident aliens on worldwide income, no matter where they live. 

This article outlines the U.S. tax system for expats covering key terms, filing requirements, common mistakes, deadlines, and practical tips to stay compliant and avoid penalties.

Overview Of The U.S. Tax System For Expats

Unlike many countries, the U.S. follows a citizenship-based taxation model. 

This means if you are a U.S. citizen or a resident alien (more on this term below), you must file U.S. tax returns and potentially pay U.S. taxes even while living abroad. 

In other words, your obligation to the IRS doesn’t end when you move overseas. You are generally required to report all income from all sources worldwide on your U.S. tax return.

To prevent double taxation (being taxed by both the U.S. and your country of residence on the same income), the tax code provides relief in the form of credits and exclusions. 

Two key provisions are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). 

The FEIE allows qualifying expats to exclude a certain amount of foreign earned income from U.S. tax – for example, up to $126,500 of foreign salary in tax year 2024. The Foreign Tax Credit, on the other hand, lets you offset U.S. tax with taxes paid to a foreign country. These benefits recognize that expats often pay taxes abroad, but you only get them by filing a U.S. return. Even if you owe nothing to the IRS after using exclusions or credits, you still must file to claim these benefits and meet your legal requirements.

Key Tax Terms Expats Should Know

Understanding a few basic tax terms will help make sense of your U.S. filing obligations:

• Tax Return – A tax return is the annual form or set of forms you file with the IRS to report your income, deductions, credits, and calculate any tax owed or refund due. For individual expats, this usually means filing Form 1040 (the U.S. Individual Income Tax Return) each year. In simple terms, it’s your annual report to the IRS on your finances. Even if you live abroad, if your income is above the filing threshold for your status, you need to submit a tax return to remain compliant.

• FBAR (Foreign Bank Account Report) – The FBAR is a separate reporting requirement for foreign financial accounts. If you are a U.S. person (citizen or resident) and the total value of your foreign bank accounts exceeds $10,000 at any time during the year, you must file an FBAR (officially FinCEN Form 114). This is not a tax form per se (no tax is calculated on it), but an informational report to the U.S. Treasury. The FBAR is filed online through the Treasury’s FinCEN system, not with your tax return. Even accounts that produce no income must be reported if the aggregate balance hit the $10k mark. Failing to file an FBAR when required can result in severe penalties, so it’s a crucial obligation for expats with foreign accounts.

• Resident Alien – In tax terms, a resident alien is a non-U.S. citizen who is treated as a U.S. resident for tax purposes. This generally means someone who either has a green card (Lawful Permanent Resident status) or meets the IRS substantial presence test (based on days spent in the U.S.). A resident alien’s U.S. tax responsibilities are essentially the same as those of a U.S. citizen: they must report and potentially pay U.S. tax on their worldwide income. For example, a foreign national working in the U.S. on a long-term assignment may become a resident alien and be subject to U.S. taxes on global income just like an American expat would be.

• Non-Resident Alien (NRA) – A non-resident alien is a non-U.S. citizen who does not meet the green card or substantial presence test for U.S. tax residency. NRAs are generally taxed only on their U.S.-source income (for instance, income from working in the U.S. or investment income from U.S. assets). They do not have to report worldwide income. For expats, this term comes up if, say, you’re an American married to a non-U.S. citizen – your foreign spouse is considered a non-resident alien for U.S. tax purposes (unless they choose to be treated as a resident alien by election). It’s important to know the difference, because U.S. tax rules and filing status options differ depending on whether a spouse is a resident alien or NRA.

Who Must File And What To Report As An Expat

Filing Requirements

All U.S. citizens or resident aliens must file a U.S. income tax return if their income is above certain minimum thresholds, which vary by filing status and age. These thresholds are usually equivalent to the standard deduction (for example, around $14,600 for a single filer under 65 in the 2023 tax year). 

In many cases, expats meet these filing minimums. In fact, if you’re married to a foreign spouse and file separately, you may have to file if you earned just $5 or more in income. The point is, don’t assume you’re off the hook just because your income is below the Foreign Earned Income Exclusion amount or because you owe no tax. Expats still need to file annual returns if their gross income exceeds the normal filing threshold for their situation.

Worldwide Income

When filing, you must report all forms of income from everywhere: salary from a foreign employer, freelance or business income, investment earnings, pensions, rental income, etc. The IRS expects expats to report worldwide income every year—not just U.S. source income. 

If you’ve paid taxes to a foreign government on that income, you can typically claim a Foreign Tax Credit to offset U.S. tax, and if you qualify, you can use the Foreign Earned Income Exclusion to exclude foreign wage or self-employment income up to the limit. But these benefits must be claimed on a filed return; they’re not automatic. 

Failing to report an income source – even if by accident – is a common mistake that can raise an IRS red flag, especially now that under FATCA (Foreign Account Tax Compliance Act), foreign banks report financial info of U.S. account holders to the IRS. In short, the IRS has ways to know about your foreign income, so it’s best to be transparent and report everything truthfully.

Foreign Assets And Accounts

In addition to your tax return, expats need to be aware of separate reporting requirements for foreign assets.

• FBAR – As explained, if your combined foreign account balances exceed $10,000 at any point in the year, you must file an FBAR. This includes not just bank accounts, but also foreign investment accounts, certain retirement accounts, or even accounts where you have signature authority but no ownership (for example, if you can sign on a parent’s or employer’s foreign account). The FBAR is an annual online filing due April 15 (it’s automatically extended to October 15 each year). It’s important to file the FBAR on time – there’s no tax to pay on it, but penalties for missing it can be steep.

• FATCA Form 8938 – Under FATCA, certain expats may also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return. 

This form overlaps with the FBAR in some ways but has different thresholds and covers a broader range of foreign assets. 

For instance, Form 8938 requires reporting foreign financial assets (bank accounts, investment accounts, foreign stocks or bonds, foreign mutual funds, etc.) if their total value exceeds a higher threshold – for example, a married couple filing jointly and living abroad would file Form 8938 only if their foreign assets exceed $400,000 on the last day of the year or $600,000 at any time during the year (lower thresholds apply for single filers or those living in the U.S.).

The exact threshold varies by filing status and whether you reside abroad or in the U.S.. Not every expat will meet these limits, but if you do, Form 8938 is required in addition to the FBAR. Like the FBAR, failing to report assets on Form 8938 when required can lead to penalties.

In summary, most expats need to report their worldwide income on Form 1040, and if they have foreign accounts or assets, be mindful of FBAR and FATCA Form 8938 requirements. It’s wise to keep records of your foreign income (pay slips, bank statements, etc.) and the highest balances of your accounts so you can report accurately. Remember: reporting does not always mean owing tax, but not reporting can lead to big problems.

Deadlines, Extensions, And Avoiding Penalties

Tax Return Deadlines

The standard deadline for filing a U.S. individual tax return is April 15 of each year (for the prior calendar year’s income).

The good news for expats is that if you are living abroad on April 15, the IRS gives you an automatic 2-month filing extension to June 15 . 

You don’t have to file any form to get this automatic extension, but it’s a good idea to attach a statement to your return noting you were abroad and eligible for the automatic extension.

If June 15 still isn’t enough time, you can request a further extension to October 15 by filing Form 4868 before June 15 . 

In special cases (and with a proper request), expats can even get an extension to December. 

However, be careful: an extension to file is not an extension to pay any tax due. 

If you end up owing U.S. tax for the year, interest starts accruing from April 15 onward, even if you filed for an extension. 

To avoid interest and penalties, it’s best to pay an estimated amount by April 15 if you suspect you’ll owe anything, or as soon as possible.

FBAR Deadline

The FBAR follows a similar schedule – it’s due April 15 as well, but FinCEN grants an automatic extension to October 15 every year. You don’t need to file any form for that FBAR extension; it’s automatic if you miss the April deadline. Essentially, October 15 is the final due date for the FBAR. Mark your calendar and don’t forget this separate filing.

Avoiding Penalties

Missing deadlines or failing to file required forms can result in penalties. 

For the tax return itself, the failure-to-file penalty can be harsh (typically 5% of the unpaid tax per month late, up to 25%), and a failure-to-pay penalty (0.5% of unpaid tax per month) may apply if you don’t pay on time. Even if you can’t pay right away, always file your return (or an extension) on time to minimize penalties. 

The IRS will usually work with you on payment plans, but not filing is seen as more serious. If you owe $0 but file late, you won’t have a failure-to-pay penalty, but a late filing can still trigger a monetary penalty if you were required to file. In short, meet your deadlines – and if you can’t, get the automatic extensions available to expats and pay what you can by April 15.

For the FBAR and other information returns (like Form 8938, or forms for foreign trusts or corporations if those apply), penalties can reach into the tens of thousands of dollars, even if no tax was due, because these are primarily about reporting compliance. 

The FBAR, for example, can carry a civil penalty of up to $10,000 for non-wilful violations, and much more if the violation is found to be wilful. 

The IRS has increasingly enforced these rules, so don’t treat them lightly. 

The safest course is to file all required forms on time and fully disclose what’s required. If you realize you’ve missed something (like forgetting an FBAR in a prior year), consider seeking advice on how to correct it – the IRS has amnesty programs (such as the Streamlined Filing Compliance Procedures) to help expats catch up on late filings penalty-free if the lapses were non-wilful.

Common Tax Mistakes And Risks For Expats

Even well-intentioned expats can slip up on U.S. tax obligations. 

Here are some common mistakes and compliance risks to watch out for:

• Assuming You Don’t Need To File – A pervasive myth is that if you live abroad or your income is under the FEIE limit, you don’t have to file a U.S. return. In reality, all U.S. citizens or residents with income over the filing threshold must file annual returns, regardless of where they live. 

Thousands of expats fail to file each year, often simply because they aren’t aware they need to. Not filing is one of the biggest red flags to the IRS and can lead to problems down the line. Remember, you may not owe tax due to exclusions/credits, but you still need to file to claim those and inform the IRS of your income.

• Reporting Only U.S. Income – Some expats do file U.S. taxes but omit their foreign income, mistakenly thinking that income earned abroad isn’t taxable or doesn’t need to be reported. This is incorrect – as mentioned, the U.S. taxes worldwide income. 

If you earned money overseas (salary, business income, interest, etc.), it must be included on your U.S. return, even if it will be excluded or offset by a credit. Failing to report foreign income can not only negate your eligibility for things like the FEIE, but it also looks like you’re trying to hide money. 

With FATCA in effect since 2010, the IRS often receives information on your foreign accounts and earnings from foreign banks. In short, they likely already know about that overseas salary or bank interest, so don’t leave it off your return.

• Forgetting To File FBAR/8938 – Another frequent mistake is neglecting the FBAR or Form 8938 reporting. 

These forms can be easy to overlook because they don’t involve paying tax, and expats may not even realize they exist until after they’ve missed a deadline. Not reporting a foreign account or asset when required is a serious compliance issue. 

An expat might think, “It’s just a savings account in my country of residence – why would the U.S. care?” But the law is the law: if the thresholds are met, you must file the FBAR and/or Form 8938. 

The IRS and Treasury have cracked down on offshore account reporting in the past decade, issuing hefty penalties to some who wilfully hid assets. Most expats who miss these forms do so by accident, but it’s an expensive accident to make. Always check each year if your accounts crossed the $10k FBAR limit or if your assets require Form 8938, and err on the side of reporting if unsure.

• Missing Deadlines Or Extensions – Life abroad can be busy, and it’s easy for tax deadlines to sneak up on you – especially with different filing dates than the local taxes in your country. Many expats file late or not at all simply due to poor deadline management. 

Missing the April 15 (or June 15 automatic expat extension) deadline without filing an extension can lead to late-filing penalties that add up. Likewise, forgetting the FBAR by October 15 could draw unwanted attention. The risk here is not just fines, but also the stress of knowing you’re behind on compliance. 

Mark your calendar with U.S. tax dates, use reminders, and if needed, get professional help to ensure you meet all deadlines. It’s far easier to file on time than to explain to the IRS later why you didn’t.

• Not Using Available Tax Benefits (Or Using Them Incorrectly) – Expats have access to special tax provisions like the FEIE, Foreign Housing Exclusion, and Foreign Tax Credit. 

A common mistake is not taking advantage of these, which can lead to overpaying U.S. taxes. 

For example, if you paid foreign income taxes, you should claim the Foreign Tax Credit to reduce your U.S. tax bill – otherwise you’re paying tax twice. 

On the flip side, some expats misunderstand these rules and claim something they shouldn’t, or double-dip (for instance, excluding income with FEIE and also claiming a credit on the same income, which isn’t allowed). 

Claiming large exclusions or credits you aren’t eligible for can raise a red flag in the IRS system. 

Always ensure you meet the criteria (like the 330-day presence test for the FEIE ) and fill out the required forms (Form 2555 for the FEIE, Form 1116 for the Foreign Tax Credit) accurately. If done right, these provisions are completely legal and beneficial. 

If done wrong, they can trigger an audit or additional taxes. When in doubt, consult a tax professional to get these right.

• Overlooking Filing Status Options – Expats who are married might not realize how their choice of filing status can affect their taxes and obligations. 

For instance, if you’re married to a non-U.S. citizen (non-resident alien), you generally cannot file jointly unless you make a special election to treat your spouse as a U.S. resident for tax purposes. 

If you don’t make that election, you’ll file as Married Filing Separately – which, as noted, can mean a very low income threshold (often effectively $5) for having to file a return. 

Some expats miss out on beneficial options, like electing to file jointly with a foreign spouse (which can allow a higher standard deduction, but also means your spouse’s income is subject to U.S. tax – a complex decision). 

Make sure you understand your filing status choices and their consequences. Likewise, if you have dependent children abroad, look into claiming the Child Tax Credit or Foreign Tax Credit for any foreign taxes paid on their behalf. Misunderstanding filing status and dependency rules can be a pitfall.

• Assuming The IRS Won’t Notice – In years past, some expats took the approach of “out of sight, out of mind” regarding U.S. taxes. 

This is increasingly risky. 

Not only does FATCA enable the IRS to receive data on Americans abroad, but there’s evidence that Americans overseas are more likely to be audited than domestic taxpayers. 

The IRS knows expat taxes can be complex, and they use automated systems to flag irregularities (like unreported foreign accounts or large exclusions). 

It’s a mistake to assume you can fly under the radar indefinitely. 

If you haven’t been filing because you were unaware of the requirements, the IRS offers programs (like the Streamlined Procedure) to come clean without facing penalties. 

But if you wilfully ignore your obligations and the IRS catches up, the outcome could be much worse – including potential fines or even loss of your passport in extreme tax delinquency cases. The bottom line: take compliance seriously, because the IRS certainly does.

By being aware of these common pitfalls, you can take steps to avoid them. Most mistakes are avoidable with a bit of knowledge and careful record-keeping.

Examples Of Expat Tax Scenarios

Every expat’s situation is a little different. 

Let’s look at a few example scenarios to see how U.S. tax rules apply in practice:

Single Filer Living Abroad

Scenario: Jane is a single U.S. citizen living and working in Australia. She earns the equivalent of $80,000 per year from an Australian employer and pays Australian income taxes on that salary. 

She also has an Australian bank account that at one point held $15,000 in savings.

How U.S. Taxes Apply: Jane must file a U.S. tax return because her income ($80k) is well above the filing threshold (even if it were below, since it’s above about $13k she’d still need to file). On her U.S. return, she will report her $80k salary as income. 

To avoid double taxation, she has options: she could use the Foreign Earned Income Exclusion (FEIE) to exclude $80k (which is under the limit of around $126,500 for the year) from U.S. taxation, or she could claim a Foreign Tax Credit for the Australian taxes she paid. 

She’ll choose the method that benefits her most (often, if the foreign tax rate is higher than U.S., the tax credit works well; if the foreign tax is lower, FEIE might save more). Either way, by using these provisions, she will likely owe little to no U.S. tax – but she still files the return to report everything and claim the exclusion or credit. 

Additionally, because her Australian bank account exceeded $10,000, she needs to file an FBAR by October 15 to report that account . 

If the total value of all her foreign financial assets is below the Form 8938 threshold (which for a single filer abroad is $200k at year-end), she wouldn’t need to file Form 8938. In Jane’s case, only the bank account of $15k is relevant and that is below $200k, so no Form 8938, just the FBAR. By filing these, Jane stays compliant and avoids penalties.

Key Takeaway: Even if you’re a single expat who owes nothing to the IRS due to foreign exclusions/credits, you must file a return and required asset reports. This keeps you in good standing and ensures you legally claim the tax benefits available.

Married To A U.S. Citizen (Both Spouses Abroad)

Scenario: John and Alice are a married couple, both U.S. citizens, living in Australia. 

John works for an Australian company and earned $100,000; Alice is self-employed and earned $50,000. They have two kids (U.S. citizen dependents) and joint foreign bank accounts that peaked at $25,000 during the year.

How U.S. Taxes Apply: John and Alice can choose to file their U.S. taxes as Married Filing Jointly, which generally offers a higher standard deduction and other benefits. 

They will report John’s $100k and Alice’s $50k, plus any other income (if Alice’s self-employment generated any business profit, that counts too). 

Since both are abroad all year, they likely qualify for the FEIE. 

They could each exclude their foreign earned income: John could use the FEIE on his $100k and Alice on her $50k (each spouse can exclude up to the limit, around $126,500 each, so all their earned income can be excluded). 

They would file Form 2555 for each spouse to claim the exclusion. 

Alternatively, if Australia’s income tax on those earnings is higher, they might choose to use the Foreign Tax Credit instead (filing Form 1116) to offset U.S. tax with Australian tax paid. 

They’ll also get to claim their children as dependents and possibly the Child Tax Credit, just as if they lived in the U.S. (note: the refundable Additional Child Tax Credit is available to expats only if they have earned income above a certain amount and taxes paid – this gets a bit detailed, but the key is they follow mostly the same rules).

Because they have foreign bank accounts exceeding $10k combined, they must file an FBAR reporting those accounts. 

Since they file jointly, they can submit one FBAR listing both as joint owners of the accounts. 

They should also check the threshold for Form 8938: for a joint return by a couple abroad, the threshold is $400,000 at year end (or $600k at any time). Their $25k in accounts is way below that, so no Form 8938 needed.

Key Takeaway: Married American expats can file jointly and effectively double the amount of foreign income they can shield via the FEIE (each can claim it) – in this case excluding all $150k of income – but they must file to claim these benefits. They also need to report foreign accounts. Being married doesn’t reduce the FBAR or FATCA reporting duties: those still apply jointly if thresholds are met. By coordinating their filing, John and Alice can minimize U.S. tax (likely to $0 after exclusions/credits) while staying fully compliant.

Working Remotely From Overseas (Digital Nomad)

Scenario: Sara is a U.S. citizen who spent the year moving between several countries in Asia and Latin America, working remotely as a freelance graphic designer. 

She has no fixed employer – she does gig work for clients worldwide, earning about $70,000 over the year. 

She didn’t establish tax residency in any one foreign country (she was traveling), and she did not pay taxes to any foreign government on that income. 

She kept her money in a U.S. bank account and a digital wallet, with only a small foreign bank account in Thailand where she briefly stayed (balance never above $5,000).

How U.S. Taxes Apply: Sara is still fully responsible for U.S. taxes on her freelance income. 

In fact, because she didn’t pay any foreign income tax, the Foreign Tax Credit isn’t applicable (there’s no foreign tax to credit). 

However, she can use the Foreign Earned Income Exclusion if she meets one of the qualifying tests. 

Since she’s a digital nomad, the likely test is the Physical Presence Test – she must show she was outside the U.S. for at least 330 days in a 12-month period that overlaps with the tax year. 

If she meets that (which, if she only had brief visits back to the U.S., she will), she can exclude up to $126,500 of her freelance income. 

Her $70k falls under that cap, so by filing Form 2555 with her 1040, she could exclude it and owe no U.S. income tax on it. 

But importantly, because she’s self-employed, U.S. self-employment tax (Social Security/Medicare) may still apply on that $70k even if income tax is excluded. 

Unless she falls under a Totalization Agreement (agreements the U.S. has with some countries to coordinate Social Security taxes), Sara is supposed to pay self-employment tax to the U.S. (approximately 15.3% of her net self-employment income). 

Some expats overlook this – but the FEIE does not waive Social Security tax. 

If she had instead been paying into a foreign country’s social system and that country had a treaty with the U.S., she might be exempt from U.S. self-employment tax. 

It gets technical, but she should be aware of this aspect. 

From an income tax perspective though, Sara can likely eliminate U.S. income tax via the FEIE.

Since Sara’s foreign bank account never exceeded $10k, she does not need to file an FBAR in this scenario. 

And her foreign financial assets are minimal, so no Form 8938 either. Her main task is to file her U.S. tax return reporting the $70k and then excluding it with FEIE. 

If she doesn’t file, the IRS doesn’t know she qualifies for the exclusion – they might assume she owes tax on $70k and could flag her for not filing. 

By filing and using the FEIE, she stays on the right side of the law and avoids a surprise IRS notice.

Key Takeaway: Even “digital nomads” and remote workers with no fixed address abroad must file U.S. taxes. In some ways, they need to be extra careful: without a foreign tax home, the Physical Presence Test is their ticket to the FEIE. Planning travel to ensure 330+ days abroad is crucial. Also, remember U.S. self-employment tax can still bite. Always evaluate both income tax and social tax obligations when working for yourself abroad.

Practical Tips For Staying Compliant And Avoiding IRS Scrutiny

Filing U.S. taxes from abroad doesn’t have to be a nightmare. 

Here are some practical tips to ensure compliance and keep the IRS happy while you enjoy life overseas:

• Stay Organized And Keep Good Records – Maintain a file (digital or physical) with all relevant documents each year. 

This includes W-2s or 1099s from U.S. payers, but also foreign pay slips, records of foreign taxes paid, bank statements showing year-end balances (for FBAR/FATCA), and any other proof of income or deductions. 

Good records make it much easier to file accurately and defend your figures in case of any questions. 

For example, if you claim the Foreign Housing Exclusion, keep receipts of rent and utilities.

If you claim the Physical Presence Test, keep travel logs or passport stamps as evidence of your days abroad. 

Having documentation ensures you can substantiate your claims and avoid trouble if audited.

• Mind Your Dates And Plan Ahead – As mentioned, mark your calendar with the key deadlines: April 15 (tax payment due), June 15 (expat return due if not extending), October 15 (extended return due and FBAR final due). 

If you know you’ll need more time, file Form 4868 by June 15 to push to October. Set reminders a month before to gather documents or reach out to a tax preparer. 

If you’re expecting a refund, filing earlier is better; if you think you owe, at least calculate and pay by April to stop interest. 

Also, if you move frequently, consider setting up a U.S. mailing address (like a family member’s or a mail forwarding service) or ensure you update your address with the IRS, so any correspondence reaches you. Missing an IRS letter because it went to an old address can escalate an issue unnecessarily.

• Don’t Skip Reporting Requirements – Make It A Checklist Item Every Year: “Do I need to file an FBAR? Form 8938? Any other forms?”. 

If you had any non-U.S. financial accounts, total their max balances to see if you cross $10k – if yes, do the FBAR. If you owned shares in a foreign corporation, or a foreign mutual fund, or you’re the beneficiary of a foreign trust, research the forms (Form 5471 for foreign corps, Form 8621 for PFICs like foreign mutual funds, Form 3520 for trusts/gifts, etc.). 

These can be complex, but they’re important. When in doubt, consult a tax professional versed in expat issues; they can identify which extra forms apply to you. It’s much better to file an informational form that might not end up being needed than to ignore it and face a penalty. Compliance is key – the more transparent you are with the IRS, the less likely they’ll have reason to scrutinize you.

• Use Direct Deposit And Online Tools – If you expect a refund, set up direct deposit to a U.S. bank account (it’s faster and more secure, and yes, you can receive a refund while abroad). Create an account on the IRS website to access your tax transcripts and notices electronically. 

This can be helpful to track your filing history or any communications. 

The IRS also has an Interactive Tax Assistant and many online FAQs that can clarify common questions for expats. And remember, you can electronically file (e-file) your return from abroad – you don’t have to mail paper forms across the ocean. E-filing is typically faster and reduces errors.

• Leverage Tax Treaties And Professional Advice If Needed – The U.S. has tax treaties with many countries that can affect how certain income is taxed (for example, a treaty might exempt certain pension income, or clarify residency in dual-resident situations). 

• Voluntary Compliance And Amnesty – If you realize you’ve missed filings in past years, don’t panic. The IRS offers pathways to get back on track. The most common for expats is the Streamlined Filing Compliance Procedures, which is essentially an amnesty program for those who failed to file or report foreign assets due to non-wilful neglect. It generally requires you to file the last 3 years of tax returns and 6 years of FBARs, and the IRS will forgive the penalties. 

Taking advantage of this can wipe the slate clean. 

What you shouldn’t do is continue ignoring the issue or attempt a “quiet disclosure” (just sending in old forms without noting you’re in a program) – that can backfire. 

Show good faith by coming forward under the proper procedures. 

The IRS is usually much harsher on those who wilfully evade taxes than those who genuinely didn’t know and then corrected their mistakes.

• Be Truthful And Thorough – This may sound obvious, but always be honest on your tax forms. 

Overstating deductions, underreporting income, or hiding accounts isn’t worth the risk. 

The IRS has become quite sophisticated in detecting discrepancies. With data sharing between countries (FATCA) and improved technology, trying to outsmart the system could lead to an audit or investigation. 

Most expats who file properly and pay what’s due (or legitimately owe nothing) will not hear from the IRS aside from maybe a refund check or a confirmation. Those who cut corners, however, might invite extra scrutiny. It’s simply not worth it. 

If you make an honest mistake, that’s one thing – the IRS can be understanding – but if you intentionally omit things, the penalties can be severe if discovered. Play it safe by filing complete and accurate returns.

By following these tips and staying informed about your responsibilities, you can significantly reduce the likelihood of IRS problems. Being an expat is exciting and comes with many life changes; by handling your U.S. taxes diligently, you’ll have one less thing to worry about.

Final Thoughts

U.S. tax obligations don’t disappear when you move abroad, but with knowledge and preparation, they become just another manageable aspect of expat life. 

To recap, always remember that U.S. persons abroad must report their worldwide income and often their foreign accounts. 

Take advantage of provisions like the FEIE and Foreign Tax Credit to avoid double taxation – these exist to help you, but you must file to use them . 

Keep an eye on deadlines (utilize that automatic expat extension to June 15, but pay by April if you owe) and don’t ignore additional forms like the FBAR. 

Common mistakes like not filing or failing to report something can lead to penalties or audits, especially since the IRS has increased its focus on international compliance. 

The good news is, if you stay compliant and informed, you can avoid penalties and IRS scrutiny while fulfilling your civic duties as an American abroad.

Singapore forms an ideal base for expanding your business overseas. However, with the promise that a new market brings, comes additional compliance issues and taxation considerations.

On a worldwide stage Singapore has a relatively simple system for tax compliance, with low tax rates, concessions, and other benefits. This will mean that an expansion overseas may introduce your business to a wide range of new, and higher taxes than you are familiar with. It is therefore important to get advice from a tax expert in the country you are expanding into.

In addition, you will need to deal with international taxation considerations and navigate the impact of your overseas income in your Singapore based business. It is essential that you have the right global tax expert to ensure you understand and prepare for this impact.

Four key points you need to consider include:

1. The type of presence you establish overseas
2. The tax impact of earning income overseas
3. Employment considerations with your overseas expansion
4. Tax implications for you or other owners who relocate overseas to operate the overseas business

Your Overseas Presence

When you expand your business overseas you have various options for establishing your presence there.

This includes:

• Selling directly without a taxable presence overseas
• A branch office
• A subsidiary or associated company
• A distribution arrangement

The type of presence you set up overseas will have a significant impact on the tax and compliance implications with your Singaporean operations. Singapore foreign income concessions may apply in the case of a branch office – however this will mean that you are paying income tax in the jurisdiction of the branch.

If you have a taxable presence overseas it will be important to engage a local advisor to ensure local compliance is met. Regardless of the type of presence you establish you will need to engage an expert in foreign taxation to help you manage your compliance obligations in Singapore.

Selling Directly Without A Taxable Presence Overseas

If your local Singapore business sells overseas, without establishing an overseas presence, that income will be subject to Singapore taxes. This may be done through an online presence for overseas distribution.

There may be withholding taxes imposed by the foreign jurisdiction and a domestic and federal level. While generally claimable as a foreign tax credit, state taxes (e.g. sales tax in the state of California) are not.

Branch Office

Setting up a branch office entails establishing a legal presence in the foreign market without creating a separate legal entity. Foreign income earned through a branch office is typically subject to corporate income tax in your Singaporean company and the jurisdiction in which you have the branch.

You should discuss the following considerations with your tax planner when considering setting up a branch overseas:

• Corporate Income Tax – Profits generated by your branch may be subject to income tax in both the foreign jurisdiction and in Singapore. Some countries also tax branch profits at higher rates than subsidiaries.
• Withholding Taxes – Transactions between your company and its branch office may trigger withholding tax obligations in the foreign jurisdiction.

A Subsidiary Or Associated Company

This option involves setting up a separate legal entity to operate in the foreign market. This entity is owned by you or your company, depending on the structure you determine to be the most suitable. Foreign income earned by your foreign company is unlikely to be taxed in your Singapore company, unless it is remitted to your Singapore business.

Your foreign company may be a foreign company for tax purposes, however  you may still have reporting obligations or be subject to withholding taxes on transactions with the foreign entity.

Proper structuring and adequate understanding of local tax laws will help mitigate your risks and manage your compliance costs both overseas and in Singapore.

A key consideration when setting up a subsidiary is also the corporate residency laws of Singapore and how they apply.  For Singapore purposes, a foreign company is a tax resident of Singapore if the board of directors physically sits and meets in Singapore.  This opens up the potential for double taxation. 

In addition to the considerations listed for a branch operation, you should consider:

• Dividends – Repatriating profits from the subsidiary to Singapore may trigger withholding taxes in the foreign jurisdiction. Singaporean tax rules on foreign dividends received may also affect the taxation of dividends remitted to the parent company.
• Thin Capitalisation Rules – Some tax jurisdictions have thin capitalisation rules that limit the deductibility of interest expenses on intra-group loans. It is essential to comply with these rules to avoid adverse tax consequences.
• Transfer Pricing– Transfer pricing regulations govern the pricing of transactions between related entities, including between your Singaporean company and your related foreign company. It is important to ensure transactions are arms-length to avoid transfer pricing adjustments.

A Distributor

A third option is to outsource the foreign operations by engaging a foreign distributor. This means the foreign business will be engaged to distribute your products and services.

Although this may appear to be a more simple option, you should still consider:

• Permanent Establishment – Depending on the level of involvement and activities conducted by the distributor, your business may create a permanent establishment for the Singaporean company in the foreign jurisdiction.
• Withholding Taxes – Payments made to the distributor may be subject to withholding taxes in the foreign jurisdiction. Understanding these obligations is crucial to avoid penalties and disputes.

The Tax Impact On Your Overseas Income

Expanding overseas comes with a range of tax implications. It is important to assess these considerations thoroughly so you can make informed decisions and be prepared to manage the foreign and local tax implications.

Foreign Taxes

This includes:

• Foreign Sales Taxes – Overseas sales may include sales taxes, value-added tax (VAT) or goods and services tax (GST) in the foreign market. Proper pricing and structuring of transactions should consider the impact of their taxes on overall profitability of the business.
• Capital Gains Taxes – Overseas assets may attract capital gains taxes in the foreign tax jurisdiction.
• Withholding Taxes – Depending on the type of transactions being paid there may be withholding taxes applicable on the transactions between your company and your foreign business.

Consider any Double Tax Agreements (DTA) that apply between Singapore and the foreign country that you are expanding into. The DTA typically helps mitigate the risk of double taxation by limiting taxes, prioritising which jurisdiction has taxing rights, and covering concessions and tax credits.

Local Taxes

Depending on the way your foreign business is setup, you may be subject to Singaporean corporate income tax on the profits derived from your foreign sales unless specific exemptions or incentives apply.

Under Singapore’s territorial tax system, foreign-sourced income is generally not taxable, except for certain types of income such as income generated through a Singapore branch.

If you setup your foreign business as a separate legal entity you will not typically need to consider any Singaporean taxes on this income, within the foreign entity assuming you have managed the corporate tax residency laws noted above. However, when the profits are distributed to your Singaporean business or directly to you, there may be taxation implications in Singapore and/or withholding tax obligations depending on the nature of the distribution.

If your foreign entity pays dividends, royalties, or interest to your Singaporean company, it typically only needs to pay taxes on that foreign-sourced income when that income is received in Singapore. If the income distribution is taxable in Singapore your company may be able to claim tax credits for any foreign taxes that have been paid or withheld.

Employment Considerations

When hiring or relocating employees to work in your overseas entity you must assess their tax obligations both in Singapore and the host country.

Singapore tax residents may be required to pay tax on overseas income under certain circumstances including:

• Payment for work in Singapore for a foreign employer
• Overseas employment that is related to employment in Singapore
• Working in Singapore as a foreign employer

This means that any employees working overseas may continue to have tax obligations back home in Singapore depending on both their employment situation with your business and how the foreign business is set up overseas.

Singapore does offer tax reliefs and exemptions for income earned abroad, which can help to mitigate double taxation.

For employees residing in Singapore who frequently travel overseas for work, the nature and duration of their overseas trips may trigger tax implications.

Understanding these complexities helps ensure compliance and avoids unexpected tax liabilities.

Moving Overseas

If you are planning to move overseas to manage the new market you will need to consider:

• Whether you retain your residency status in Singapore or become a tax resident of the foreign jurisdiction
• Withholding taxes from income earned overseas
• Foreign tax obligations
• Singapore tax obligations where the income is taxed in Singapore
• Double taxation provisions between Singapore and the country your move to

Singapore taxes residents on a territorial basis. This means that overseas income is not typically taxed unless it’s derived from a Singaporean trade, business or profession. However, maintaining tax residency in Singapore while living abroad may still entail tax obligations.

It is important to be aware of the tax consequences of your movements so you can make appropriate plans and optimise your tax obligations.

Summary

Navigating the compliance requirements and tax obligations of your overseas expansion can be complicated. Not only do you have to consider the compliance requirements and tax obligations in the foreign jurisdiction, but you may also have to consider compliance and taxation in Singapore.

Planning a move overseas is a big step, no matter where you are going. There are different social expectations, legal rules, business regulations, tax requirements, and more to figure out.

You need to determine whether you or a key team member is going to make the physical move to head up the overseas expansion, and facilitate this move to be as smooth and efficient as possible. 

Then there are business decisions such as deciding whether to set up a brand-new company, or trade overseas directly under your head company. While there are too many factors to consider in one article, and it is essential to get tailored advice for your situation, you can get a head start by considering an overview of the key concepts that you will need to cover.

1. Operation Zones

Companies in Dubai can choose to operate as free zone companies, offshore companies, or Mainland companies. This decision will have an impact on where you can do business.

If Dubai is going to be your hub for regional or international commerce, then a free zone entity may be the best option. This is because Free Zone Companies can only operate within their Free Zone and abroad, not on the mainland. However, if you are intending to provide goods and services to the UAE, then a Mainland firm would be the required option.

Free Trade Zone Company

There are over 40 zones throughout the UAE that are Free Trade Zones. These zones have special tax, customs, and import regimes. Businesses operating within these Free Trade Zones may be exempt from paying corporate tax as well as import and export taxes. However, they are restricted from doing business with the Mainland.

Mainland

A Mainland business can be set up in Dubai or any other emirates, so they can operate in the UAE as well as internationally.

Offshore Company

If your company is incorporated in the UAE offshore, you can operate with minimal capital requirements and operate on an international basis.

2. Income Taxes

From June 2023 all companies operating in the UAE under a commercial licence are taxed after the first 375,000 AED of their net profits. The tax is charged at a flat rate of 9% and only applies to the profits above this first 375,000 AED. This makes it one of the more appealing corporate tax rates in the world.

Note that Free Trade Zone companies may continue to be exempt from paying corporate tax under their specific free zone incentives. 

In line with the Global Minimum Corporate Tax Rate agreement, multinational firms with profits exceeding EUR 750 million, will have to pay 15% tax. 

From June 2023 businesses operating under the new rules now need to register with the Federal Tax Authority and lodge tax returns for the business on an annual basis.

3. VAT and Excise Tax

Since 2018 a goods and services tax, or a value-add tax, known as VAT, has been applicable at a flat rate of 5%.

There are some exclusions to which items incur VAT, including exports of goods and services, international transportation, some education and healthcare services, investment-grade precious metals, and new construction of residential properties. Some Free Trade Zeons are also exempt from paying VAT for trade within their zones. 

In 2017 the UAE implemented an excise tax. This is an indirect tax that is imposed on goods that are considered to be harmful to either personal health or the environment. This includes a 50% tax on carbonated drinks and a 100% tax on energy drinks and tobacco products.

4. Employer Responsibilities

As an employer you are responsible for paying your employees under the local employment rules and regulations. There are a range of responsibilities that you are required to cover for your employees, including:

• Paying wages in accordance with local laws and regulations. This includes proper job documentation, conditions of labour, and paying wages on time. As there is no individual income tax there is no tax withholding regime to consider.
• Providing health insurance for employees. This is a compulsory requirement for all employers.
• Under UAE law the employer is responsible for paying the travel and recruitment costs, including entry visa, of any employee they are recruiting or moving to the UAE.

5. Moving To Dubai When Expanding Your Business

A visa residency through employment is required for any individual moving to Dubai for work purposes. Note that it is the employer’s responsibility to organise and pay for an employment Visa.

The standard work Visa lasts for two years. This requires an employer sponsor to confirm employment in Dubai.  

A “Green Visa” is applicable for freelancers or self-employed individuals. This requires specialised educational qualifications and evidence of your annual income to prove financial solvency. This Visa is for five years.

Finally, the “Golden Visa” is a residency permit that allows foreigners to live, work, or study in the UAE for 10 years without a sponsor. Investors, entrepreneurs, and more can apply for this Visa. This Visa also allows the immediate family to be sponsored so they can move to Dubai as well.

It is also important that individuals moving to Dubai are aware of local expectations, laws, and requirements, which may be vastly different from your home country.

6. Other Business Responsibilities

As with running a business in any other location, there are essential rules, regulations, licensing, and other requirements that your business needs to be aware of as part of your setup and operation.  Some of these are listed below.

Bank Account

It can take two to four weeks to open a bank account for commercial purposes. While the required documents vary according to the bank and the type of account you open, the Business Manager will need to have their own residency visa in order before you apply.

Trade Licence

Every business that operates in the UAE must have a trade licence, or a business licence. This may be a commercial licence, a professional licence, or an industrial licence, depending on your business activity.

Business Entity

You can set up your business as a sole proprietorship, an LLC company, or a branch office. If operating from a Free Trade Zone your business can be 100% foreign-owned.

7. Double Tax Agreements (DTAs)

The UAE is expanding their list of DTAs throughout the countries of the world in order to facilitate strategic global partnerships. These agreements help ensure that the consequences of being taxed in multiple tax jurisdictions is mitigated via exemptions or reductions in taxation on investments from profits.

While the USA does not have a DTA with the UAE, there is currently a DTA between the UAE and Singapore, as well as the UAE and the UK. Australia is in the process of establishing a DTA with the UAE. 

8. Property Taxes

Although there is no capital gains tax or inheritance tax in the UAE, there is a transfer charge on the transfer of property within the UAE. The rate of charge varies in each Emirate, with a 4% charge applying in Dubai. This transfer fee is typically paid by the buyer of the property.

9. Rental Tax

Although there is no individual income tax in Dubai, there is a rental tax. The tax on rental properties varies between Emirates. In Dubai commercial tenants pay 10% and residential tenants pay 5%. In some locations citizens are exempt from the rental tax.

Foreigners In The UAE

As there is no income tax for individuals, both residents and non-residents of the UAE are not required to lodge an income tax return in the UAE.

However, if you remain a resident of your home country then you will need to lodge a tax return in your country of residence, and this may require the inclusion of income earned from the UAE.

Depending on how your business in the UAE is set up, you may also be required to report this income as foreign income in a local company tax return.

Local Taxation Experts

As there is no individual income tax and corporate tax is new to the UAE, there may be limited access to accountants, and limited experience with the UAE tax regime on a local level.  

It is therefore especially important to seek the advice of International Tax Experts who can help you navigate the new requirements in Dubai, as well as the impact of doing business across multiple borders.

CST have been assisting Australian and expat clients for over 30 years. Helping businesses to set up overseas and connect with local tax experts is an essential part of the support we offer clients around the globe. With the UAE now introducing a corporate tax into their tax regime it is more important than ever that you get the right advice for your expansion into Dubai. 

In today’s world we have incredible opportunities to build our business beyond our own shores and reach into expansive international markets. Indeed, the number of expats is growing so fast that if all the expats were members of a country, it would be one of the fastest growing countries in the world.

The United Arab Emirates (UAE) is one of the most popular destinations for expats. As of 2023 the UAE is called home by approximately 10.2 million people. A staggering 85% of the individuals who comprise that population, are expats. When you look at why Dubai is an attractive market for businesses, it’s not hard to see why this temptation to join the shores of the UAE is hard to pass.

In this article we’ll look at the appeal of Dubai as a destination to expand your business to, and what you need to know when you’re ready to expand your business to Dubai.

The Appealing Business Market of Dubai

The simplified and diversified economy of Dubai makes it an attractive place to set up your international business. Some of the key reasons that Dubai is particularly appealing include:

1. Minimal Tax Regime In The UAE

One of the most appealing benefits of doing business in Dubai is a minimal tax regime. Company taxes are low and there is no income tax on individuals and no capital gains tax. 

2. Free Trade Zones

The UAE includes a number of Free Trade Zones, with about 20 located in Dubai. Free Trade Zones are geographical locations where people from any other country can come in and set up their international business, without requiring a local connection. Businesses located in Free Trade Zones can operate their business within their zone and internationally. Each Free Trade zone has their own rules, regulations and incentives. 

This differs from Mainland zones. Mainland Zones have more rigorous entry requirements, including local sponsorships, before your business can set up and operate. These Zones are regulated by the Department of Economic Development (DED). However, a business operating in a Mainland Zone is able to trade within the UAE, as well as internationally.

3. A Robust, Yet Simplified and Diversified Economy With A Strong Exchange Rate and Access To Resources

Balancing a safe and robust standard of governance, with minimal taxation responsibilities,       Dubai offers a world-class infrastructure and is well known as a world-class financial hub for business operations. The local economy is strong and the UAE has a solid exchange rate. 

As a popular location for expats around the world, there is also a rich and diverse supply of experience and professional skills on location. 

Furthermore, the local government is a strong advocate for developing ideas and facilitation of growth and progress. As a technologically advanced nation, Dubai also has access to significant beneficial resources.

4. Limited Restrictions and Regulations On Your Company

There is no restriction on capital repatriations. This means that your company can return any investments to foreign owners, without limitations. 

Share capital requirements are minimal, with no minimum amount of capital required for limited liability companies. This ensures that your company can be established with the flexibility to suit your purposes. 

Unlike many countries, there is no requirement to have a physical office established to operate in Dubai. 

Due to the minimal amount of regulations, when compared to other onshore jurisdictions the costs of setup in Dubai are low.

5. Geographically Ideal Location

Geographically, Dubai provides a strategic position for businesses looking to expand to the Middle East, Europe, Asia and Africa. As such it is an ideal location to set up a range of businesses including import/export, logistics, tourism, and more. 

For transportation, Dubai offers access to the largest sea and airports in the world.

6. Strong Connections With the Worldwide Economy and Worldwide Business Standards

The UAE has signed up with the Common Reporting Standard (CRS), as part of the global standard for the exchange of information, including allowing countries to exchange tax data between participants. This helps with the prevention of fraud, and aids in the management of business matters across international borders. 

In essence, Dubai is an appealing place to run a business because of the ease and convenience of doing business there, solid business standards, access to resources, and the simple and low tax regime that applies.

Many private clients heading to abroad may already have a trust in their home country or a 3^rd Country.

Historically trusts have been attractive vehicles because they offer people the potential of protecting their wealth from external attacks, but it can also help lower the burden of taxation on a family group.

For those who do not have a trust as yet but who are considering establishing a trust, a great deal of thought and planning needs to go into it.

We make sure our clients understand the four golden rules of setting up a trust:

1. Ensure the bank or financial advisory firm managing your money does not own the trustee company that will be the trustee of your trust. This prevents a conflict of interest.
2. Understand how you can unwind the trust arrangement.
3. Recognise that long-term solutions require tax contingency planning before you sign on the dotted line. As your residency can change, so can your tax position.
4. Make sure you understand how you can access trust income and/or capital to pay taxes that may become due on the gains of the trust.

Before delving into some further issues associated with trust management, I will cover just a few central points about how trusts work for those who may not have worked with trusts.

How Trusts Work

A trust is an arrangement whereby a trustee has a fiduciary obligation to deal with property over which they have control for the benefit of one or more beneficiaries who are able to enforce such an obligation.

Beneficiaries may be individuals, corporations, or indeed other trusts (such as a charitable trust).

All trusts have a trust deed. 

At a high level, this is a document that outlines the rules that the trustee must follow in relation to the property they control.

Common objectives for utilising trusts are to protect assets and ensure that beneficiaries are deable to benefit financially from the trust in a manner that suits the family group and in accordance with the wishes of the settlor of the trust.

The discretionary trust is the most common trust used by business owners and investors. 

They are generally set up to hold family and/or business assets for the benefit of providing asset protection and tax-planning benefits for family members.

The Trust Deed: Its Importance

The trust deed is the most important document of a trust as it establishes and defines terms and conditions upon which the trust must be operated and managed.

More specifically, the trust deed sets out the beneficiaries of the trust, as well as the end date of the trust and the conditions upon which the trustee holds the property for the beneficiaries.

Actions undertaken outside the provisions set out in the trust deed can be deemed by a court of appropriate jurisdiction to be null and void. 

The implications of an action being null, and void can reach further than the act simply being treated as if it did not occur.

An invalid act of a trustee can result in unwanted taxation implications for the trustee, and a breach of the trustee’s duties can lead to personal liability for damages or alternatively unwanted consequences for beneficiaries.

The best approach in dealing with trust management and planning is to treat every trust deed as unique and therefore refer to the provisions in the deed prior to taking any action.

How Are Trusts Taxed?

While a trust is regarded as a taxpayer in some countries (e.g., Australia), in other countries this is not the case. 

In some countries, the beneficiary is taxed on gains accruing in the trust; in others, it is the original settlor who suffers the tax burden.

Changing Residency With a Trust

One aspect of trust management and planning to get right when you have a trust is to ensure that assets are not unwittingly ‘exported’ into certain tax jurisdictions when you change your tax residency status.

If you want to set up a trust, then before you move to a particular country it is important to understand how a trust determines its residency status under the laws of that country.

In Australia, a trust is regarded as a tax resident of Australia if one of the trustees is a tax resident of Australia. 

However, in other jurisdictions, the concept of central management and control of the trust is used to determine the residency status of the trust.

It is important to work through all the residency aspects likely to impact your trust when you move around with an existing trust.

The key point to note is that it can be a useful exercise to transfer assets from an individual to a trust prior to changing residency and heading overseas. 

However, like most things, this strategy has its pros and cons.

Trusts Heading Overseas: Residency Determination

In the Australian context, where an individual trustee of an Australian trust changes residence, then, often, the trust will also change its residence.

In these cases, you need to make sure that when the trustee changes its residence, the tax consequences are identified.

Before you depart you need to consider whether it is beneficial to you and your family for the trust to stay a resident in your home country where it was established or if it makes sense for the trust to move with you to your new country.

If the immediate and ongoing tax consequences of keeping the trust in its particular form are not advantageous to you then we can discuss alternative strategies with you.

Such strategies may include replacing the trustee of the trust with a company that is domiciled in the jurisdiction to which you are moving and make the trust subject to the laws of that jurisdiction. 

In other situations, it may be more appropriate for a replacement trustee to be appointed in a third jurisdiction and have the trust reside in a 3^rd country.

The purpose of the discussion here is to highlight the fact that planning for a departing trust is very important.

Our approach to this area is to recognise that trusts are long-term family vehicles, and just because a client may move to a new country, it does not mean that they should have to wind up their trust and forgo all the benefits that it has provided them.

Given our international tax and trust knowledge, we will be able to help our client make important decisions such as this.

Trusts Arriving Abroad

Moving around the world while being in control of trusts is complicated and should not be done lightly.

Arriving in another country with a trust and no plan is a recipe for disaster.

Where a new individual client has changed their residence and they are the trustee of a foreign trust, it is clear that this trust is also likely to become a resident of the arrival country.

In other cases, even if the client ceases being the trustee before they change their residence specific jurisdictions tax income on ‘pre-migration transfer of assets’ to foreign trusts. 

It is also likely that the trust deed may need a review as some of its definitions and terms may have no meaning in the new country the trust is being exported to.

Even if the trust is residing in a 3^rd country, a review of the trust deed from the perspective of the laws of the new country is warranted.

Other concepts, which might be recognised abroad, such as ‘community title’, might be used in the trust deed, but these concepts might have no application in the arrival country.

The arriving trust may still have reporting obligations in the country in which it was established. 

It may also be the case that there are foreign protectors or other people who have an ongoing role in the management of the trust.

You should consider how they are affected in terms of reporting based on the country you are moving to.

This is particularly important if the arriving trust has a business or significant assets.

Often, the cost base of trust assets must be understood on the day the trust first enters a new country.

Usually this will be the market value of the assets on the day of the trust’s arrival, but not always.

While your move abroad is an exciting time for most people and full of challenges and new opportunities, considering the tax issues of how your trust would be affected by your move is essential.

Setting up your business overseas is one of the most exciting things that many of us will do in our business career.

Not only are we, as business Founders or C Suite executives, moving with the business – but the idea that we are taking our business proposition to a new foreign market is a thrill and a bit daunting in many respects.

Establishing my business in Singapore in March 2004 was a completely foreign experience in so many respects. There were many logistical challenges to deal with including adjusting to a new business environment, a new regulatory regime and building a totally new market for our product and services.

For most of you setting up or moving a business you will be pre-occupied with establishing revenue earning operations.

This means that often tax and other planning is left until you arrive.

This, of course, is way too late.

This article covers some issues to address ahead of time.

Expecting The Unexpected

Make sure you really examine how to manage a number of common risks as you expand into your new markets including:

• The real financial cost of expansion (it will take longer and cost a lot more to break even)

• The cultural divide between domestic and foreign markets (get a copy of the book The Culture Map by Erin Meyer) which is to say that the way people understand communication and make decisions is often a major reason why the business will not succeed in the new location

• Regulatory differentials between domestic and foreign markets (expect the approach of the regulator in your new country to be vastly different from your home country)

• Download a copy of my book ‘Expatland’ from our Expatland website 

Setting Up Business

Planning your overseas expansion generally requires you working with your accountants in both countries for between six and twelve months before you head overseas.

One of the key things to understand is that if a subsidiary or a branch pays tax overseas there is some form of tax credit when profits are remitted to the parent company.

Sometimes the best country to pay tax in is where the majority of shareholders live. 

This is so that shareholders might be able to get a credit for tax paid by the company.

Foreign tax paid at the company level is generally not something that shareholders in another country get a tax credit for.

You need to spend some time thinking about the best form of business structure also. 

In my experience, while the main forms of business entities can vary from country to country, those countries with English common law regimes, generally have similar types of structures.

Many countries have structures that provide limited liability to owners but are treated as ‘flow-through’ vehicles for tax purposes, so only the owners are taxed. A classic example is a US LLC (limited liability company).

Other Tax Issues To Consider

Your focus should be on the key issues to consider on departure such as:

Issue 1: How does the foreign country tax system work?

In a number of countries, the US being a prime example, there can often be three levels of tax. For example, in New York, there is federal tax, state tax and city tax to contend with. In other countries like Hong Kong, foreign income is exempt from tax.

Issue 2: Transfer pricing issues

What transfer-pricing issues will you have to deal with. Having prices above or below market value for transactions between related companies is a major tax risk in the present global environment.

As an example, recently a prospective client in the global travel business told us that they had a ‘back office’ for their IT department in San Francisco. 

They then told us that their previous accountant had told them they did not have to worry about filing a US tax return – because the branch was not charging any expenses back to Australia and they were just covering their direct costs!

Great news, they thought, until we had to tell them that it was totally incorrect.

Upon a review of the facts of the case, it actually turned out that they had a ‘permanent establishment’ in the US. This gave them a US tax filing obligation.

The previous accountant also completely missed that transfer pricing rules demand that a market price be charged by the San Francisco office to the head office for the services being provided to head office.

Our client had no idea about these issues.

This is one of the challenges we regularly face when dealing with clients coming to us from domestic-only focused firms.

Firms that focus only on single country tax systems with little or no expertise in international tax, nonetheless, often seek to advise clients going overseas. 

Rather than admitting ‘they don’t know what they don’t know’ and looking to work with a specialist firm to get some outside help, they try to do it in-house.

Usually, this leads to expensive mistakes.

Issue 3: Using debt or equity to fund the foreign expansion

In using capital to start your foreign business, one of the key issues to consider is how to get money into your foreign business operation and then how to get profits out.

Many people are tempted to take the view that lending money into the foreign business is easier because it can be ‘repaid’ with little or no complexity. 

The general thinking being that money that goes in as a loan can come out as a loan, right? 

Well, it is not always that simple.

Many foreign countries have rules that require the payment of interest on inter-company loans.

Issue 4: How to send profits to the home country

Having considered how to fund your foreign business and make it profitable, the next question to think about is how profits can be remitted to your home country.

There are a number of techniques that can be used to send profits home. These include dividends, interest, or royalty payments. 

Other techniques include management fees and head office recharge. 

One of the issues to consider here, includes the likely imposition of a foreign withholding tax on payments out of the country. 

Planning profit repatriation is a key issue to consider.

Issue 5: Review your intercompany pricing model don’t assume

Many businesses – especially large American businesses adopt a ‘one size fits all’ approach.

Rather than take a country-by-country approach to looking at how to price transactions between group companies, larger businesses just assume they can apply a Group Policy across the board.

That is not acceptable in most advanced tax regimes.

Consider the real-life case study that I dealt with recently.

CabinetMaker Inc (not their real name)

‘We don’t do things that way’ was what the US-based CFO told me when I suggested they get an arm’s-length review of their ‘global transfer pricing model’ by an Australian transfer pricing specialist.

‘CabinetMaker Inc’, was supplying IT products and services from the US to Australia.

They decided that the Australian company would, ‘just like all other overseas subsidiaries’, receive an 8 per cent payment from the US office for the services it provided the US office from Australia.

A couple of months before, the CFO had called me following a referral from a US client.

Given we have a US–Australia tax specialisation, they called us to see if we would prepare their Australian income tax return for their sole Australian company.

The company in Australia had a ‘representative office’ function.

Its purpose was to source leads in the Australian market and then refer those leads to the US office to complete the sales process and the forming of the business relationship.

The US company was being very careful that what it did in Australia did not give it a ‘taxable presence’.

All reasonably standard stuff they thought.

When I asked how they arrived at the 8 per cent, they mentioned that they had a pricing model in Chicago.

They said that the ‘Chicago model’ was used globally to justify how 8 per cent was ‘payment enough’ for sourcing sales in Australia.

I persisted with a few questions, as follows:

So, with three questions, I could see that CabinetMaker Inc. was relying on a home country pricing model developed with no understanding of the Australian market.

A fatal mistake to make when you are a new company expanding abroad.

I attempted to acquaint them with the realities of doing business away from the US.

They were in another country now and they had to adapt to the differences in the market.

Needless to say, when the CFO hit me with the comment, ‘I will take it to the Board of Directors and come back to you’, I heard nothing more from them.

The aftermath to the above is that recently a story broke in the Australian media that the company, a subsidiary of a US tech company, was being audited by the Australian Taxation Office.

The media reports noted that their transfer pricing practices were suspect.

The global giant failed to adapt its pricing model between group companies and did not want to listen to advice.

They did not want to unlearn what they thought they knew.

They persisted in trying to apply an overseas model without adapting to their new surroundings. 

As a result, their business practices were found wanting in Australia and abroad.

The above mistake is reasonably common; that is, companies expanding abroad believe they can bring their own way of doing business with them. 

Nine times out of ten that is incorrect.

When companies expand to a new country, it pays to go back to first principles, get proper advice and assume nothing. 

Adapting to your new surroundings is essential.

We understand that business owners and entrepreneurs require specific advice from experienced professional advisers in multiple jurisdictions and that a migration tax plan has to be prepared for a company – just as it does for an individual.

Examples Of Unintended Arrival

Example 1 

A foreign company establishes a branch in the arrival country.

This occurs when senior directors of a foreign company remain directors of the foreign company and they change their personal tax residence.

As is commonly the case, the directors continue to ‘run the foreign company’ from their new location. They often do this without realising that they have unwittingly brought the foreign company into the purview of their arrival country.

This triggers tax filing and other reporting obligations.

Example 2

Shareholders leave their home country to live abroad, and while they may not be directors of the foreign company, they remain nonetheless individual shareholders.

In this instance, many tax regimes will demand that tax be paid on the earnings of the foreign company as the profit belongs to the shareholders now living in their new country.

This tax exposure would arise by the ‘controlled foreign corporation’ legislation that many countries have.

If one or both of these unintended actions has occurred, then there is a need to value the assets of the company and understand the value of the shares in any foreign company.

Often, the ‘starting cost base’ of the company assets is relevant because that is the basis upon which future capital gains are calculated. 

Most clients miss this step unless properly advised.

Companies that ‘arrive’ on an unintentional basis now have two tax returns to do one in their home country and one in their arrival country!

Planned Arrivals

When we have an opportunity to work with clients ahead of their departure, we can plan how best to ‘move the company’.

Taking your business abroad is an exciting time for most people. Full of challenges and new opportunities, it is often a make-or-break time for a corporate group.

My view is that if you undertake a proper tax planning exercise covering some or all of the above issues before you leave, then the thrill of setting up your business overseas will not be overshadowed by unintended tax and business issues.

Similar to the need for you to plan your departing tax issues on the way out of your home country there is a major need to plan what your tax profile will be when you arrive in your new country. 

Sometimes, however, it is easy to assume that arriving in another country has no tax consequences and that can make things difficult.

A recent client example springs to mind.

David Smith (not his real name), an expat relocating from Singapore to the US (upon his retirement), decided to access his Australian superannuation fund.

What a mistake that was.

In Australia, pension payments for those over 60 years of age are tax free.

This is, however, not the case in the US.

David had worked out that he and his wife could afford to live in the US the way they envisaged, based on paying no US federal or state tax.

They were quite shocked when we told them that the US would tax David’s Australian-sourced pension stream.

It was not a great conversation.

Key Items To Consider

Set out below are some of the key things you need to consider ahead of your arrival:

• Complying with the requirements of more than one tax jurisdiction (are tax credits available for any foreign tax paid?)

• Accounting for a new tax and legal system (are you moving to a country that has a civil law regime or a common law regime?)

• Understanding the tax issues associated with moving to the arrival country (does the country you are moving to have a general anti avoidance regime that targets tax planning?)

• Considering how foreign assets are accounted for (is foreign income exempt or is it non-taxable there is a big difference between the two)

• Locating other professional service providers to work with (do not assume your foreign tax advisor has international tax experience as this is often not the case)

How Will Your Assets Be Treated?

In some jurisdictions the moment you arrive in the country you are treated as having bought all your foreign assets at the market value of the date you became a tax resident.

This means that a ‘cost base’ has been established for your foreign assets.

Then when you sell those assets in future – a gain or loss can be worked out in relation to those assets. Australia is one such jurisdiction that treats your assets this way.

Other jurisdictions such as the US – do not give you this ‘step up’ in value.

This is a serious problem as you can end up paying a lot of tax to the Internal Revenue Service – based on the original cost of your assets which may have been many years ago.

This is grossly unfair, as most of any gain will have happened while you were a US non-resident – particularly if you sell the asset shortly after you arrive in the US (you may want to sell foreign assets to buy a house in the US for example!)

Your arrival must be carefully planned as the ramifications of an ill-prepared arrival can be costly. 

If you undertake a proper tax planning exercise before you leave, then the thrill of arriving in your new country is not shaken up by the bad news of unintended tax issues. 

Moving abroad is one of the most challenging things that many of us will do.

My move to Singapore in March 2004 was a completely foreign experience in so many respects. There are so many logistical challenges to deal with that often tax planning is left until you arrive.

This of course is way too late.

This article covers some issues to address ahead of time.

Exit Taxes

An example of an issue that frequently arises is the issue of ‘exit tax’; that is, the act of leaving one country may trigger the deemed sale of all your assets held in your home country. 

Hence, it pays to know if the country you are leaving has an ‘exit tax’ as this can have quite serious consequences for you.

Tax Elections

It is also worth considering whether you can exercise any ‘tax elections’ as to how you may be able to obtain concessional tax treatment as you depart your home country.

For example, in Australia, one of the things to consider depending upon the particular asset, is whether you choose to be treated for tax purposes as ‘retaining some of your assets’.

Though you may move abroad, that does not mean that all your assets need to go with you.

Lodging an election to retain some of your assets for tax purposes in your home country, may give you a bit more flexibility as to the tax treatment available when you decide to sell them.

Creating a Trust in a 3rd Country

For a number of reasons, including tax planning, asset protection and risk mitigation, many people wish to hold their assets in a third country, through some type of trust.

Part of the planning you may choose to do before your move to a new country, is considering whether you should establish a pre migration trust in a 3rd country before you move to the country where you will work.

Often this will lead to a better tax outcome than ‘taking all your assets’ with you.

Many countries do not have tax regimes which tax foreign trusts, and therefore, income accumulating therein is not taxable in the country of your tax residence.

Tax Regime For Expats

In the planning phase of where you might go to work overseas, one important consideration is to consider whether the country you are moving to has a ‘concessional’ or ‘modified’ tax regime for expats.

Some countries, have particularly favourable tax regimes for expats.

As an example, some concessional tax regimes e.g., Japan, Belgium, Korea to name a few, may only tax expats on income arising in their country during the first five years of the expat’s tax residence in the country. 

These transitional rules are generally designed to provide an incentive to work in their country.

Other countries, such as the US, tax expats living in the US on passive income accruing in their home country structures.

Unique Residency Status

Another factor for you to consider when planning your move abroad, is the type of residency that you, the ‘departing expat’, will be taking up in your new country.

In some countries, there are unique residency statuses that can have different tax implications for you. 

An example of this includes the ‘temporary resident’ status in Australia.

This type of residence status imposes a different tax outcome as compared to general residence, and they can provide some additional flexibility in your tax position upon arrival.

Restructuring Your Existing Company or Trusts

It is vital to understand how your existing tax structures may have to be ‘restructured’ before you leave the country.

In some cases, a restructure may only involve changes to the office holders of a company or trustee of a trust.

For example, the residency of the trustee determines the residency status of a trust in Australia. 

If the intention is to keep the trust a tax resident of Australia, then this may be achieved simply with the resignation of the current trustee (the departing expat) and the appointment of another individual who will remain in Australia.

In other cases, it may be possible to issue or transfer shares to a family member to ensure that the company you have in your home country is not caught by the controlled foreign corporation rules when you arrive in your new country.

Most expats moving overseas will have some form of pension or superannuation plan.

In my experience changing one’s tax residence does not of itself impact how that pension plan is treated in most jurisdictions. However, some particular complex jurisdictions, like the United States of America, have egregious tax laws that often cause unintended consequences for arriving expatriates.

A US Example

One of my clients moving to the US was adversely affected by the international tax rules of the US with respect to foreign pensions. My client, Peter, had built up a sizeable superannuation (pension fund) balance in Australia. It was the product of 30 years working in the film and entertainment business. Over the previous ten years, Peter had been a senior executive working for a chain of movie theatres in Singapore. As such, international tax had not crossed his mind much. Peter and his wife, Helen, had grandchildren living in Santa Monica. They were keen to retire and enjoy the good life in a new location. Peter had calculated that he would be able to fund his future Santa Monica lifestyle through a combination of personal savings and by accessing his Australian pension. Everything was set.

Pension payments in Australia were tax free, so Peter thought that Uncle Sam would also not tax them. Unfortunately, that was not the case. In the US, such income streams are taxable if you are a US tax resident. We stopped Peter sending his pension to the US in the nick of time. We collapsed Peter’s Australian pension and enabled Peter to take his capital to the US and invest it in the US tax efficiently. Disaster averted.

This case study highlights why, in order to enjoy your pension, you must consider the impact of foreign tax laws when you are changing jurisdiction.

Countries have different rules

In delivering service to clients, we consider the impact of any overseas move on their home country pension. The underlying motivation for establishing a pension fund is typically based on a desire to save funds for retirement so that there is no reliance on government pensions. 

Thus, it means that having the maximum amount available in the pension plan that is not eroded by taxation, is a primary objective. It is folly to think that a tax-advantaged regime in one country with respect to pension funds will axiomatically apply in another country. That is rarely the case.

Moving your Pension Plan

We have extensive knowledge of the taxation issues relevant to pensions and superannuation. 

This enables us to assist clients with compliance and planning in relation to this important area of their lives. When expats leave their home country to move abroad, there are many aspects of tax that need to be considered prior to departure and pension fund planning is often a priority.

For those expats that have their pension fund in the UK, it may actually be worthwhile moving their pension with them. There are particular rules to address this. A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC). A QROPS can receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge.

In Australia, for example, pension funds are only considered to be complying under the governing legislation if they remain within the Australian tax jurisdiction. This means, that the trustee must remain an Australian resident. Therefore, in the case of an expat, relocation can inadvertently trigger a tax liability. Steps need to be taken prior to departure.

Complying in multiple countries

Similarly, many expats arrive in a new country with their home country pension fund in place.  Therefore, they must adhere to the rules in their home country and their arrival country in relation to this pension fund. One of the specialist skills we possess is in advising clients how foreign pension plans will be treated as they move around the globe. We can assist clients on QROPS and other similar regimes.

Moving abroad is an exciting time for most people. If you undertake proper planning with respect to your pension plan before you leave, then the thrill of arriving in your new country is not shaken up by the bad news that you have created unintended tax issues by leaving your home country in an unplanned way.