Part 4 - Direct Tax and Cross-Border Income Tax for US Businesses Going International

Of all the areas where US businesses encounter unexpected complexity when they go international, direct tax is the one that produces the most expensive surprises. Not because the rules are irrational, but because they are genuinely unfamiliar to businesses that have only ever operated domestically, and because the consequences of getting them wrong compound over time.

The starting point is understanding what the United States actually does differently from most other countries. It is not the basic idea of taxing resident companies on worldwide income. Most developed countries do that, though many soften it with participation exemptions or branch exemptions for foreign profits. What is genuinely unusual about the United States is that it also taxes its individual citizens on worldwide income no matter where they live, a position almost no other country takes for individuals. For a US business, the practical reality is still that income earned anywhere in the world is potentially within the scope of US tax, and the countries where that income is earned have their own claim on it too.

This part covers the direct tax framework that applies when a US business starts operating internationally. It is written for business owners and finance professionals who need to understand what the obligations are and why they exist, not for tax specialists who already know the technical detail. Tax law changes frequently, thresholds are adjusted for inflation, and several of the rules described here changed materially for tax years beginning in 2026. Any specific compliance decision should be confirmed with a qualified international tax advisor working from current guidance, not from a general guide such as this one.

How the US approach to worldwide income actually compares

A US corporation is taxed on its worldwide income, meaning profits earned anywhere in the world are potentially subject to US federal income tax, regardless of where they were generated or where the cash currently sits. This is often described as though it were a uniquely American feature, but that framing overstates the case. Most major economies also tax their resident companies on worldwide income as the starting position. The United Kingdom, for example, generally brings a UK-resident company's worldwide profits within UK corporation tax, and then applies relief through foreign tax credits, an exemption for most foreign dividends, and an elective exemption for the profits of foreign branches. A UK company earning income through a German branch does not simply escape UK tax on that income by virtue of it being foreign. It is within the UK tax net unless a specific relief or election takes it out.

What genuinely sets the United States apart is less about companies and more about individuals. The US taxes its citizens and green card holders on worldwide income wherever they live, a position known as citizenship-based taxation that almost no other country applies to individuals. For a US business, the practical takeaway is narrower than the common description suggests: worldwide taxation of resident companies is the international norm, not a US anomaly, but the US system tends to be less generous with exemptions for foreign business income than many territorial-leaning systems, and the interaction between US rules and the rules of the countries you operate in still needs to be worked through carefully in every case.

The consequence that matters most for planning purposes is this. A US business cannot assume that earning income through a foreign subsidiary automatically keeps that income outside the reach of US tax indefinitely. The controlled foreign corporation rules described later in this part are specifically designed to bring certain categories of foreign subsidiary income into current US taxation, and the direction of policy over recent years, including significant 2026 changes described below, has generally been toward taxing foreign income currently rather than allowing indefinite deferral.

How foreign countries tax US businesses operating within their borders

When a US business operates in another country, that country generally has the right to tax income that arises within its borders. This is source-based taxation: the taxing right belongs to the country where the income is sourced, regardless of where the business is incorporated or where its owners live.

The threshold question for a US business operating in a foreign country is whether it has enough of a presence in that country to be subject to that country's income tax. The answer depends on the concept of permanent establishment, covered later in this part. In broad terms, a US business that has a fixed place of business in another country, or that has employees or agents operating there with authority to conclude contracts, typically has a permanent establishment and is subject to local income tax on the profits attributable to that establishment.

A US business that sells to customers in another country but has no physical presence there, and no employees or agents conducting substantive business activity there, typically does not have a permanent establishment and is not subject to that country's income tax on its trading profits. It may still be subject to withholding tax on certain types of payment made from that country, which is covered separately later in this part.

Corporate income tax rates applied to a US business's foreign operations vary significantly by country. Some jurisdictions have rates broadly comparable to the US federal rate. Others have significantly higher or lower rates. The interaction between the foreign rate and the US rate, through the Foreign Tax Credit mechanism, determines the overall tax cost of operating in a given foreign jurisdiction.

Double taxation and the mechanisms designed to prevent it

Double taxation arises when the same income is subject to tax in two different countries. For a US business with foreign operations, this is a genuine risk rather than a theoretical concern. The US taxes its businesses on worldwide income. Foreign countries tax income earned within their borders. Without relief mechanisms, a US business earning income in a foreign country would pay foreign income tax on that income and then pay US income tax on the same income again.

Two primary mechanisms exist to address this. The first is the Foreign Tax Credit, which allows a US taxpayer to offset foreign taxes paid against its US tax liability on the same income. The second is the network of bilateral tax treaties between the US and other countries, which allocate taxing rights, reduce withholding tax rates, and in some cases provide exemptions that limit the double taxation that would otherwise arise.

These mechanisms work well when they are understood and applied correctly. They work less well, or not at all, when a US business does not know they exist, fails to claim them in the right way, or structures its operations in a manner that inadvertently disqualifies it from treaty benefits. A significant amount of the unnecessary international tax cost incurred by US businesses operating globally arises not from bad planning but from a failure to claim reliefs that were always available.

Tax treaties

The United States has tax treaties with a large number of countries. These treaties are bilateral agreements that determine how the two countries divide the right to tax income that arises in one country and flows to a resident of the other. They are not the same as trade agreements and do not cover customs duties or VAT. They are specifically about income tax.

For a US business operating in a treaty country, the treaty may provide several benefits. It may reduce or eliminate the withholding tax rate that would otherwise apply to dividends, interest, and royalties paid between the two countries. It may provide a more favorable definition of permanent establishment than domestic law, reducing the circumstances in which the US business is deemed to have a taxable presence in the foreign country. It may provide a mechanism for resolving disputes between the two tax authorities without the business being caught in the middle.

Claiming treaty benefits is not automatic. It requires the right documentation to be provided to the right party, and the documentation differs depending on which direction the payment is flowing, a distinction covered in detail in the withholding tax section below. Certain treaty positions taken on a US return also need to be disclosed on Form 8833. Failing to complete the required documentation means the treaty benefit is not claimed, and the higher statutory withholding rate applies instead.

One complexity that US businesses sometimes encounter is the limitation on benefits clause that most US tax treaties contain. This clause is designed to prevent residents of third countries from routing income through a treaty country to claim treaty benefits they would not otherwise be entitled to. For a straightforward US operating company with genuine business activity, this clause is typically not an obstacle. For businesses with holding structures that involve intermediate entities in other jurisdictions, the limitation on benefits analysis can be more involved.

Not every country has a tax treaty with the US. A US business operating in a country with no treaty relies on unilateral relief mechanisms, primarily the Foreign Tax Credit, rather than treaty-based protection. The absence of a treaty does not mean double taxation is inevitable, but it does mean the analysis is more dependent on the specific facts of the US business's operations in that country.

The Foreign Tax Credit

The Foreign Tax Credit is the primary US mechanism for relieving double taxation on foreign income. It allows a US taxpayer to reduce its US tax liability by the amount of qualifying foreign income tax paid on the same income that is subject to US tax.

The way the credit is claimed depends on the type of taxpayer. Individuals, estates, and trusts generally claim the credit on Form 1116. Corporations generally claim it on Form 1118. A partnership or S corporation does not typically claim the credit itself. Instead, it generally passes the foreign taxes it has paid, along with the related foreign-source income, through to its owners, who then claim the credit on their own returns using the form appropriate to them.

The calculation is not simply a dollar-for-dollar offset of all foreign tax paid. There are limitations designed to prevent the credit from reducing US tax on US-source income, and the credit must be calculated separately within specific statutory categories, commonly referred to as baskets. These include a general category covering most active business income, a passive category for investment-type income, a foreign branch category, and a separate category for income and taxes associated with the global intangible low-taxed income regime, now renamed net CFC tested income under the 2026 changes described below. Foreign taxes in one basket generally cannot be used to offset US tax on income in a different basket.

The limitation on the credit within each basket is calculated as the ratio of foreign-source income in that basket to total worldwide taxable income, multiplied by the US tax before credits.

• If the foreign tax rate is lower than the US rate, the credit will generally fully absorb the foreign tax and there will be residual US tax to pay.

• If the foreign tax rate is higher than the US rate, the credit is limited. Excess foreign tax credits can generally be carried back one year or forward ten years within the same basket, although special rules apply to the net CFC tested income category, for which unused foreign taxes generally cannot be carried back or forward.

Whether a foreign levy is creditable at all is a more technical question than it might first appear. In general terms, a foreign tax needs to be the substantial equivalent of a US income tax, applying tests around how income is measured and recognized, though the detailed rules include specific provisions for taxes imposed in lieu of an income tax and for taxes covered by an applicable treaty. Some foreign minimum taxes, turnover taxes, and certain other levies do not meet the creditability tests and are not creditable, though they may still be deductible as an ordinary business expense. Given how technical this determination can be, any foreign tax that a business is planning to rely on as a credit should be confirmed as creditable with a tax advisor rather than assumed.

FDDEI, formerly FDII: the export incentive most US businesses miss

Foreign-Derived Intangible Income, commonly known by the acronym FDII, is a provision of the US tax code that has historically provided a reduced effective tax rate on income that US C corporations derive from serving foreign markets. It was introduced as part of the 2017 tax reform to encourage US corporations to keep income-generating activity in the United States rather than locating it offshore, and it has since been significantly restructured.

Legislation enacted in 2025, commonly referred to as the One Big Beautiful Bill Act, renamed the provision Foreign-Derived Deduction Eligible Income, or FDDEI, and changed both the mechanics and the rate for tax years beginning after December 31, 2025. Under the rules that applied through 2025, the deduction was 37.5 percent of qualifying income, producing an effective federal rate of 13.125 percent. For tax years beginning in 2026 and after, the deduction rate is 33.34 percent, producing an effective federal rate of approximately 14 percent. The legislation also removed the previous requirement to calculate a deemed return on tangible assets as part of the formula, which generally simplifies the calculation and, for businesses with a significant tangible asset base, can increase the deduction compared with the pre-2026 rules.

It is worth being precise about how the qualifying income is identified, because this is an area where the mechanics are easy to misdescribe. The deduction is formula-based. It does not require a business to trace its foreign-derived income to specific intangible assets that are physically or legally located in the United States. In broad terms, the calculation starts with the corporation's income from sales of property to foreign persons for use outside the US and from services provided to persons located outside the US, applies certain exclusions and expense allocations, and then applies the applicable percentage to arrive at the deduction. A domestic corporation claims the deduction on Form 8993.

The reason many US businesses miss this benefit entirely is that it requires active identification of qualifying foreign-derived income as part of the annual tax return preparation process. A C corporation that sells significant volumes to overseas customers and does not run the FDDEI calculation may be leaving a meaningful tax benefit unclaimed. The provision is only available to C corporations, not to S corporations, partnerships, or sole proprietors, so the choice of entity for a US export business has a direct bearing on whether this benefit is available at all.

Permanent establishment risk

Permanent establishment is the concept that determines whether a US business has enough of a presence in a foreign country to be subject to that country's income tax on its trading profits. It is one of the most important and most commonly misunderstood areas of international tax for US businesses going global.

Under most tax treaties and under the domestic law of most countries, a permanent establishment arises when a business has a fixed place of business in the foreign country through which the business of the enterprise is wholly or partly carried on. A fixed place of business includes an office, a branch, a factory, a workshop, a mine, a building site that lasts for more than a specified period, and similar facilities. It does not typically include a place used solely for storage, display, or delivery of goods, or for collecting information, or for preparatory or auxiliary activities.

The more problematic form of permanent establishment for many US businesses is the dependent agent permanent establishment. This arises when a person, other than an independent agent acting in the ordinary course of their own business, habitually acts in a foreign country on behalf of the US business and has and habitually exercises there an authority to conclude contracts in the name of the business. For a US business that has an employee working remotely in a foreign country, or that has a local representative or distributor with authority to commit the business to contracts, the dependent agent test may be satisfied even without any physical office or facility.

The consequences of having an unrecognized permanent establishment are significant. The foreign country is entitled to tax the profits attributable to that establishment, and interest and penalties may apply to any period in which the permanent establishment existed but tax was not paid. The US business also has filing obligations in the foreign country, typically including the preparation of local financial statements and the filing of a local corporate income tax return. Compliance after the fact, when a permanent establishment has existed for several years without being recognized, can be complex and expensive.

The most common permanent establishment trigger for US businesses expanding internationally is the decision to hire a person who is based in another country. Remote working has made this more common and more complicated. An employee who works from home in another country, represents the US business to local customers, and has authority to agree terms on behalf of the business may constitute a permanent establishment of the US business in that country, regardless of the employment contract's governing law or the fact that the person is paid from the US.

A second common trigger is the use of a local distributor or agent who has authority to conclude contracts, rather than merely to solicit orders that are then approved in the US. The distinction between order solicitation and contract conclusion is the key factual question in many permanent establishment analyses. US businesses that use local representatives abroad should have their arrangements reviewed against the permanent establishment rules of the relevant country, particularly in treaty jurisdictions where the definitions may differ from those in domestic law.

Withholding tax on cross-border payments

Withholding tax is where the direction of the payment matters a great deal, and it is worth being precise about which country's rules apply in each direction, because the two situations a US business encounters are genuinely different from each other.

When your US business pays a foreign person or business

Certain payments made by a US business to a foreign person, most commonly royalties, interest, dividends, and fees for certain services, are treated as US-source income to the foreign recipient. Under US rules, the US business making the payment is generally required to act as a withholding agent: it withholds the applicable percentage from the payment, typically 30 percent absent a treaty reduction, and remits that amount to the IRS, along with the associated information reporting.

To claim a reduced treaty withholding rate on a payment you are making, the foreign recipient generally needs to provide you, as the US withholding agent, with a completed Form W-8BEN-E if the recipient is a foreign entity, or the equivalent form for a foreign individual, certifying its foreign status and its entitlement to treaty benefits. If that documentation is not on file before the payment is made, US rules generally require withholding at the full statutory rate rather than the reduced treaty rate, and recovering the excess from the IRS afterward is a separate and often slow process.

When your US business receives a payment from a foreign person or business

The reverse situation, where a foreign payer is making a payment to your US business, works differently. If the payment is treated as sourced in the foreign country under that country's own rules, the foreign country's withholding tax rules apply, not the US rules, and any amount withheld is remitted to that country's tax authority, not to the IRS.

To claim a reduced treaty withholding rate on a payment you are receiving from abroad, your US business generally needs to provide the foreign payer with proof of US tax residency, most commonly a certificate of residency obtained from the IRS on Form 8802, which results in the IRS issuing Form 6166. This is a different document from Form W-8BEN-E, which is not the right form for a US business to use when claiming treaty benefits on income it is receiving from a foreign source. Some countries also require their own domestic treaty relief form to be completed in addition to, or instead of, the US residency certificate, and the specific requirement should be confirmed with a local advisor in that country.

The withholding tax that a foreign country deducts from a payment to your US business is not necessarily lost. Provided it qualifies as a creditable tax under the rules described in the Foreign Tax Credit section above, it can generally be claimed as a credit against your US tax liability on the same income, which is one of the reasons accurate tracking of foreign withholding suffered is an important part of the annual US tax return preparation process.

Transfer pricing

Transfer pricing refers to the prices charged for transactions between related parties, typically between a US parent company and its foreign subsidiaries. Tax authorities in every major jurisdiction require that these intercompany prices be set on an arm's length basis, meaning at the price that unrelated parties would agree to for the same or a comparable transaction under comparable circumstances.

The arm's length principle applies automatically the moment a US business has a foreign subsidiary with which it transacts. What is not automatic is a specific annual filing requirement attached to every individual intercompany transaction. The relevant US regulation, generally understood as a contemporaneous documentation standard, exists principally to provide penalty protection: a business that prepares and retains adequate transfer pricing documentation by the time it files its return is generally protected from certain accuracy-related penalties even if the IRS later disagrees with the pricing, whereas a business with no documentation at all has no such protection if an adjustment is made. Maintaining that documentation is best practice and significantly reduces risk, even though it is not, strictly speaking, a standalone filing submitted to the IRS each year.

Two separate reporting obligations are sometimes confused with each other in this area, and they apply on very different bases. Form 5471, covered in the next section, is required based on a US person's ownership, control, acquisition, or disposition of an interest in a foreign corporation, and it applies regardless of the dollar value of any particular intercompany transaction. Form 8975, the US country-by-country report, is an entirely different filing that applies only to very large US-parented multinational groups whose consolidated annual revenue exceeds a substantial threshold set in the regulations, and it is not something the great majority of US businesses with a single foreign subsidiary will ever need to file.

The practical starting point for a US business that has recently established a foreign subsidiary is to identify all intercompany transactions, determine the appropriate arm's length pricing method for each, document the methodology and the basis for the prices charged, and review this documentation annually. The documentation does not need to be elaborate for straightforward transactions, but maintaining it is the difference between having penalty protection and having none if the pricing is ever challenged.

Form 5471: reporting for US shareholders of foreign corporations

Form 5471, the Information Return of US Persons With Respect to Certain Foreign Corporations, is one of the most significant US information reporting obligations for US businesses with foreign subsidiaries. It is not a tax payment form. It is an information return that provides the IRS with detailed information about foreign corporations in which US persons hold significant interests.

The filing obligation applies to US persons who fall into one of several categories of filer, each with different disclosure requirements, based on the nature and extent of their ownership or control rather than on any transaction threshold. A US business that owns more than 50 percent of a foreign corporation, or in some cases 10 percent or more, will typically be required to file Form 5471.

The information required on Form 5471 is extensive. It includes a balance sheet and income statement for the foreign corporation, a reconciliation of earnings and profits, details of intercompany transactions, information about the foreign corporation's income by category for controlled foreign corporation purposes, and details of any income inclusions required under the relevant anti-deferral rules. The preparation of Form 5471 is a significant undertaking for a foreign subsidiary with complex operations.

The penalty structure for failing to file Form 5471 when required is layered and can become substantial. An initial penalty of $10,000 applies per form per year for a failure to file, or to furnish required information, by the due date. If the failure continues after the IRS has notified the taxpayer, an additional penalty of $10,000 applies for each 30-day period the failure continues, up to an additional maximum of $50,000. This means the total potential penalty exposure per form per year can reach $60,000, not $50,000, and this applies regardless of whether any tax was actually owed. These are among the most severe information reporting penalties in the US tax code, and they apply to a form that many US businesses with foreign subsidiaries are unaware they need to file.

Form 8865: reporting for US partners in foreign partnerships

Form 8865, the Return of US Persons With Respect to Certain Foreign Partnerships, is the equivalent of Form 5471 for US persons who have interests in foreign partnerships rather than foreign corporations. A US business that is a partner in a joint venture or partnership organized under the laws of a foreign country, or that transfers property to or receives property from a foreign partnership, may have a Form 8865 filing obligation.

The categories of filer and the associated disclosure requirements for Form 8865 parallel those for Form 5471, based on the nature and extent of ownership or control rather than on transaction size. The penalties for non-filing follow a similar structure, starting at $10,000 per form per year with additional penalties for continued failure after IRS notification.

For US businesses that participate in international joint ventures structured as partnerships, or that use partnership structures for foreign operations, Form 8865 compliance is an area that requires specific attention. Joint venture arrangements in some industries and some countries commonly use partnership structures, and the US participants in those arrangements may not always be aware that a US information reporting obligation exists independently of any obligation in the country where the joint venture operates.

FBAR and foreign bank account reporting

Any US person, including a US business entity, that has a financial interest in or signature authority over one or more foreign financial accounts is required to file FinCEN Form 114, commonly known as the FBAR, with the Financial Crimes Enforcement Network, if the aggregate value of all of those foreign accounts combined exceeded $10,000 at any point during the calendar year. The threshold is applied to the combined total across every foreign account the filer has an interest in or authority over, not separately to each individual account. A US business with three foreign accounts each holding $4,000 has an FBAR filing obligation, because the combined total exceeds $10,000, even though no single account does.

The FBAR is not a tax form and is not filed with the IRS. It is filed electronically with FinCEN and is due by April 15 of the year following the calendar year being reported, with an automatic extension to October 15.

The penalties for FBAR non-compliance are among the most severe in US law and are adjusted annually for inflation, so the applicable maximum should always be checked for the current year rather than assumed from an earlier figure. As adjusted for 2026, the maximum penalty for a non-willful violation is $16,536, and the maximum penalty for a willful violation is the greater of $165,353 or 50 percent of the account balance at the time of the violation. Following the US Supreme Court's 2023 decision in Bittner v. United States, a non-willful penalty is generally assessed per annual FBAR report that should have been filed, not separately for each individual account that should have been listed on that report, which significantly reduces exposure for a filer with several accounts compared with the position tax authorities had argued for before that ruling. Willful penalties, by contrast, continue to be assessed on a per-account basis in many circumstances, and can in principle exceed the total value of the accounts involved.

The distinction between willful and non-willful is a facts and circumstances determination that has been extensively litigated, and the IRS has taken the position in some cases that a taxpayer who deliberately avoided learning about the filing requirement can still be treated as willful. For a US business that has had foreign bank accounts and has not filed FBARs, there are IRS programs for correcting past non-compliance that can significantly reduce penalty exposure compared with waiting for the IRS to discover the non-compliance independently. Any US business in this position should seek specialist advice before taking any action.

FATCA and foreign asset reporting

The Foreign Account Tax Compliance Act, known as FATCA, created a parallel foreign asset reporting regime that is often confused with the FBAR but applies on a different basis and, importantly for most US businesses, does not apply automatically to an ordinary operating company.

The relevant form, Form 8938, is filed with a taxpayer's federal income tax return and requires disclosure of specified foreign financial assets. For business entities, the obligation to file Form 8938 falls only on what the regulations define as a specified domestic entity, which generally means a closely held domestic corporation or partnership that meets specific tests based on the proportion of its income or assets that are passive in nature, or certain domestic trusts. An ordinary US operating company actively carrying on a trade or business, with a foreign subsidiary through which it conducts genuine operating activity, is generally not a specified domestic entity and is generally not required to file Form 8938 in respect of that structure, even though the same underlying foreign interests may separately need to be reported on Form 5471 and may separately trigger an FBAR obligation.

Where a business entity does meet the definition of a specified domestic entity, the reporting thresholds are higher than the FBAR threshold and are set by reference to the value of specified foreign financial assets at year end and at any point during the year. Given how fact-specific the specified domestic entity determination is, any business that has been told it might have a Form 8938 filing obligation should have that conclusion confirmed by a tax advisor rather than assumed, since applying the test incorrectly in either direction, filing when it is not required or failing to file when it is, carries real consequences.

The penalty for failing to file Form 8938 when it is genuinely required is $10,000, increasing by $10,000 for each 30-day period the failure continues after IRS notification, up to a maximum additional penalty of $50,000. Form 8938 and the FBAR overlap in some respects but are not duplicates of each other, and both may be required in the same year for the same underlying accounts if the specified domestic entity test is met.

State income tax considerations for US businesses operating internationally

Federal income tax is not the only US tax dimension for a US business operating internationally. State income taxes add a layer of complexity that is sometimes overlooked in international planning.

Most US states with an income tax use a form of apportionment to determine the portion of a multistate business's income that is subject to tax in their state. The apportionment formula typically includes factors based on sales, payroll, and property located in the state. For a US business with significant international operations, the question of how foreign income, foreign payroll, and foreign assets interact with state apportionment formulas can have a meaningful effect on state tax liability.

Some states conform to the federal treatment of certain international provisions, such as the exemption for qualifying dividends from foreign subsidiaries, while others do not. A US business that receives a dividend from a foreign subsidiary that is exempt from federal income tax may still owe state income tax on that dividend in states that have not adopted the corresponding federal exemption.

The interaction between the worldwide consolidation approach used by some states for apportionment purposes and the separate entity approach used by others creates additional complexity for US groups with significant foreign operations. A business that operates in multiple states and has foreign subsidiaries may find that its state income tax position requires analysis in each state independently, rather than following a single federal framework.

Repatriation planning

Repatriation refers to the movement of profits earned by a foreign subsidiary back to the US parent. For US businesses that have accumulated profits in foreign operations, understanding the tax consequences of repatriation is an important part of managing the overall international tax position.

The 2017 tax reform introduced a participation exemption, under section 245A, for certain dividends received by a US C corporation from a foreign corporation in which it is a 10-percent-or-more US shareholder, meaning it owns at least 10 percent of the foreign corporation's stock measured by vote or by value, and has met a minimum holding period, generally requiring the stock to have been held for more than 365 days within a surrounding 731-day testing period. Where these conditions are satisfied, the foreign-source portion of the dividend is generally 100 percent deductible, effectively reducing the US tax on that dividend to zero. This represents a significant change from the pre-2017 position, under which the full amount of foreign dividends was included in US taxable income with a credit for underlying foreign taxes.

The participation exemption does not apply to all dividends from foreign subsidiaries. It does not apply to what the rules define as a hybrid dividend, which is a dividend for which the paying foreign corporation received a deduction or other tax benefit under the tax law of a foreign country, rather than simply any dividend from an entity that happens to be treated as a hybrid for other purposes. Dividends paid out of earnings that were previously subject to current US tax under the controlled foreign corporation rules are also generally not eligible for the exemption again on distribution, since they have already been taxed. The participation exemption also does not apply to pass-through entities, so US businesses operating as partnerships or S corporations do not benefit from the same mechanism.

Beyond the participation exemption, repatriation planning involves considering the foreign withholding tax that will apply to dividends paid by the foreign subsidiary, the availability of foreign tax credits to offset any residual US tax, and the interaction with any applicable tax treaties. For US businesses with operations in countries that impose significant withholding taxes on dividends, the total cost of repatriation needs to be assessed before distributions are made.

Coordinating your US and foreign tax advisors

One of the most common and most expensive failures in international tax compliance for US businesses is the gap between advisors. The US tax advisor knows the US rules. The foreign country advisor knows the local rules. Neither has full visibility of the other's work, and the interaction between the two sets of rules falls into a gap that neither advisor is monitoring.

The specific failure modes are predictable. The US advisor does not know that the foreign subsidiary has created a permanent establishment in a third country where neither advisor has been engaged. The foreign advisor does not know that the management fees being charged from the US parent to the subsidiary need transfer pricing documentation under US rules. Neither advisor is reviewing whether the intercompany loan is priced consistently with the arm's length standard for purposes of both the US and the foreign country's rules. The US return includes a Foreign Tax Credit claim that is not properly supported by documentation showing the foreign tax actually qualifies as creditable.

Preventing these failures requires someone to own the coordination explicitly. That may be the US advisor if they have genuine international capability, the in-house finance function if it has the expertise, or a specialist cross-border advisor whose role is specifically to sit between the domestic advisors and ensure the interaction is managed.

The practical minimum for a US business with foreign subsidiaries is a structured annual process in which the key cross-border issues are identified and assigned: who is responsible for transfer pricing documentation, who is responsible for ensuring Form 5471 is filed correctly, who is tracking the permanent establishment position in each country, who is reviewing the interaction between the US and foreign returns for consistency. Without that structure, the gap between advisors remains open, and the cost of falling through it tends to be discovered at the worst possible time.

International income tax for US businesses is complex but navigable, and the rules are also genuinely changing at the moment, with the 2026 restructuring of the FDDEI and NCTI regimes being one of several significant recent shifts. The businesses that manage this well are almost always the ones that identified the key obligations early, built the right advisor relationships, and put a coordination process in place before the complexity compounded, and that keep checking their assumptions against current rules rather than relying on what applied a few years ago.

Part 5 covers VAT, indirect tax, and what US businesses need to know about the overseas indirect tax obligations that arise when they sell goods, services, and digital products to customers in other countries.

About Brolma Advisory

Brolma Advisory provides accounting, finance, and tax support for US businesses with international operations. We focus on accrual-based accounting, multi-currency reporting, cross-border payment structures, direct and indirect tax, and the financial infrastructure that international operations require. We can work alongside your existing US tax advisor and local counsel in the countries you operate in, providing the advisory clarity that sits between accounting and compliance.

Part 1 — Why Going International is Different from Growing Domestically

Part 2 — International Accounting and Financial Reporting

Part 3 — Cross-Border Payments and Settlement

Part 4 — Direct Tax and Cross-Border Income Tax for US Businesses

Part 5 — VAT and Indirect Tax: What US Businesses should understand

Part 6 — Foreign Exchange and Currency Exposure

Part 7 — Entity Structure for US Businesses Operating Internationally

Part 8 — Banking and Treasury for US Businesses Going International

Part 9 — International Compliance Calendar for US Businesses

Part 10 — Applied Guides for US Businesses Expanding Internationally

Part 11 — Working with Advisors on International Expansion

Disclaimer:
Content published by us is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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