Want to work from the beach in Belize? Our 21st century virtual and global economy tempts many of us to head to other countries to work or run a business. There are lots of opportunities to own a business abroad.
In this article, I'll discuss some of the tax, financial, and immigration issues involved with being a U.S. citizen living abroad as an ex-patriot and working or running a business, and I'll offer you some tips to making the transition to a business abroad easier.
Justin Bosco is the president of Foothills Creative, an inbound marketing agency specializing in graphic and web design for bold brands. Justin decided to take his business overseas, to Austria, where he has his virtual office. While there are always issues, Justin mentioned two in particular: financial transactions and taxes.
One of the main frustrations in working and living outside of the US is...having to jump through hurdles when dealing with the financial sector. For example, new transactions frequently get flagged and held up since my IP shows I’m outside of the states. Each time I have to verify all my information, down to my driver's license.
Dealing with banks is also difficult when you don’t have a physical address within the US, which they all require. I’ve heard using a virtual mailbox is a good way around this, but I’m currently using my parents' address so that someone I trust can keep an eye out for important mail.
Justin also mentioned the foreign earned income exclusion, which allows U.S. citizens who spend more than 330 days in a consecutive twelve-month period as being eligible for a tax credit, up to a maximum. I'll explain more about this below.
Jeanna Barrett is Founder & Chief Strategist of First Page. First Page works with startups and businesses to drive brand awareness and growth through the inbound marketing channels of content, social media & SEO. She lives and works in Belize. I asked Jeanna about her experience with issues involved in working in Belize: She also mentioned the banking and financial transaction issues:
...there are some complications to getting a bank in foreign countries. It's tricky to get a Belize bank account, so I have US bank accounts still. BUT if I lose my card or it gets compromised, they'll ship a new one to my US address, so I could potentially be without a card to access cash in Belize until I can get it shipped from the US to Belize.
Therefore, I guard my bank card with my life. Also, every time I take cash out in Belize (a lot of places here like small fruit/veggies stands and mom and pop businesses only take cash), I am subject to a foreign transaction fee.
Here are 5 things you should consider before doing a business abroad:
1. Find an Experienced Tax Professional
Look for someone who is knowledgeable about tax issues and reporting for ex-patriots. You can find tax software that will help you file the right tax forms, but if your situation is complicated, even just a little, you should have someone to talk to.
2. Check Immigration Laws
Each country has different requirements for foreign residents who want to live and work in their countries. Working in a country is different from just staying in a country; working requires you to get a work permit, not just a visa.
If you plan to work in Europe, the European Union has a Blue Card agency that allows you to apply for a work permit. It's available to "highly-qualified" non-EU citizens.
3. Set up Banking and Financial Matters
Banking in non-U.S. countries has become more difficult with new U.S. laws to curtail money laundering and also to prevent tax evasion by keeping money overseas. These are the restrictions that Justin ran into.
The Foreign Account Tax Compliance Act (FATCA) requires that U.S. citizens report financial assets that are held outside the U.S. So if you are working in another country and you have a bank account there for local transactions, you must report these balances to the IRS.
One way to handle foreign business transactions to and from the U.S. is to find a large U.S. bank that deals with these transactions every day. For example, Wells Fargo and Chase Bank have international departments that can help you. Shop around to find the lowest fees.
4. Find Someone You Trust in the U.S
You'll need someone to receive business — and personal — mail and to deal with other business matters.
There's no reason you can't run a U.S.-based company abroad, but you will need to check with your state to make sure you have a legitimate business address in the state. Most states require you to have a registered agent, someone who can receive legal documents, and this person needs to have a physical address (not a PO box) in the state.
But your registered agent won't deal with regular mail, so you will need someone with a physical address to pass on important mail. You might want to give that person a power of attorney; you can specify what matters that POA applies to.
5. Understand the Foreign Earned Income Tax Exclusion
If you want to exclude your foreign income from U.S. taxes, you'll need to know the details of this program so you can make sure you comply with the limits and restrictions. Only earned income is eligible for the exclusion (not dividends or other investment income).
You must be a U.S. citizen (some resident aliens may be eligible). You must also have a tax home outside the U.S.; this tax home is your main place of business or work. You must reside in that country for 330 days within a 12-month period, and there are limits on the amount of income you can exclude.
You may also be eligible for an exclusion or deduction on your housing expenses overseas if your tax home is in a foreign country. There are, of course, some restrictions and limitations.
Other Tax Issues for U.S. Citizens Working Abroad
Social Security and Medicare Taxes
The foreign tax exclusion described above doesn't include self-employment taxes (Social Security and Medicare taxes on your business profits). You must still pay these taxes.
If your foreign income comes from an employer, you may be able to get an exemption from withholding this foreign earned income, if you are eligible for the exclusion. Use IRS Form 673 to file this claim.
For Additional Information
See IRS Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad