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Yes, you have read this right: I would like to maximize the taxes paid by a US corporation to make sure that its income tax rate is > 25%.

This is a prerequisite to avoid the profits of the US corporation of being taxed at its shareholder level (double taxation and other issues) Controlled foreign corporation (CFC) rules.

The shareholders are European citizens and would incur additional taxes if the US corporation would be considered to be in a low-tax country for which the threshold is 25% income tax paid.

The main business of the US corporation is investing in stocks which generate capital gains, interest and dividend income.

This was no problem before President Trump reduced the federal corporate tax to 21% but this has become a challenge for non-US controlling shareholders of US corporations. However, this can be remedied if taxes paid by the US corporation are >25%. The corporation has not been founded.

Questions

Which strategies would you recommend to make sure that taxes paid are >25%?

What type of corporation (C Corp, S Corp, etc) would you recommend to achieve this goal?

Which US states would you recommend the corporation to be headquartered? (My preference would be Delaware)

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A U.S. S-corp doesn't allow foreign owners while a U.S. partnership does. But the partnership requires a withholding and filing of U.S. taxes for foreign partners. Then those foreign partners might also owe home country taxes.

A U.S. C-corp is the best type of U.S. company for foreign partners. Taxes are no problem to the shareholders if no dividend is paid. The company can just grow in value instead of paying a dividend and then the shareholders are only subject to capital-gain tax.

However, if the C-corp is in a state that has corporate income tax then the state tax plus the federal tax will often be greater than the 25% low-tax-country threshold.

Now an issuer C-corp can't be used for investing as a core purpose unless it meets investment company regulation. However an LLC, as a member-based company and not a stock issuer company, can elect to be taxed as a corporation.

Or in more general terms, an LLC can avoid being an S-corp by electing to be taxed as a corporation.

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  • Here is one of many links: cohencpa.com/insights/articles/… .
    – S Spring
    Apr 24 '20 at 14:21
  • Thank you for your very helpful answer, S Spring. I am looking for more information on why "C-corp can't be used for investing as a core purpose unless it meets investment company regulation". This article How To Decide If A C-Corp Is Appropriate For Your Trading suggests otherwise.
    – user13041
    Apr 24 '20 at 15:57
  • A stock issuer company must meet investment company regulation if its core business is investing and if it has more than 100 shareholders. My stock issuer C-corp has a strong historical core purpose and then a non-core investment portfolio that is 60% Treasury Securities and those two things together avoids being subject to investment company regulation. Here is one of many links concerning "inadvertent investment company": fedseclaw.com/2018/03/articles/sec-news/… .
    – S Spring
    Apr 24 '20 at 17:12
  • A stock issuer company must meet investment company regulation if its core business is investing and if it has more than 100 shareholders. But the 100 or fewer shareholders of a hedge fund must be accredited investors. Also, personnel of a hedge fund can face investment advisor regulation. Then a hedge fund is an issuer corporation that has pass-through taxation such that it must be noted in some way as similar to an investment company.
    – S Spring
    Apr 24 '20 at 17:40
  • There would be only one investor and shareholder. For international taxation purpose a C Corp seems to be the most suitable.
    – user13041
    Apr 24 '20 at 17:43

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