TAG Tax

Contact: Ray Polantz; Cohen & Company (Ohio, USA)

Doing business internationally is practically a necessity to survive in today's competitive business environment. Many companies find that setting up a separate legal entity in a foreign jurisdiction is the best way to conduct business there. Operating through a foreign subsidiary, however, presents many challenges, including the potential for double taxation of profits.

Generally, profits earned in foreign subsidiary corporations can be subject to two layers of tax:

• tax in the foreign jurisdiction; and
• U.S. tax when profits are repatriated, often in the form of a dividend.

At times this potential double taxation is mitigated by the U.S. tax system's foreign tax credit regime, which allows a dollar-for-dollar reduction of U.S. tax for foreign income taxes paid, subject to certain limitations. However, not all U.S. owners are eligible to claim foreign tax credits for the income taxes paid by a foreign subsidiary corporation.

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