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As an e-resident of Estonian, I worked for my Estonian company in the US working with US contracts. I earned income (say $100k) that was partially distributed to myself as the sole owner (say $50k distributed) and the remaining amount ($50k) was reinvested.

Per Estonian corporate tax law, I owe 20% tax to Estonia for the distributed income ($10k) and 0% on the reinvested amount.

In the US, per the IRS I am able to deduct the taxes paid to Estonia from my taxable income ($50k - $10k = $40k).

Assuming that my reinvested amount ($50k) earned capital gains which was further reinvested, am I liable for US capital gains tax on the Estonian reinvested earnings? What filing requirements am I subject to for the holdings and invested earnings of the Estonian company?

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  • You say 50% was re-invested. Reinvested by whom? You personally or by your company? Reinvested in what? Are these earnings retained by your sole proprietorship in Estonia or invested in the Estonian stock market (since you talk of capital gains)? – Dilip Sarwate Apr 3 '19 at 14:07
  • You can take the $10k Estonian tax as a credit on your US tax, much better than a deduction, up to your US tax on that income (pro rata by category). However, since it's effectively pay for work, you also need to pay self-employment/SE tax on it (i.e. Social Security and Medicare) which is 15.3% (less if over the SS cap, currently about $130k). For the 'retained' money, a US LLC or Scorp would pass through to you, but I don't know about Estonia. – dave_thompson_085 Apr 3 '19 at 15:35
  • @DilipSarwate I am the sole owner of the company, but the assets that were reinvested are owned by the company. They are retained in accounts held by the Estonian company and invested in international (including US) index funds. – aidan.plenert.macdonald Apr 3 '19 at 16:39
  • @dave_thompson_085 I was confused how that would work because the company is paying the tax, not me. So I wasn't sure If I can count that for a tax credit. – aidan.plenert.macdonald Apr 3 '19 at 16:42
  • Yes, that probably makes a difference. Unless the company is disregarded for US tax (which I don't know, and if it is you owe on all $100k), a tax on distribution is NOT a tax on income, and only a tax on income gets the foreign tax credit or deduction from US tax. But if you received the distribution because of your work, US will still tax it as earned income. (Dividends paid by US corporations to investors have a similar issue; they come out of the corporation's already-taxed income, and are taxed again when received by the investor, but in most cases at a special lower rate.) Sorry. – dave_thompson_085 Apr 3 '19 at 21:01
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From the 1040 Abroad, there is a discussion on managing a Controlled Foreign Corporation (CFC) as a US Citizen,

One-time Mandatory Repatriation of Funds. Current undistributed retained earnings are taxed at 15.5% if held in liquid assets, and 8% for those held in illiquid assets. Any money you have retained in a foreign company will be subject to this one-time tax. But the good news is you can pay it over an 8 year period.

You can also look at the Treasury Announcement,

The United States Department of the Treasury today announced the release of proposed regulations relating to the section 965 transition tax, on U.S. multinational companies’ overseas income, which is being repatriated under section 965 of the Tax Cuts and Jobs Act.

That Section 965 Communication from the IRS states,

What is section 965?

Section 965 requires United States shareholders (as defined under section 951(b)) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.

Tax Code

The full tax code 26 U.S. Code § 965. Treatment of deferred foreign income upon transition to participation exemption system of taxation gets pretty complicated.

IRS Publication 5292 (2017), How to Calculate Section 965 Amounts and Elections Available to Taxpayers has a walkthrough for filling out Section 965 Forms.

Payment Option

The 8 year payment option for the tax is per Instructions for Form 965-A,

The general installment payment schedule for a net 965 tax liability subject to an election to pay in installments is:

  1. 8% of the net 965 tax liability payable in year 1 (the year of the section 965(a) inclusion or triggering event with respect to a deferred S corporation-related net 965 tax liability)
  2. 8% of the net 965 tax liability payable in year 2
  3. 8% of the net 965 tax liability payable in year 3
  4. 8% of the net 965 tax liability payable in year 4
  5. 8% of the net 965 tax liability payable in year 5
  6. 15% of the net 965 tax liability payable in year 6
  7. 20% of the net 965 tax liability payable in year 7
  8. 25% of the net 965 tax liability payable in year 8
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