Legal Question in Business Law in California

A citizen of the United States is taxed on his or her worldwide income. As such, you would be taxed on all dividends, salaries, and other distributions from any company, wherever it is.

While counsel might be able to help you minimize your tax in ways that comply with the law, no one is going to actively assist you engage in tax evasion. The question of reporting to the government by the foreign entity is thus irrelevant. You have an individual obligation to report your entire income on your tax returns.

Consideration #1: Your taxable income as a shareholder of a corporation (other than a domestic "S" corporation) is based upon your salary and dividends from the corporation. To the extent you don't take cash out of a corporation, you won't be taxed on its income (again, unless you've elected the "S corporation" tax treatment). Retaining income defers the tax liability and allows the company to grow (of course, at the expense of current cash flow to the owners).

Consideration #2: If you divided your business and had a very profitable manufacturing operation in some tax-haven country -- let's call it Volcanovia -- you have basically only two alternatives for enjoying that profit: (a) repatriate it as salary or dividends, at which point it becomes reportable and taxable; or (b) retire to Volcanovia and become personally subject to its laws and not those of the U.S. But watch out, because Volcanovia may devalue its currency from time to time, or have a Marxist revolution and nationalize your bank account and factory.

I'd say that for companies that are large enough to keep the multiple sets of books, hire lawyers and accountants to maintain the separate companies, and employ local management to run them responsibly, offshore subsidiaries will produce some advantages in cash flow and/or manufacturing costs. Nevertheless, there are so many hurdles for the smaller business -- and fewer advantages than disadvantages -- that moving a substantial part of an operation offshore is not often a smart move. Contracting out your production to a more-or-less independent offshore manufacturing company is difficult enough, but I've seen that work well for small business -- but not so often with direct investment in an overseas subsidiary.

You have received a couple of very good answers. The bottom line is that when the money hits an account from which you can spend it on your needs and wants, it's going to be taxable in the U.S. and the state in which you live. Money "parked offshore" is not taxed under U.S. taxes, but as soon as it transfers to a U.S. account it does. There is a whole set of tax laws and regulations that cover all that. In fact large multi-national corporations, such as Apple and MassMutual that have substantial sales or investment income from overseas sources have large teams of accountants and tax lawyers who do nothing but figure out the most tax advantaged way to hold and time repatriation of income. Sometimes they even have enough parked offshore to negotiate tax concessions in return for repatriating large sums when the government needs cash. They never try, however, not to pay taxes, because there simply is no way to do it without money laundering and tax evasion crimes.