US Corporation Run From Abroad: Is All Profit Taxed?

Does a Delaware C corporation pay US tax if all work happens abroad?

Yes. A Delaware C corporation pays US federal tax on worldwide taxable income at 21% even when all work happens abroad (26 USC 11; IRS). If it conducts no business in Delaware, it owes no Delaware corporate income tax, but still files an annual report and pays franchise tax (Delaware Division of Revenue). Delaware incorporation makes it a domestic corporation regardless of where its owner or workers live (26 USC 7701).

The company reports its income and expenses on Form 1120 even if its taxable income is zero. For a calendar-year corporation, it is generally due April 15 of the following year (Form 1120 instructions). Work abroad can make income foreign-source, which matters for a foreign tax credit, but foreign-source income still enters the US corporation's return. A foreign company has different US rules; see when foreign owners owe US tax. For the US company's other annual filings, see foreign-owned C corporation filing.

What federal rate applies to its worldwide profit?

The regular federal corporate rate is 21% of taxable income, under 26 USC 11. Taxable income means receipts less allowed deductions and adjustments; it is not necessarily the cash in the bank or the profit shown in the books.

Some services to customers outside the US may qualify for a section 250 deduction, reducing taxable income. Working abroad alone does not qualify a company, and foreign branch income is excluded.

The rate applies to the corporation, whether its owner leaves the earnings in the company or later takes them out. A foreign tax credit may reduce the US tax, but does not remove the income from the return. For deductions, losses, dividends and the second layer of tax when profits are distributed, see how C corporations are taxed.

Does a tax treaty stop US tax on the corporation?

Usually no. A treaty does not undo the corporation's US incorporation, and treaty saving clauses generally preserve a country's right to tax its own residents (IRS treaty guidance). Treaty relief depends on the particular treaty and the company's residence under it.

India is a caution against assuming that management abroad produces an exemption. The US technical explanation of the US–India treaty says a US corporation managed in India can be resident in both countries and, if so, is outside most treaty benefits. That does not settle whether a particular company is resident in India under current Indian law. Review the treaty and both countries' residence rules before claiming relief.

Does Delaware tax a corporation with no business there?

Delaware does not impose corporate income tax on a corporation incorporated there but not conducting business there. Incorporation still brings an annual report and franchise tax (Delaware Division of Revenue). The two obligations are separate:

A Delaware mailing address or registered agent is not a complete activity test. Check where people work, contracts are carried out and sales or property sit. The annual report and franchise tax are due March 1 of the following year (Division of Corporations). For the annual charge and report, see Delaware franchise tax.

Can a customer, employee or contractor create tax in another state?

Yes, depending on the state's rules and what that person does. California can require Form 100 when a corporation does business there or receives California-source income; it also has sales, property and payroll tests (California FTB; doing business test). Delaware incorporation and foreign management do not prevent a California filing.

An employee selling or serving customers from California is a strong signal. A contractor acting for the corporation there may also create a filing issue; paying someone who happens to live there does not, by itself, answer it. Customer sales can trigger a state test without an office. If California treats the company as doing business there, its C corporation minimum franchise tax is generally $800, with a first-year exception for newly incorporated or qualified corporations (FTB). California may tax an apportioned share of income rather than all worldwide profit. See business income tax in other states and California minimum tax.

Can the corporation also be resident where its owner lives?

Yes, if that country's law treats the corporation as resident because of where it is managed or controlled. US incorporation does not stop another country from applying its own residence test. The IRS description of dual-resident corporations recognizes that both countries may tax the same corporation on a residence basis.

Ownership alone may be different from management: gather board minutes, decision records, where officers work, who signs contracts and where staff perform services. Those facts can also matter to whether the company has a taxable business presence abroad even if it is not resident there. Foreign law and any treaty decide that outcome. A corporation actually managed in another country needs local tax advice before relying on a US-only filing plan.

Can it credit foreign tax paid on the same profit?

Possibly. A domestic corporation may credit qualifying foreign income tax that the corporation itself legally owes, subject to the US limit on foreign-source taxable income (26 USC 901; 26 USC 904). The owner's personal foreign tax is not the corporation's credit.

Source and creditability need their own checks. Fees for services performed abroad generally count as foreign-source income, but software licenses, sales and mixed work may follow different sourcing rules. The credit generally cannot exceed the US tax on the same category of foreign-source income after related expenses, so it may be less than the foreign tax paid (26 USC 904). The corporation chooses a credit or deduction for eligible foreign income tax each year. To elect the credit, it attaches Form 1118 to its return; it can make or change that election within a special 10-year period from the original due date of the return for the year the foreign tax was paid or accrued (Form 1118 instructions). Keep proof of the foreign tax. Collect the foreign return, payment record, invoices, contracts, work locations and expense detail before calculating it.

Example

These are illustrations in US dollars. Assume a Delaware C corporation has $100,000 of federal taxable income before any foreign tax credit, with no other tax adjustments.

Software services performed in India

All services are performed in India. Federal tax before credits is $21,000: $100,000 × 21%. Delaware has no corporate income tax if the company conducts no business there, but its annual report and franchise tax remain.

A contractor starts working in California

In a later year, a California contractor starts selling the company's software on its behalf. That activity may make the corporation do business in California. If it does, the company files Form 100. After any first-year minimum-tax exception, it generally pays at least California's $800 minimum tax; a higher calculated tax can apply. Its California taxable income depends on state sourcing and apportionment.

The company pays foreign income tax

The corporation pays $5,000 of creditable foreign income tax on the same $100,000 of foreign-source taxable income. If the full credit is allowed, federal tax falls from $21,000 to $16,000. The credit is not automatic: its amount depends on source, expense allocation and the foreign-tax rules. Whether India also treats the company as resident needs a local review.

Different for you?

• The company is not incorporated in the US: see when foreign owners owe US tax.
• You need the corporation's full filing list, including foreign-owner reporting: see foreign-owned C corporation filing.
• The company has activity or customers in several states: see business income tax in other states.
• You are taking profit out while living abroad: see paying yourself as a foreign owner.
• The corporation may be resident or taxable in another country, or paid tax there: bring incorporation papers, management records, contracts, worker locations, state sales and payroll by state, and both countries' tax returns to cross-border tax.