Boundless leadership: Tax considerations for C-suite moves to the US

Substantial presence test

One of the first questions a non-US executive must answer is whether they will become a US tax resident. The substantial presence test is calculated based on whether they are physically present in the US on at least:

• 31 days during the current tax year; and
• 183 days during the current year and the two preceding years, calculated using a weighted formula (all days in the current year, 1/3 of days in the first preceding year, and 1/6 of days in the second preceding year).

Meeting this test means the executive is considered a US resident for tax purposes, with worldwide income subject to US taxation. Executives from countries with income tax treaties with the US may find themselves classified as tax residents in both jurisdictions. Tax treaties typically contain "tiebreaker" provisions to determine the primary country of residence, prioritising factors such as permanent home, centre of vital interests, habitual abode, and nationality.

Worldwide taxation vs. territorial taxation

The US follows a worldwide taxation system for residents, meaning all income, no matter where earned, is subject to US federal income tax. This contrasts with many countries that tax only local (territorial) income. For executives accustomed to territorial taxation, the shift to US worldwide taxation can be dramatic, impacting salary, investment income, rental income, and gains from the sale of assets abroad. This makes determining timing of services and payments crucial to minimising tax burden. And this doesn’t just apply to income; it applies to all assets located outside of the US. Foreign banks, stocks, and other financial assets need to be reported annually for US residents.

Conclusion

Relocating to the United States can offer a wide range of professional opportunities, but the transition carries significant tax consequences for non-US executives. By understanding US residency rules, compliance obligations, and the intricate interplay between domestic and international tax regimes, executives can navigate the complexities, mitigate risks, and position themselves for success. 

Early engagement with cross-border tax advisors and a careful review of financial arrangements are essential to ensuring a smooth transition – protecting both personal wealth and corporate interests in a new chapter of international leadership.

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Derek Morgan is an international tax services director at Mowery & Schoenfeld. He specialises in identifying and managing the foreign tax compliance process for clients across various industries. He holds his master’s degree in accounting and a Bachelor of Science in Accounting from the University of Alabama, and is a Certified Public Accountant.