A Look at Repatriate Profits - US to Canada
As certified public accountants and tax advisors in today's global economy, one of the most common questions asked of us by business owners is: If my foreign company sets up a business in the United States how do I get the profits back to my home country in the most tax-efficient manner?
To answer this question, this article will focus specifically on Canadian business owners and the multiple ways to repatriate profits from a U.S. company back to Canada including a (1) management fee, (2) interest charge, or (3) paying a dividend.
One of the most common repatriation strategies is the use of a management fee. The Canadian entity would charge the U.S. entity a fee for services they provide, including but not limited to bookkeeping, IT support, and administrative fees. The benefit of using a management fee is there is no U.S. withholding tax provided the service rendered for the management fee is performed outside of the United States. However, it is important to note that any foreign-related company transactions are heavily scrutinized by the taxing authorities in both countries and may require a transfer pricing study.
Using an interest charge is another common form of repatriating profits. This applies if the U.S. entity is loaning funds from the Canadian entity and paying interest on those funds. The U.S.-Canada tax treaty allows interest to be transferred at a 0% withholding rate. Companies using this method need to be cautious of the interest deduction limitations in the U.S. under the newly revised section 163(j) of the internal revenue code.
Another option to repatriate profits would be paying a dividend from the U.S. company to the Canadian company. This may not be an optimal solution because there is a withholding tax that would need to be paid to the IRS and the U.S. company cannot take a deduction for dividends, as they could for management fees or possibly interest expense. Given that the U.S. and Canada have a tax treaty, the dividends are subject to a withholding rate of 5% for Canadian companies that own 10% or more of the U.S. company. If a U.S. entity is paying a dividend to an entity organized in a country that does not have a tax treaty, the withholding rate would be 30%.
How do repatriate profits fit best into your tax strategy? Contact Kelsey Weigel, CPA for more information.