How do I know if my corporation is an incorporated employee?
Look at what the relationship would be if the corporation were not there. If the individual doing the work would reasonably be regarded as an employee of the client but for the interposed company, the rule is in play. The tests are the ordinary employment ones: who controls how and when the work is done, who supplies the tools, whether the worker may send a substitute, who bears the financial risk, and whether there is any real chance of profit or loss. A single client and a long engagement do not decide the question on their own, but they are what draws attention to it.
What can a personal services business actually deduct?
Very little compared with an ordinary corporation. The deductions available are essentially the remuneration and benefits paid to the incorporated employee, together with a narrow category of costs of a kind an employee could have claimed. The everyday business expenses a company would normally set against its income are not available. That is the point of the rule: it removes the advantage of interposing a company while leaving the company in place. The practical consequence is that corporate income is taxed with almost nothing set against it, which is why a reassessment hurts even where the revenue was modest.
Why does my client insist on contracting through my company?
Usually because it moves employment risk and payroll obligations off the client. It does not change the substance of the relationship, and the risk it moves does not disappear; it lands on you. A contract describing the parties as independent carries weight only so far as the working arrangements match what it says. If you are directed like a member of staff, integrated into the client's team and unable to take on other work, the paper will not hold the position on its own. Negotiate the working arrangements, not only the wording of the agreement.
Does this apply if I contract through a company set up abroad?
Incorporating in another country changes the facts you have to analyse rather than removing the question. A corporation formed abroad can still be resident where its central management and control actually sit, and the income can still be attributed to work performed where the person is. On top of that, the other country will apply its own characterisation to the same arrangement, and the two characterisations do not have to agree. The usual outcome of an offshore contracting company arranged for this purpose is more filings and more exposure, not fewer.
How can I show my company is a real business?
By having the features a business has, and by being able to evidence them at the time rather than later. More than one client, or a genuine and documented effort to obtain others. Your own tools and premises, to the extent the work needs them. Control over how the work is done and when it is carried out. A right of substitution that is real rather than decorative, and ideally one that has been used. Your own insurance and your own liability. Invoicing on your own terms. None of these is decisive alone; the picture they make together is what the analysis turns on.
What happens if my company is reassessed under this rule?
The corporation's income is taxed without the deductions it had claimed, at the punitive rate the rule exists to impose rather than the rate the company had budgeted for. Because the analysis is factual rather than elective, a reassessment normally reaches every open year with the same arrangement in it, not only the year under review, and interest runs from the original due dates. The realistic defence is evidence about how the work was actually carried out, gathered while it was being carried out, which is why the position is worth settling before a review starts.
What happens if the two countries disagree about which of them can tax me?
The treaty has a procedure for exactly that. You apply to the competent authority in your residence country, which takes the case up with its counterpart, and the two negotiate a position that removes the double taxation. Some treaties add binding arbitration if they cannot agree. It is slow and it runs on documents, so the practical work is preserving the record and filing protective claims while the clock runs. See our treaty work.
Do American citizens living abroad have to pay taxes?
American expats and green card holders need to file US returns for life, and many of them pay little or no US tax once the relief is applied — but the filing is what unlocks the relief, so the two questions have different answers. The exclusion for foreign earned income, the credit for foreign tax already paid and the treaty between the two countries between them usually leave the total at roughly the higher of the two countries' tax rather than the sum. Skip the return and none of it applies. See Americans abroad.
