Saving $132,500 Annually Through Cross-Border Tax Planning
The Challenge
A U.S. citizen living in New Zealand operated a legal-recruitment business serving U.S. law firms through a New Zealand company that wholly owned a U.S. LLC. With projected net profits of approximately $500,000 a year, the structure appeared straightforward but produced a severe mismatch between U.S. and New Zealand tax rules.
For U.S. purposes, the LLC was transparent and its active income flowed into the New Zealand parent, a controlled foreign corporation. The owner therefore faced annual U.S. tax under the CFC/NCTI rules. New Zealand, however, generally taxed the same profits when distributed to the owner, and those later taxes were not creditable against the earlier U.S. inclusion. Assuming full distribution, the combined liability was estimated at $316,500 - a 63.3% effective tax rate.
Our Approach
ETP analyzed the entity classifications in both countries, the U.S. high-tax exception, New Zealand's management-and-control rules, salary and dividend treatment, foreign tax credits, self-employment tax and the timing value of deferral. We modeled seven scenarios across the existing structure and four principal alternatives.
The most tax-efficient solution was a full-salary structure. The U.S. LLC would pay an intercompany fee to the New Zealand company, which would pay its profits to the owner as salary. This left no net corporate profit subject to U.S. CFC/NCTI tax. New Zealand tax on the salary exceeded the corresponding U.S. income tax and was fully creditable, eliminating U.S. income tax. U.S. self-employment tax did not apply because the owner was an employee of the New Zealand company.
Creating Additional Value
Our comparison also made the tradeoff between current tax and deferral explicit. Partial-salary structures could reduce currently payable tax to roughly 29%-31%, but their ultimate effective rates rose to approximately 40%-42%. The full-salary approach required payment of tax currently, but produced the lowest total global liability.
The analysis also showed that removing all companies would be less efficient because U.S. self-employment tax would apply. Conversely, the U.S. LLC could potentially be removed from the recommended structure if it served no continuing legal or commercial purpose, simplifying the arrangement without changing the core tax result.
The Result
ETP converted a double-tax structure into a coordinated U.S.-New Zealand compensation model. Based on approximately $500,000 of annual profits, our recommendation helped the client:
Eliminate U.S. CFC/NCTI tax on the business's operating profits;
Reduce estimated global tax from $316,500 to $184,000, lowering the effective rate from 63.3% to 36.8%;
Save approximately $132,500 per year; and
Avoid U.S. self-employment tax while obtaining full foreign tax credit relief for New Zealand tax paid on salary.