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New US Tax Laws Mean Headaches for Mexican Companies’ US Shareholders

By Orlando Gotay

OPINION ORLANDO

I regularly get asked questions about Mexican corporations and US taxing of their American shareholders. Foreign corporations are a minefield that is best avoided unless there’s no practical alternative. Sadly, many set up entities to run local businesses, without taking time to ponder federal (or state) repercussions.

“Feds” get very edgy when Americans set up foreign entities. Why? Those foreign entities aren’t transparent to them, given those corporations are outside IRS reach. The first “bright idea” Americans here in México get is, “If they don’t know about it, I won’t have to report any money I make from the business.” Wrong.

A foreign corporation may be outside IRS claws, but you aren’t. Congress set up requirements to force disclosure of ownership by taxpayers. The IRS also knows that corporations are used to “park” income—whatever’s left after paying expenses. Some also say, “I won’t pay myself dividends and therefore won’t have to pay tax on that money.” But if enough of the corporation is US-owned, the IRS will require computation of what I’ll call “imputed dividends,” adding to the shareholder’s tax bill for the year, even if not a cent was actually paid out.

The new tax law widened the universe of US shareholders required to pay tax on undistributed earnings. Just like big multinationals, little guys are seeing that it may be a bad idea to park earnings in corporate bellies. Under the “expanded dragnet,” old corporate undistributed earnings are subject to an immediate tax on the 2017 shareholder’s return, which can be paid under a special installment plan.

Since corporations aren’t born with capital, the IRS also wants to know who contributes and what. If you contribute enough, you also have to report, whether it’s cash or property. Also, if you sell your shares of course, the IRS also wants to know, so they can extend their loving hand out to you.

Mexican entities keep books under Mexican accounting rules. Those books will need converting to US accounting standards in order to have proper numbers for US tax filings. Of course, that’s aside from mere peso to dollar conversions.

One more thing: if those corporations have foreign bank accounts, they may also be reportable in your own Foreign Bank Account Report (FBAR). If you “control” the entity, corporate bank accounts may be reportable by you.

Oh, what a trip. Forewarned is forearmed!

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to federal and state tax matters of US expats in México. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer. This is just a most general outline. It is informational only and not meant as legal advice

 

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