U.S. EXPAT TAX GUIDE – MEXICO
How does GILTI impact US business owners in Mexico?
Global Intangible Low-Taxed Income (GILTI) affects US shareholders of foreign companies—like businesses in Mexico. If US citizens own more than 50% of the business, it’s classified as a Controlled Foreign Corporation (CFC), meaning even undistributed earnings are subject to US tax.
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What defines a Controlled Foreign Corporation (CFC)?
A CFC is any foreign company in which US shareholders own more than 50% of the stock. This triggers complex tax reporting obligations under IRS rules, including filing Form 5471. US owners are taxed based on their ownership share, whether or not profits are distributed.
How does GILTI affect retained earnings?
GILTI taxes retained earnings, even if profits are kept in the business. US shareholders must report their share of the profits under GILTI. This can result in paying taxes on income that hasn’t been paid out to you.
Can higher Mexican corporate taxes reduce GILTI?
Yes, if your Mexican business faces higher corporate taxes, these can often be credited against GILTI to reduce US tax liability. The Foreign Tax Credit (FTC) can be used to offset some or all of the GILTI tax depending on the amount of taxes paid in Mexico.
Are there any exclusions under GILTI?
Yes, there are several important exclusions:
- High-Tax Exclusion: If foreign income is subject to a tax rate greater than 90% of the US corporate rate, it can be excluded from GILTI.
- Section 250 Deduction: Allows US corporations to deduct 50% of GILTI, lowering the effective tax rate.
- Section 962 Election: Individual shareholders can elect to be taxed at corporate rates, potentially reducing GILTI impact.
What is the effect of GILTI on individual shareholders?
For individual shareholders, GILTI is taxed at personal income tax rates, which can be as high as 37%. Electing Section 962 allows individuals to be taxed as a corporation, reducing the tax rate on GILTI income to 21%, with additional benefits like the Section 250 deduction. However, distributions are taxed later when profits are received.
How does GILTI work for US corporations owning a Mexican business?
US corporations owning Mexican CFCs benefit from the Section 250 deduction, which reduces the tax burden on GILTI by 50%. Additionally, FTCs can offset the US tax liability, making it easier for US corporations to manage GILTI income.
What is the advantage of the Section 962 election for individual shareholders?
Making a Section 962 election allows individual shareholders to be taxed at the corporate tax rate on GILTI income. This reduces the immediate tax burden and allows access to the Section 250 deduction, which cuts GILTI taxes in half.Â
However, dividends are later taxed when distributed.
Can disregarded entities in Mexico avoid GILTI?
For disregarded entities (such as single-member LLCs), GILTI is included in the owner’s personal income. The owner may still use Section 962 to elect corporate treatment, but all income is reported on the owner’s individual tax return.Â
Consulting with a tax professional is recommended to decide whether this option makes sense for your business.
How can small business owners reduce their GILTI liability?
Small business owners may consider restructuring their businesses. Instead of operating as a corporation, you can treat your Mexican business as a sole proprietorship. This avoids GILTI reporting and allows the income to flow through directly to your personal tax return. Filing Form 8832 is required to make this change.
What is the process for reclassifying my business to avoid GILTI?
You can reclassify your Mexican business from a corporation to a disregarded entity or sole proprietorship by filing Form 8832 with the IRS. This simplifies tax reporting, avoids Form 5471, and eliminates GILTI requirements.
What should business owners know about GILTI and double taxation?
The Foreign Tax Credit (FTC) is a critical tool for US business owners in Mexico. It ensures that you aren’t taxed twice on the same income by applying Mexican taxes as a credit against your US tax liability.
Can married couples owning a business jointly avoid GILTI?
If a US citizen and their non-US spouse jointly own a business, they may face constructive ownership rules, meaning both ownerships are combined for GILTI purposes.Â
This could trigger GILTI filing obligations, even if the US person owns less than 50%. To avoid GILTI, consider restructuring the business as a sole proprietorship under one spouse’s name.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.