I own a business in the EU and like to permanently move to the United States. Which U.S. tax issues should I consider prior to my departure?

It does not happen too often but, at times, we do get a client who lives in Europe, owns a business in Europe and decides to permanently move to the United States. The reason behind this decision is generally not rooted in tax mitigation. After all, the United States (especially attractive states like California) are not known for their low tax burden. Nevertheless, there are measures you can take which may help you mitigate U.S. tax on your move to America. Though I am an attorney and not a tax advisor, I want to use this note to share some of the U.S. tax lessons I have learned working with pretty amazing U.S. tax advisors on properly structuring our clients’ departures to the United States. Hopefully, anyone contemplating a departure to the U.S. will find this note helpful. Nothing in this note serves as tax advice. It only serves to highlight potential tax issues which should then be carefully examined by tax experts. 

There is one item I will not dwell on but I do like to point out here at the outset. Depending on your current EU jurisdiction, you may have to pay an exit tax upon your move out of the EU. Make sure to look into this with your local counsel. This note will center on U.S. tax and not your local EU tax. 

As detailed in an earlier note, the United States has enacted a tax regulation called the Global Intangible Low-Taxed Income Tax (“GILTI”). GILTI’s aim is to prevent U.S. residents from setting up businesses abroad instead of in the United States. If an EU resident, who owns a majority share in an EU company, moves to the U.S. and becomes a U.S. tax resident, the company will be deemed a controlled foreign corporation (a CFC) and will fall within the GILTI regime. Under GILTI, a foreign company’s yearly profit (insofar it's a CFC) must be included in the U.S. tax resident’s personal income tax filing subject to federal income tax rates of generally 37%. This tax will be levied on your EU company’s profit, regardless whether you distribute this profit or not

Mitigate GILTI by a 962 election. 

I have detailed in my earlier note on GILTI, that you can make a so-called 962 election under U.S. law pursuant to which you will be taxed in the U.S. as if you are a corporation and not an individual. The GILTI tax rate for corporations stands at 10.5% (as opposed to the 37% for individuals). This is already a step forward and you should definitely look into its possibility with your tax advisor, but even better would be to ensure you do not fall inside the confines of GILTI at all. 

Eliminate GILTI by invoking the high tax exemption

Depending on the EU jurisdiction where your company is based, you may be able to rid yourself entirely of GILTI upon your move to the U.S. by invoking the high tax exemption. Insofar the effective corporate tax rate of your EU corporation is higher than 18.9%, you may be able to invoke the high tax exemption and remain outside the scope of GILTI. For example, if you own a Dutch company with a minimum 19% corporate tax rate, you can very likely make use of the high tax exemption for GILTI. Upon your move to the United States, there will then be no GILTI tax levied on your Dutch company’s profit due to the high tax exemption. You won’t have to worry about any U.S. tax until you actually distribute profits to the United States. At that point, you will owe U.S. federal tax on the distribution at a 23.8% qualified-dividend rate. The bad news is that your EU company will have to continue to pay 19% Dutch tax. The good news is that this allows you to prevent GILTI tax on your company’s profit and defer any further U.S. tax. 

Eliminate GILTI by a check-the-box election

By a simple check-the-box election on your future IRS entity classification form, you can render your EU company transparent for U.S. tax purposes. Since GILTI tax is levied on your EU company’s profit,  the company’s conceptual invisibility for U.S. tax purposes will leave no corporate profit to tax with GILTI rates. Instead, your EU company’s income will qualify as your own personal income and be taxed accordingly in the United States at ordinary income rates. This eliminates a direct GILTI tax (which is good) but it does still expose your company’s profit to direct tax at personal income rates. Is this as good as it gets? No. Check out the next paragraph. 

A Step Up in Basis and Amortization Shield 

A check-the-box election which renders your EU company transparent, can create a step-up in tax basis for you along with a fifteen year (goodwill) amortization shield. What does this mean in plain English? Your assets will have value upon your arrival in the United States. This value can be used to offset your future U.S. personal income tax. Let’s assume your Dutch company has been valued at fifteen million dollars upon your arrival. With a fifteen year amortization period, this translates into one million dollars per year. So every year, you can distribute (max) one million dollars of income from your EU company to yourself in the United States without any federal U.S. income tax. 

Note however that if you distribute three million dollars in one year, the first million will be tax free due to the 1M / year amortization period, but the additional 2 million will be taxed at ordinary federal income tax rates (up to 37%). The good news is that, on the 2 million (i.e. on the amount which exceeds the 1M/year), you will be able to use the paid EU corporate income tax as a foreign tax credit in the United States. You cannot do this with the first million. Foreign tax credit can be used to offset foreign sourced income. A step-up in basis along with the amortization period removes your foreign income up to the amortized yearly value (in our example 1M). 

Let’s recap

U.S. tax is complex and GILTI can, after your move to the United States, hit your foreign EU company profits harshly and with no deferral. You can assess whether you can mitigate the hit by a 962 election pursuant to which you will be taxed on your GILTI inclusion not as an individual but as a corporation at more beneficial (10.5) corporate GILTI rates. Alternatively, you can examine possibilities to rid yourself entirely of GILTI. Perhaps your EU company’s high effective corporate tax rate allows you to invoke GILTI’s high tax exemption. Alternatively, you can stay outside of GILTI by checking the box on your European entity and rendering it transparent for U.S. tax purposes. When you go down this route, your foreign company’s profit will be deemed your personal income and taxed directly at ordinary federal income (and not GILTI) rates. This last option really becomes interesting if your EU company can claim a high valuation. That would enable you to create a step up in tax basis and use this to shield yourself from further U.S. income tax during a fifteen year amortization period. Do bear in mind that if you yourself play a pivotal and valuable service role in your EU company, your departure to the United States and subsequent potential high service fees might impact your EU company’s capability to consistently claim a high valuation. 

If you are contemplating a move to the United States and seek advice, feel free to contact us at marianne@starkslegal.nl. We will guide your move from a legal perspective and work closely with experienced tax counsel to ensure proper examination of all the issues mentioned in this note.