Article
Five international tax considerations for contracting multinational companies
Oct. 4, 2021 · Authored by Andrea Monroe, Vernon Noronha and Daniel Way
In the lifecycle of a multinational company, there are times when it makes sense to downsize the business or its global footprint. Whether your business is contracting due to planned or unforeseen circumstances — or keeping up with market trends by discontinuing operations — there are numerous considerations to take into account. While some considerations are practical, there are also international tax planning opportunities that can help facilitate a seamless transition, such as:
- Cash-repatriation planning
- Employees versus independent contractors
- Permanent establishment risks
- Foreign-derived intangible income
- Transfer pricing
Cash-repatriation planning
When an operation has been successful or there are transfer-pricing strategies that haven’t yet been optimized, cash has likely built up in a foreign jurisdiction. The question of how and when to repatriate this cash carries with it financial, operational, and tax considerations, but it’s often an afterthought in the wake of a discontinued operation.
There are various repatriation options for multinational companies, and cash can return to the headquarter company via the following:
- Dividends
- Related-party loans
- Royalties
- Management fees
In the context of discontinued operations, companies may want to consider dividends and management fees to reduce cash in the foreign jurisdiction prior to liquidation. For example, if a foreign corporation’s earnings have already been taxed in the United States due to a U.S. international tax provision, a dividend may be treated as a tax-free distribution rather than a taxable dividend. In the context of a discontinued operation, however, it’s important to consider whether dividends may be limited by local law (for instance, dividends may not be legally allowed if there are accumulated losses in a jurisdiction).
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.