International tax strategies: Cash repatriation and intangible property

Every international expansion plan should be flexible rather than reactive. While there’s no one-size-fits-all approach, the first step could be to consider big-picture strategies that find a balance between your tax exposure versus the cost of implementing and maintaining your plan.

There are two main tax strategies to consider for international expansion.

• Cash repatriation
• Intangible property migration

Cash repatriation

A common byproduct of an international corporate structure, which may have a beneficial tax impact, is the accumulation of cash in foreign jurisdictions. The decision to hold funds offshore or to repatriate them to the United States has both business and tax considerations, the latter having changed significantly since Tax Cuts and Jobs Act (TCJA) of 2017.

Prior to the TCJA, a U.S. company could generally defer foreign income from U.S. taxes by retaining earnings indefinitely in a foreign subsidiary. Upon repatriation, the earnings would be subject to those taxes with an available credit for the foreign taxes paid. The repatriation could result in a net U.S. tax obligation because the U.S. tax rate would often be higher than the foreign tax rate.

After the 2017 reform, a U.S. company is more likely to pay U.S. tax on foreign earnings each year. This change has effectively removed a U.S. company’s ability to defer foreign income from U.S. tax and shifted the timing of the tax burden from when cash is repatriated to when income is earned.

Strategy

With careful advance planning and documentation, you can generally achieve a lower U.S. tax impact when repatriating income after being subjected to U.S. taxation.

• Consider repatriating funds to the United States through dividends, royalty payments, intercompany management fees, intercompany advisory fees, or intercompany loans.
• Analyze each method to understand which is most tax efficient for repatriation. This can be based on several factors, including the international structure, the amount of foreign earnings previously taxed in the United States, and the specific foreign jurisdiction housing the cash. The most favorable route may be a hybrid model that involves several options.