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I'm opening a business via the e-residency program with Estonia. I am a United States citizen and reside there, as well. Who should I file taxes with?

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    You will file your personal income tax in the US, and your business will file its corporate income tax in Estonia. – phoog Jan 27 '16 at 18:57
  • Thanks, good answer. So if I take no personal income from the business, then i do not need to claim any profits in the US, only where incorporated? – Justice Plant Jan 27 '16 at 19:27
  • Right. If you are living off savings, for example, or income from another job, you could do that. The whole point of setting up a business as a legal entity is that it is a separate legal entity. You may own it, but you aren't it, nor is it you. At some point, however, if you make any money from it, whether as salary or capital gains, you'll have to pay taxes on that. – phoog Jan 27 '16 at 19:33
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If the business is a limited company or something equivalent, and you are the one actually performing the work that the company sells, you'll most probably have to file taxes both in Estonia (because the business is registered there) and in the US (because you carry the work there). Where you pay taxes (and how much) is a lot more complex issue. There are exceptions to this, and lots of loopholes and tricks, but you really need to check with an accounting for relevant details.

You then need to file and pay personal income taxes (on dividends or wages paid by the company to you, or when you sell the company) in the US.

If you are operating as the equivalent of a sole trader or partnership, or some other forms of companies which are not subject to company tax, then the income is directly taxable in the US.

Some "light reading":

https://www.irs.gov/Businesses/International-Businesses/Lithuania---Tax-Treaty-Documents

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U.S. citizens, as a general rule, are subject to taxation on their worldwide income, but get a tax credit for taxes paid on account of that income to the country where the income is earned (subject to an exclusion from U.S. income taxation for certain wages and salaries earned abroad by natural persons). This can still sometimes be harsh because many countries raise proportionately more of their taxes from consumption based value added taxes, and proportionately less of their taxes from income based taxes on earning or profits, than the U.S.

The rules for determining when an entity is a U.S. person, subject to special tax rules because it is controlled by U.S. persons, or is a foreign person, are quite arcane. For example, consider the Internal Revenue Manual for Controlled Foreign Corporations which is just a small subset of these issues. https://www.irs.gov/irm/part4/irm_04-061-007.html

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  • I'm sure there is an IRS publication you can reference for anyone interested in the details suggested in your second paragraph.... – feetwet Nov 15 '16 at 16:35
  • @feetwet Not sure. I learned directly from the Internal Revenue Code and Treasury Regulations and case law in law school and spent maybe two months learning it. A full answer is multi-volume treatise length and I would recommend the follow short book as an introduction: amazon.com/International-Taxation-Nutshell-Richard-Doernberg/dp/… this includes foreign taxation of U.S. companies, transfer pricing, controlled foreign corporations, foreign personal holding companies, foreign captive insurance companies, check the box rules, and more. – ohwilleke Nov 15 '16 at 16:42
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    OMG, yep, the rules on this look absurdly complex. I just glanced here and here. That's just for filing compliance. I suppose the practical answer is all in your first paragraph: Pay tax on its income, or show the IRS that you already paid tax to another government.... – feetwet Nov 15 '16 at 17:22

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