The United States taxes its citizens on worldwide income, and the 2017 Tax Cuts and Jobs Act introduced the Global Intangible Low‑Taxed Income (GILTI) regime. For most Americans, GILTI translates into a 10.5 % tax on earnings from foreign‑owned companies, even if the profit is never repatriated. Understanding how GILTI, Controlled‑Foreign‑Company (CFC) rules, and Passive‑Foreign‑Investment‑Company (PFIC) rules interact is essential before deciding where to incorporate an offshore entity.
How GILTI works for a typical offshore structure
- A U.S. C‑corporation owns the foreign subsidiary.
- The foreign subsidiary pays the foreign‑jurisdiction tax on its profit.
- Under IRC 245A the U.S. parent can repatriate the after‑tax profit tax‑free, provided the foreign tax rate is at least 13.125 % (the “deemed paid” credit).
- The remaining GILTI amount is taxed at 10.5 % in the United States.
- If the foreign entity qualifies as a PFIC, additional reporting and tax complications arise.
The net effect can be a corporate‑tax rate lower than the U.S. statutory 21 % (plus any state tax), but only when the offshore jurisdiction offers a low or zero tax rate and the structure satisfies substance requirements.
The most tax‑advantageous option: relocating to Puerto Rico
- Act 60 (formerly Acts 20/22) provides a reduced corporate tax rate of 4 % for qualifying businesses and can eliminate tax on dividends and capital gains for bona‑fide residents.
- To benefit, the individual must become a Puerto Rico resident (minimum 183 days per year) and meet the Act 60 activity requirements.
- This approach effectively sidesteps GILTI because the income is sourced from a U.S. territory rather than a foreign jurisdiction.
Offshore structures while remaining in the United States
If relocation is not feasible, an offshore company can still be useful when:
- The foreign entity conducts no U.S. trade or business (i.e., no U.S. customers, contractors, or suppliers).
- The U.S. parent holds the foreign company as a pass‑through for non‑U.S. revenue streams.
In such cases the foreign company may pay little or no tax locally, but the U.S. owner will still owe the 10.5 % GILTI tax on the earnings. Effective tax savings often range from 50 % to 80 % of the U.S. corporate rate after accounting for allowable deductions and foreign‑tax credits.
Criteria for selecting a jurisdiction
| Factor | Why it matters |
|---|---|
| Tax rate | Zero or near‑zero corporate tax minimizes the GILTI base after foreign‑tax credits. |
| Substance requirements | Many jurisdictions now demand physical office space, local directors, or employees to prove genuine economic activity. |
| Banking access | Reliable correspondent banking is essential for receiving payments and managing cash flow. |
| Remittance or territorial tax system | Jurisdictions that tax only locally‑sourced income can reduce withholding obligations. |
| Regulatory stability | Predictable legal environment lowers compliance risk. |
Jurisdictions commonly considered
- United Arab Emirates (UAE) – 0 % corporate tax in most free zones, strong banking infrastructure, and a straightforward incorporation process.
- Cyprus – 12.5 % corporate tax (effectively lower after EU tax treaties), EU member status, and robust financial services; suitable when European clients are a primary market.
- Hong Kong – 16.5 % corporate tax on locally‑sourced profits only; however, banking relationships can be challenging for non‑resident owners.
- Labuan (Malaysia) – 0 % tax on foreign‑sourced income, flexible licensing, and a well‑established offshore centre.
- Territorial tax jurisdictions (e.g., Belize, Panama) – tax only on income earned within the jurisdiction; often paired with a “remittance‑based” system that avoids withholding on outbound payments.
High‑tax exemption caveat
U.S. law provides a “high‑tax exemption” for foreign entities that are subject to an effective tax rate of ≥ 18.9 % (90 % of the U.S. federal corporate rate). In that scenario the entity is excluded from GILTI, but the resulting tax rate is still higher than the 10.5 % target for most offshore structures.
Practical steps for an American considering an offshore company
- Map your revenue sources – Identify which income streams are truly foreign (non‑U.S. customers, contractors, and suppliers).
- Choose a jurisdiction – Evaluate the criteria above against your business model and client geography.
- Set up a U.S. C‑corp – This entity will own the offshore subsidiary and serve as the conduit for repatriation under IRC 245A.
- Ensure substance – Obtain a local office address, appoint resident directors if required, and maintain appropriate accounting records.
- Open a bank account – Prioritize jurisdictions with reputable international banks to avoid payment‑processing hurdles.
- File U.S. compliance – Submit Forms 5471 (CFC), 8621 (PFIC), and the GILTI Schedule I on the corporate tax return.
- Monitor changes – Both U.S. tax law and foreign jurisdiction regulations evolve; periodic review is essential to maintain compliance and tax efficiency.
By aligning the corporate structure with the GILTI framework and selecting a jurisdiction that offers low tax, sufficient substance, and reliable banking, an American entrepreneur can significantly reduce the effective tax burden on foreign‑sourced earnings while remaining compliant with U.S. tax obligations.
