US expats who own a foreign corporation can pay themselves a salary, dividends, or both, and only the salary may qualify for the Foreign Earned Income Exclusion (FEIE).
The most tax-efficient mix depends on foreign corporate taxes, US reporting requirements, and whether Controlled Foreign Corporation (CFC) rules apply.
If you’re an American living abroad and operating a foreign company, deciding how to pay yourself can significantly affect your US taxes.
Should you take a regular salary, distribute company profits as dividends, or use both?
Although these payment methods may appear similar from a cash-flow perspective, they receive different treatment under US tax law. Salary is generally compensation for work performed, while dividends represent distributions of corporate earnings.
For US expats who own foreign corporations, the decision becomes more complicated because of the Foreign Earned Income Exclusion, foreign tax credits, payroll obligations, and foreign business reporting requirements.
Key Takeaways: Salary vs. Dividends From a Foreign Company
Salary compensates you for services, while dividends generally distribute corporate earnings.
Qualifying foreign salary may be eligible for the Foreign Earned Income Exclusion.
Dividends do not qualify for the FEIE and may be subject to different US tax rates.
Salary may be deductible by the foreign company, depending on local tax law.
Foreign company profits may trigger CFC taxation even without a dividend distribution.
A combination of salary and dividends may be appropriate, but the optimal structure depends on both US and foreign tax rules.
Salary vs. Dividends: US Tax Treatment
| Tax consideration | Salary | Dividends |
|---|---|---|
| Payment represents | Compensation for services | Distribution of company earnings |
| US income tax | Generally taxable as wages | Generally taxable as dividend income |
| FEIE eligibility | Potentially eligible | Not eligible |
| Foreign Tax Credit | May apply | May apply |
| Company tax deduction | Often deductible if permitted locally | Generally not deductible |
| US payroll taxes | Depends on employment arrangements | Generally not wages |
| CFC considerations | May affect company profits | May interact with previously taxed earnings |
| US reporting | Form 1040; potentially Form 2555 or 1116 | Form 1040; potentially Schedule B, Form 1116, and other reporting |
This comparison assumes the business is treated as a corporation for US federal tax purposes.
How Does Paying Yourself a Salary Work?
When you receive a salary from your foreign company, the payment is generally treated as compensation for the services you perform.
For example, suppose you own a consulting company in Germany and pay yourself an annual salary of $90,000. If you perform your work in Germany, the compensation is generally considered foreign-source earned income for US tax purposes.
You must ordinarily report that salary on your US tax return, even if your company already withholds German income taxes.
However, certain tax provisions may reduce your US income tax liability.
Salary and the Foreign Earned Income Exclusion
One potential advantage of receiving salary is eligibility for the Foreign Earned Income Exclusion.
For the 2026 tax year, qualifying taxpayers can exclude up to $132,900 of foreign earned income from US federal income taxation.
To qualify, you generally must:
- Have a tax home in a foreign country.
- Meet the bona fide residence test or physical presence test.
- Receive qualifying income for services performed abroad.
For example, if you earn $100,000 in qualifying salary from your foreign corporation, you may be able to exclude the entire amount from regular US federal income tax.
However, the FEIE does not automatically eliminate payroll or self-employment taxes, and it does not apply to dividends.
The salary must also represent genuine compensation for services. Simply labeling a corporate distribution as salary does not guarantee FEIE eligibility.
Foreign Tax Credits on Salary
If you pay foreign income tax on your salary, you may instead benefit from the Foreign Tax Credit.
The FTC can reduce US income tax on qualifying foreign-source income, subject to applicable limitations.
In countries with relatively high income tax rates, using the FTC rather than the FEIE may produce a better overall result.
The two provisions also interact: foreign taxes attributable to income excluded under the FEIE generally cannot be used to claim a foreign tax credit.
How Are Dividends From a Foreign Company Taxed?
Dividends are payments distributed to shareholders from corporate earnings and profits.
Unlike salary, dividends generally do not compensate you for performing services.
Suppose your foreign company earns $150,000 in profit, pays applicable corporate taxes, and distributes $50,000 to you as a dividend.
That payment may be taxable on your US individual income tax return, even if the company already paid corporate income tax in its country of incorporation.
Do Foreign Dividends Qualify for Lower US Tax Rates?
Some dividends from foreign corporations qualify for preferential US federal income tax rates.
For individuals, qualified dividends are generally taxed at rates of 0%, 15%, or 20%, depending on taxable income.
However, dividends from foreign companies do not automatically qualify.
Eligibility depends on factors such as whether the corporation meets the applicable qualified foreign corporation requirements, treaty provisions, holding periods, and other restrictions.
Dividends from certain foreign corporations, including PFICs, generally cannot receive qualified-dividend treatment.
Nonqualified dividends are ordinarily taxed at regular income tax rates.
Depending on the taxpayer’s income and circumstances, dividends may also be subject to the 3.8% Net Investment Income Tax.
Why Dividends Cannot Use the FEIE
The Foreign Earned Income Exclusion applies to qualifying income earned from performing services abroad.
Dividends are generally investment income rather than compensation for services.
Therefore, even if you own and actively manage the foreign company distributing the dividends, those payments do not qualify for the FEIE.
This distinction is particularly important for US expats who rely on the FEIE to reduce their annual US income tax liability.
Salary vs. Dividends: A Practical Example
Consider a US citizen living in Spain who owns a Spanish company.
The business has $120,000 available before owner compensation and related corporate taxes.
The owner is considering three approaches:
| Payment approach | Salary | Dividends |
|---|---|---|
| Option A: Salary only | $120,000 | $0 |
| Option B: Dividends only | $0 | Amount available after corporate taxes |
| Option C: Combination | $70,000 | Amount available after salary costs and corporate taxes |
Option A: Salary Only
The owner receives $120,000 in compensation.
If the salary qualifies as foreign earned income and the owner meets the FEIE requirements, some or all of it may be excluded from regular US federal income tax.
However, Spanish payroll taxes, social contributions, and corporate deductibility rules must also be considered.
Option B: Dividends Only
The company retains its profits until applicable corporate taxes are paid, then distributes the remaining amount.
The dividends do not qualify for the FEIE.
The owner may owe US tax on the distribution, although foreign tax credits, preferential dividend rates, or previously taxed earnings rules could affect the outcome.
Additionally, US tax on certain corporate profits may arise before any dividend is paid.
Option C: Salary and Dividends
The owner receives $70,000 in salary and distributes some remaining profits as dividends.
This approach separates compensation for services from returns on ownership.
It may provide flexibility, but it does not automatically produce the lowest tax liability.
The best option cannot be determined from the payment amounts alone. A meaningful comparison must account for corporate income taxes, personal income taxes, social contributions, CFC rules, and applicable tax treaties.
Own a Company Outside the US?
We prepare Form 5471, CFC calculations, and owner compensation planning for Americans with foreign corporations.
How CFC and GILTI Rules Affect Your Decision
For many US expats, the most important consideration is whether their foreign company qualifies as a Controlled Foreign Corporation.
A foreign corporation generally becomes a CFC when more than 50% of its voting power or value is owned by qualifying US shareholders under the applicable ownership rules.
If you are a US citizen who wholly owns a foreign corporation, the business will generally be a CFC.
US Tax on Undistributed Foreign Company Profits
Certain US shareholders of Controlled Foreign Corporations (CFCs) may owe US tax on corporate profits even when no dividends are distributed.
These rules include Subpart F income and the Section 951A regime, historically known as GILTI. For tax years beginning after December 31, 2025, legislative changes renamed and modified the Section 951A inclusion as net CFC tested income (NCTI).
As a result, retaining profits inside a foreign company does not necessarily defer US taxation.
Salary payments may reduce corporate income when properly deductible, potentially lowering the amount subject to these rules. However, the outcome depends on the company’s earnings, foreign taxes, ownership structure, and other factors.
Treatment of Previously Taxed Earnings
If corporate profits have already been included in your US taxable income under CFC rules, later distributions of those previously taxed earnings may be excluded from US gross income to prevent double taxation.
However, proper tracking is essential because these distributions can involve additional reporting requirements and foreign currency considerations.
US Payroll Taxes and Foreign Social Security Contributions
Salary and dividends can also differ in their employment tax treatment.
If you receive wages from a foreign corporation, US Social Security and Medicare tax obligations depend on factors such as the employer’s status, the employment arrangement, and applicable law.
Foreign employment does not automatically mean US FICA taxes apply.
Similarly, receiving a salary through a foreign corporation does not automatically make the payment subject to US self-employment tax.
Foreign social security contributions may apply under the rules of the country where you work.
Where the United States has a Totalization Agreement with that country, the agreement may help determine which country’s social security system covers the employment.
Dividends generally are not wages, but their classification must reflect the actual nature of the payment and applicable law.
Foreign Company Reporting Requirements
Whether you receive salary, dividends, or both, owning a foreign company can create separate US information reporting obligations.
Form 5471
Certain US citizens and residents who own shares in foreign corporations must file Form 5471 with their US tax returns.
The form provides information about the corporation’s ownership, income, transactions, and other financial activities.
Filing requirements depend on the shareholder’s ownership percentage, the corporation’s status, and other circumstances.
Other Potential Reporting Forms
Depending on your business structure and financial accounts, additional forms may include:
- Form 8992: Used to calculate applicable Section 951A inclusions.
- Form 1116: Used by individuals claiming qualifying foreign tax credits.
- Form 8938: May apply to specified foreign financial assets exceeding reporting thresholds.
- FBAR (FinCEN Form 114): May apply to foreign financial accounts when the aggregate reporting threshold is exceeded.
Not every foreign business owner must file all these forms.
The company’s US tax classification is particularly important. A foreign entity treated as a disregarded entity or partnership may be subject to different tax and reporting rules, including Forms 8858 or 8865.
How to Decide Between Salary and Dividends
Before deciding how to pay yourself from a foreign corporation, review the following factors.
1. Confirm the company’s US tax classification.
A foreign limited company is not necessarily treated as a corporation for US tax purposes. Its classification determines which compensation and reporting rules apply.
2. Determine whether you qualify for the FEIE.
If you perform services abroad and meet the eligibility requirements, qualifying salary may provide a US tax advantage.
3. Compare foreign and US tax rates.
Consider both corporate and personal income taxes, along with the availability and limitations of foreign tax credits.
4. Evaluate CFC and Section 951A exposure.
Determine whether corporate profits could be taxable to you in the United States before distribution.
5. Review payroll and social security obligations.
Account for local payroll rules, employment taxes, and any applicable Totalization Agreement.
6. Calculate the combined tax cost.
Compare the overall tax consequences for the company and shareholder rather than focusing only on the tax rate applied to salary or dividends.
Deciding How to Pay Yourself?
Talk to a US expat tax professional before your next distribution so salary and dividends work together.
