Why Your Foreign Company Is Still Taxable in the US

There's a moment most US expats remember clearly. You register a company abroad. The paperwork goes through. A local accountant confirms everything is compliant. You pay tax in your new country. It feels settled.

Then, months later, usually while dealing with your US tax return, a different question lands:
Why is the IRS still involved?

It feels unfair at first. Even a little absurd. The company isn't in the US. The clients aren't in the US. The money doesn't touch a US bank account. And yet, here you are, still explaining the business to the IRS.

That confusion isn't accidental. It comes from a mismatch between how most countries tax businesses and how the US taxes people.

● Where this assumption comes from

Most countries operate on some version of a territorial system. If your company is incorporated locally and earns money locally, that's where the tax story ends.

So when a US expat sets up a company in, say, the UK or Australia, the logic feels airtight. The company is foreign. The tax is foreign. End of discussion.

Local advisers often reinforce this view, not because they're careless, but because US citizenship-based taxation simply isn't their frame of reference. It's not how their system works.
The problem is that the US never signed up for that logic.

● How the US actually looks at this

The US taxes its citizens on worldwide income. Not residency-based. Not location-based. Citizenship-based.

That principle doesn't stop at salary. It doesn't pause for businesses. And it doesn't care much about where the company was formed.

From the IRS's perspective, the central question isn't where the company is. It's who is behind it. Once you see that, the rest starts to make uncomfortable sense.

● Why a foreign company doesn't block US tax

A foreign company can feel like a solid wall between you and US tax. Legally, it's separate. Practically, it has its own bank account, invoices, and obligations.

But for US tax purposes, separation isn't always respected the way people expect.

If you own the company outright, or nearly so, the IRS often looks through the structure to the owner. Control matters. Economic benefit matters. Whether profits can flow to you matters.

In other words, a company can be very real locally and still be treated as closely tied to you in the US tax system.
That's the mental shift most expats don't make until they're forced to.

● Pass-through vs corporate treatment: where things get messy

Some foreign companies are treated, by default, as if profits flow straight through to the owner. Others are treated as separate corporate taxpayers.

That distinction changes everything. It affects whether income shows up on your personal US return. It affects timing. It affects which reporting forms suddenly become part of your annual routine.

What trips people up is that the default US treatment doesn't always match how the company is taxed locally. You can have a company paying corporate tax abroad while the IRS treats the income as yours personally.

That's when the numbers start looking strange.

● The quiet role of IRS classification elections

There is a mechanism that allows certain foreign businesses to choose how they're treated for US tax purposes. That's where IRS Form 8832 (https://www.expattaxonline.com/irs-form-8832/) comes in.

The catch is that many expats never realize a choice exists. They assume the company's legal form abroad answers the question automatically. It doesn't.

So a default classification applies instead. By the time someone realizes the consequences, the flexibility they thought they had may already be gone.

This is less about paperwork and more about timing.

● Scenarios that catch people off guard

Picture a solo consultant who sets up a foreign company to invoice clients more cleanly. No distributions taken. Profits left in the business. Still, the IRS may view that income as theirs.

Or a husband-and-wife business abroad, assumed to be "corporate," quietly treated as a partnership for US purposes.

Or profits reinvested year after year, with no money coming home, yet still creating US reporting and tax consequences.

None of these feel aggressive or exotic. That's why they surprise people.

● When the assumption is partly right

To be fair, foreign companies don't automatically mean higher US tax. Corporate treatment can defer personal taxation in some cases. Foreign tax credits often soften, or even eliminate, double tax.

So "still taxable" doesn't always mean "you'll owe more." Often, it means complexity rather than cost. But structure decides which version you get.

● Understanding exposure before it turns into cleanup

Setting up a foreign company isn't a mistake. For many US expats, it's the right move.

Problems tend to start when US tax rules are discovered after the structure is already in place, profits are flowing, and filings are overdue. At that point, the conversation shifts from planning to repair.

Expat Tax Online (https://www.expattaxonline.com/) helps US expats understand why foreign companies may still be taxable in the US, and how to align structure and reporting early, while choices are still choices, not fixes.

This release was published on openPR.