Taxation

At Vanguard Legal PLLC, with offices in Houston and Dallas, we advise Texas companies on the legal and tax complexities of expanding into global markets. Whether your business is opening a foreign subsidiary, acquiring an overseas partner, or establishing operations abroad, careful international tax planning is critical to avoid unintended exposures and maximize the benefits of cross-border growth.

Global expansion offers tremendous commercial opportunities — but it also exposes companies to overlapping tax regimes, reporting requirements, and transfer pricing scrutiny. Below are several key international tax concepts that every Texas business should understand before going global.

When a Texas company operates abroad, one of the first tax questions is whether those activities create a “permanent establishment” (PE) in a foreign country.

A permanent establishment generally means that a company has a fixed place of business (such as a branch, office, or dependent agent) in another country. If a permanent establishment exists, the foreign jurisdiction may have the right to tax the business income attributable to that activity — even if the company itself is a Texas corporation.

Best practice: Before sending employees abroad or signing foreign agency or distribution agreements, companies should analyze whether their presence or contracts might create a taxable permanent establishment. Careful structuring — such as limiting authority to bind the company, or using independent contractors — can often reduce exposure.

The United States maintains a wide network of income tax treaties designed to prevent double taxation and clarify the allocation of taxing rights between countries. These treaties can provide:

• Reduced withholding rates on dividends, interest, and royalties;

• Exemptions for certain business profits if no permanent establishment exists; and

• Foreign tax credits or deductions for taxes paid abroad.

Not all countries have a treaty with the United States, and eligibility often depends on ownership and residency requirements. For Texas companies planning international expansion, structuring through treaty-eligible jurisdictions can provide meaningful tax efficiency.

Even with careful planning, U.S. taxpayers with overseas operations may still face double taxation — paying income taxes to both a foreign country and the United States on the same earnings. To mitigate this, the U.S. tax system allows foreign tax credits (FTCs), which generally permit taxpayers to offset U.S. tax liability by the amount of qualifying income taxes paid to foreign governments.

Foreign tax credits are subject to detailed limitations, sourcing rules, and “basket” categories that determine which foreign taxes can be credited and how much may be applied in a given year. Unused credits may sometimes be carried forward or backward to offset taxes in other years.

Properly tracking foreign income and taxes paid is essential for compliance and optimization. Texas companies operating abroad should maintain thorough documentation of foreign tax assessments, withholding statements, and intercompany transactions to substantiate credit claims. Strategic coordination between foreign and U.S. tax advisors is often necessary to maximize available credits and minimize global effective tax rates.

A Controlled Foreign Corporation (CFC) is a foreign corporation in which U.S. shareholders (each owning at least 10%) collectively own more than 50% of the company’s voting power or value.

CFCs are subject to complex anti-deferral rules under Subpart F of the Internal Revenue Code. These rules require U.S. shareholders to include certain categories of the foreign company’s income — such as passive income, interest, and royalties — on their U.S. tax returns even if no distribution has been made.

Failure to comply with CFC reporting obligations can lead to significant penalties. Texas companies with overseas subsidiaries should ensure robust accounting and compliance systems are in place to track earnings and related-party transactions.

The GILTI regime (Global Intangible Low-Taxed Income) was introduced under the Tax Cuts and Jobs Act (TCJA) to discourage profit shifting to low-tax jurisdictions.

Under GILTI, U.S. shareholders of CFCs must include in their taxable income certain high-return foreign earnings each year, regardless of whether the profits are distributed. While corporate taxpayers may benefit from partial deductions and foreign tax credits, individuals and pass-through entities face higher effective tax rates unless structured through a U.S. C corporation.

Planning tip: Texas companies should model the after-tax impact of GILTI and consider entity restructuring to reduce exposure — for instance, by using a corporate holding company or optimizing foreign tax credits.

Vanguard Legal PLLC serves as your corporate counsel for emerging and expanding technology businesses, offering integrated legal and tax structuring guidance to help your company innovate, grow, and thrive — in Texas and beyond.

The Foreign-Derived Intangible Income (FDII) regime provides a valuable tax incentive for U.S. corporations that generate income from exporting goods, services, or intellectual property to foreign customers.

In essence, FDII allows qualifying U.S. corporations to claim a reduced effective tax rate on profits derived from serving non-U.S. markets. For Texas companies in technology, energy, or manufacturing, the FDII deduction can substantially improve global competitiveness when properly structured.

The Base Erosion and Anti-Abuse Tax (BEAT) is another provision designed to prevent multinational companies from eroding the U.S. tax base through deductible payments (such as interest, royalties, or service fees) to related foreign affiliates.

BEAT generally applies to large U.S. corporations making significant deductible payments to related foreign entities. It imposes a minimum tax to ensure that a baseline level of U.S. tax is paid, even if deductions otherwise reduce taxable income.

Practical takeaway: Texas companies with cross-border intercompany transactions should regularly review payment structures and consider transfer pricing documentation to defend against BEAT exposure.

In essence, FDII allows qualifying U.S. corporations to claim a reduced effective tax rate on profits derived from serving non-U.S. markets. For Texas companies in technology, energy, or manufacturing, the FDII deduction can substantially improve global competitiveness when properly structured.

Transfer pricing refers to the pricing of goods, services, and intellectual property between related entities in different tax jurisdictions. The IRS and foreign tax authorities require that these transactions be conducted at arm’s length, reflecting what unrelated parties would charge under similar circumstances.

Non-compliance can lead to income adjustments, penalties, and double taxation. Companies should maintain contemporaneous transfer pricing documentation and evaluate intercompany agreements, royalty rates, and cost-sharing arrangements for consistency with OECD and IRS guidelines.

BEAT generally applies to large U.S. corporations making significant deductible payments to related foreign entities. It imposes a minimum tax to ensure that a baseline level of U.S. tax is paid, even if deductions otherwise reduce taxable income.

Practical takeaway: Texas companies with cross-border intercompany transactions should regularly review payment structures and consider transfer pricing documentation to defend against BEAT exposure.

In essence, FDII allows qualifying U.S. corporations to claim a reduced effective tax rate on profits derived from serving non-U.S. markets. For Texas companies in technology, energy, or manufacturing, the FDII deduction can substantially improve global competitiveness when properly structured.

At Vanguard Legal PLLC, we advise Texas companies on international tax planning, compliance, and cross-border structuring. Our attorneys understand both the legal and commercial challenges of expanding abroad and provide strategic guidance on:

• Avoiding foreign permanent establishment exposure;

• Leveraging U.S. tax treaties and credits;

• Structuring foreign subsidiaries to manage CFC, GILTI, and BEAT risks;

• Designing efficient transfer pricing policies; and

• Capturing FDII benefits for export-oriented businesses.

Our Houston and Dallas offices counsel clients in industries ranging from energy and manufacturing to technology and professional services, helping them expand globally while maintaining tax efficiency and regulatory compliance.