Are There Restrictions on Dual Citizens Paying Themselves a Salary from Foreign Subsidiaries?

 If you’re a dual citizen running international businesses, one question you’ve probably asked yourself is: Can I pay myself a salary from my foreign subsidiaries without running into legal trouble? The answer isn’t as straightforward as you might hope. While dual citizenship can provide flexibility in operating businesses across borders, it can also introduce complex tax, legal, and compliance challenges when paying yourself from foreign subsidiaries.

In this blog, we’ll break down the rules, potential restrictions, and practical strategies to ensure you legally and efficiently pay yourself while operating internationally.

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1. Understanding the Basics: Ownership vs. Salary

Owning a foreign subsidiary doesn’t automatically entitle you to draw a salary. There are several key distinctions to understand:

• Dividends vs. Salary:

  • Dividends are profits distributed to shareholders and are typically taxed differently than salaries.

  • Salaries are compensation for work performed and are subject to payroll taxes and employment regulations in the subsidiary’s country.

• Legal Authority:

  • Being a shareholder doesn’t automatically make you an employee. To pay yourself a salary, you generally need a formal employment arrangement recognized under local labor law.

• Tax Implications:

  • Salaries are usually deductible for the company, reducing corporate tax liability.

  • Dividends are often paid from post-tax profits and may incur withholding taxes in the subsidiary’s country.

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2. Restrictions That May Apply

a. Local Labor and Tax Laws

• Many countries regulate how foreign-owned companies can compensate directors or foreign employees.

• Salaries must comply with minimum wage rules, statutory contributions (like social security), and local payroll reporting.

• Some jurisdictions impose strict documentation requirements for employment contracts and salary payments.

b. Exchange Controls

• Certain countries have foreign exchange regulations restricting the movement of funds abroad.

• Paying yourself a salary in another currency may require approval or registration with local authorities.

c. Dual Taxation Concerns

• Dual citizens may be subject to tax obligations in multiple countries.

• Without careful planning, paying yourself a salary could trigger double taxation, where both the subsidiary country and your country of residence tax the income.

d. Corporate Governance Rules

• Some countries require approval from the board of directors or shareholders for executive compensation.

• If you hold multiple roles (shareholder, director, and employee), proper corporate documentation is essential to avoid disputes or violations.

e. Industry-Specific Restrictions

• Certain regulated sectors, such as banking, telecommunications, or defense, may have extra rules governing compensation for foreign executives.

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3. How Dual Citizenship Adds Complexity

1. Reporting Obligations

• Dual citizens may need to declare foreign income, even if already taxed in the subsidiary country.

• Some countries require reporting of foreign bank accounts or foreign corporate ownership (e.g., the U.S. FBAR/IRS requirements).

2. Tax Residency Rules

• Your country of residence or primary citizenship may treat your salary as taxable income.

• Tax treaties between countries may mitigate double taxation, but eligibility must be confirmed.

3. Exchange of Information Between Countries

• International agreements mean tax authorities often share information about foreign salaries, dividends, and ownership.

• Undeclared salaries or improperly structured payments can lead to audits or penalties.

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4. Strategies to Legally Pay Yourself

1. Establish a Formal Employment Contract

• Register yourself as an employee of the subsidiary.

• Include salary, benefits, and job description in accordance with local labor law.

2. Understand Local Payroll Requirements

• Calculate income tax withholding, social security contributions, and other statutory obligations.

• Remit taxes properly to avoid penalties and maintain compliance.

3. Consider Dividends vs. Salary

• Dividends may be more tax-efficient in some jurisdictions, while salaries may reduce corporate tax liability.

• Structuring a mix of salary and dividends can optimize your tax position.

4. Leverage Tax Treaties

• Research treaties between the subsidiary country and your country of residence to prevent double taxation.

• Proper documentation can often reduce or eliminate tax overlap.

5. Use Professional Payroll or Accounting Services

• For multi-country operations, a global payroll provider ensures compliance with local and international rules.

• They handle withholding taxes, social security, and reporting requirements, reducing risk.

6. Maintain Clear Documentation

• Board resolutions approving your compensation, employment contracts, and payroll records are essential.

• Proper documentation protects against audits, disputes, and claims from other shareholders.

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5. Real-World Examples

Example 1: Tech Entrepreneur with a U.K. Subsidiary

• A dual U.K./Kenya citizen owns a software company in the U.K.

• They formalize themselves as an employee with a contract, receive a salary in GBP, and comply with U.K. PAYE taxes.

• Dividends are paid quarterly to optimize personal tax and corporate deductions.

Example 2: E-Commerce Business in Canada

• The dual citizen resides in another country but owns a Canadian subsidiary.

• Payroll is managed through a PEO to comply with Canadian employment and tax laws.

• Salary is paid locally, and tax credits are applied in their country of residence to avoid double taxation.

Example 3: Manufacturing Subsidiary in Africa

• Salary payments are subject to local exchange control regulations.

• Approval is obtained for repatriation or foreign currency payments.

• The owner receives a combination of salary and dividends to balance tax efficiency and cash flow needs.

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6. Key Takeaways

• You can generally pay yourself a salary from a foreign subsidiary, but you must comply with local labor, tax, and corporate governance laws.

• Dual citizenship introduces extra layers of reporting and tax considerations, including potential double taxation.

• Structuring compensation as a mix of salary and dividends can optimize taxes while maintaining compliance.

• Professional payroll and accounting services can help manage cross-border obligations efficiently.

• Proper documentation, including employment contracts and board approvals, is critical for legal protection.

By understanding the rules and planning strategically, dual citizens can legally pay themselves from foreign subsidiaries without risking fines, audits, or corporate disputes.

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