A sovereign state in free association with the United States (Compact of Free Association).
The Federated States of Micronesia (FSM) taxes nearly all businesses through a 3% Gross Revenue Tax (GRT) applied regardless of profitability, while FSM-incorporated entities meeting specific capitalization thresholds ('major corporations') may instead elect a separate flat 21% Corporate Income Tax under FSM Code Title 54, Chapter 3, with the two regimes operating as alternatives rather than cumulatively. The FSM is a sovereign state in free association with the United States under the Compact of Free Association, and comprises four states (Yap, Chuuk, Pohnpei, and Kosrae) each retaining fiscal autonomy to levy additional state-level taxes or fees.
Gross Revenue Tax returns must be filed quarterly, due January 1-31, April 1-30, July 1-31, and October 1-31 for the respective preceding calendar quarter, with tax due paid at the time of filing; businesses earning gross revenues of USD 2,000 or less per year are exempt.
3% Gross Revenue Tax (GRT). Distinctly and separately, FSM Code Title 54, Chapter 3 (the "Corporate Income Tax Act of 2004") imposes a flat 21% tax specifically on "major corporations" incorporated in the FSM. Major corporations remitting this Chapter 3 tax are exempt from the Chapter 1 Gross Revenue Tax instead (Section 323), per FSM Supreme Court case law (22 FSM R. 85) - the two regimes are alternatives, not cumulative. The 21% rate applies to taxable years ending on or after March 31, 2011; a higher 25.5% rate applied to taxable years ending on or before March 30, 2011. Taxable income is determined per IFRS or GAAP as regularly used in the major corporation's principal shareholder's home jurisdiction, with a foreign tax credit available for income taxes the major corporation itself paid to a foreign country on that same income.
The Federated States of Micronesia levies a wage and salary tax on employment income: 6% on the first USD 11,000 of gross wages, 10% on wages above that threshold, with no tax-free threshold. Employers withhold at source. Investment income, interest, and dividends are generally not subject to income tax at the national level. Note that a separately reported "5% sales tax rate" figure from another source likely reflects state-level sales taxes or fees - the FSM's four states (Yap, Chuuk, Pohnpei, and Kosrae) each have fiscal autonomy and may levy their own state-level sales taxes, distinct from the national government's tax system, which has no VAT/GST at all (see below).
5% sales tax reported.
The FSM's national tax system is built on three separate national taxes under Title 54 of the FSM Code: an import tax, the Gross Revenue Tax described above (applied to almost every person or company earning money from FSM activities, other than employees), and a wages and salaries tax withheld by employers. FSM comprises four states (Yap, Chuuk, Pohnpei, and Kosrae), each retaining some degree of fiscal autonomy and able to levy additional state-level taxes or fees. The FSM Supreme Court has held that Chuuk state is constitutionally entitled to 50% of Title 54 Chapter 3 corporate income tax collected by the FSM from major corporations incorporated in Chuuk specifically. FSM (22 FSM R. 85, 2018) - illustrating a real, litigated revenue-sharing dimension between the national government and individual states.
A foreign company with a permanent establishment or otherwise engaged in trade or business within the FSM is subject to the 3% Gross Revenue Tax and potentially the major-corporation Corporate Income Tax; the FSM Tax Code presumes that a business operating both within and outside the FSM during a calendar year derives all of its gross revenue from FSM sources unless it can demonstrate otherwise, a source-attribution presumption that functions as the FSM's practical permanent establishment backstop for foreign businesses.
No provision requires an FSM resident to include a foreign entity's undistributed profits in their own taxable income. FSM's tax system is territorial - the Gross Revenue Tax applies to FSM-source income only, and the separate "major corporation" regime taxes only the FSM-incorporated entity's own income, with a credit for foreign tax paid on that same income.
No thin capitalization rule, interest-deduction limitation, or debt-to-equity ratio exists under FSM Code Title 54.
The FSM classifies entities under its own domestic FSM Code rather than offering an elective check-the-box system, and no ATAD2-style anti-hybrid mismatch regime addressing double-deduction or deduction-without-inclusion outcomes has been identified, consistent with the FSM having no CFC-style attribution provision at all, since its territorial Gross Revenue Tax and major-corporation regime both tax only FSM-source or FSM-incorporated-entity income directly rather than looking through to a foreign subsidiary's profits.
No domestic FBAR-equivalent regime requires FSM residents to separately disclose foreign financial accounts, and the Federated States of Micronesia is not currently a CRS participating jurisdiction, so it does not automatically exchange financial account information with foreign tax authorities under the OECD's Common Reporting Standard. US persons remain independently subject to FinCEN Form 114 (FBAR) and potentially Form 8938 regardless of the FSM's own rules.
No participation exemption regime for dividends or capital gains from a qualifying subsidiary was identified, consistent with the FSM's territorial structure under which foreign-source income generally falls outside the national tax base entirely (no FSM CFC-style attribution) rather than being taxed and then exempted through a distinct participation mechanism.
A major corporation electing the 21% Corporate Income Tax under FSM Code Title 54, Chapter 3 is entitled to a foreign tax credit for income taxes it has itself paid to a foreign country on income also taxed by the FSM; the FSM has no double tax treaties and no bilateral tax agreement with the United States despite the Compact of Free Association relationship, so this unilateral credit is the primary relief mechanism available.
The FSM has no double tax treaties. There is no bilateral tax agreement with the United States either. The Compact Trust Fund held approximately USD 1.8 billion as of July 2025, and Compact funds remain the FSM's largest single source of government revenue.