The United States imposes income taxes on foreign corporations only if they are engaged in business in the United States or receive income from sources within the United States.  In general the rules governing U.S. taxation of a foreign corporation’s income is the similar as the rules for a nonresident alien.

Entity options for a foreign corporation engaged in US trade or business

“U.S.trade or business” is not defined in the tax code or regulations. It is defined by case law as profit-oriented activities that are “regular, substantial and continuous”.U.S.tax treaties with other country provide guidance that business profits of a treaty resident is taxed only if the profits are attributable to a “permanent establishment” in the United States. Merely representative office will not trigger the U.S. taxation as long as the activities are limited in nature that the foreign corporation does not have a “permanent establishment in the U.S. Any inadvertent performance by exceeding the permissible activities may trigger taxable presence in the U.S.

Branch Once a foreign corporation creates a PE, a branch office is established in the U.S.  A branch is similar in nature to a representative office in that it does not need registration in the U.S. However, a branch establishes doing business in the U.S. of the foreign corporation and constitutes taxable presence in the U.S. The foreign corporation must account for and file tax return on the branch profit. Since a branch office is not a separate legal entity of the parent corporation, this structure generally does not shield the foreign corporation from liability incurred at the branch level and therefore liability in the U.S. at the branch level would expose the foreign parent corporation to liability.

 Subsidiary A U.S. subsidiary is incorporated by a foreign corporation under U.S. domestic law. The subsidiary is a separate U.S. domestic corporation from its foreign parent. In this way, the foreign parent corporation limits its exposure to U.S. tax liabilities and is not subject to the complex cost allocation. With a U.S. subsidiary, the foreign corporation may not be required to file their income tax or disclose its worldwide assets, liabilities, and equities.

Limited Liability Company (LLC) Most states in the U.S. allow for the formation of an entity known as a “limited liability company” (LLC). An LLC is an unincorporated business entity. From a state business law perspective, LLCs limit members liability protection that a corporation offers to its shareholders. For the federal tax purpose, an LLC is an eligible entity that can elect to be treated as either a partnership, a corporation or a disregarded entity.

U.S. Taxation on Subsidiary of Foreign Corporations

AU.S.subsidiary of foreign corporations is taxed on its worldwide income as any other domestic corporation.  The net income of a US Subsidiary is subject to the US corporate tax rate. The 15% to 39% corporate tax rates and the 20% corporate alternative minimum tax rate are used to determine the corporate tax liability.

In case that the US subsidiary distributes the dividends to the foreign shareholders or pays the interest to the foreign investors, a flat rate of 30% is generally applied to the U.S. source investment income unless a reduced rate is applied under U.S. tax treaties. The U.S. taxes on the investment income are collected through the withholding process. In contrast to the tax on ECI, the withholding tax is applied to gross income with no deductions allowed.  Capital gains that are not effectively connected with the conduct of a us trade or business are exempt from U.S. taxation.

U.S. Taxation on Branch office

AU.S.branch may put the foreign parent corporation under U.S. taxation, even not on its entire corporate income.  The corporation must first determine whether income is from U.S. sources or foreign sources. There need schemes that allow for inter-country allocations of related deduction to determine the effective connected income for U.S. purposes. Profits allocated to the branch will be subject to the same U.S. income tax treatment as a domestic corporation.

In addition to the income tax, a second level of tax would be imposed on the corporate profits to the extent that the branch did not reinvest its net profit in the U.S. branch operation. This “branch profits tax,” enacted by the 1986 Act, is intended to replicate the shareholder-level dividend tax that would have been applicable if the investment had been made through a U.S. corporation that then distributed its net profit as a dividend. The dividend equivalent branch profit tax equal to 30% (or a lower rate under tax treaties) times the dividend equivalent amount.

Tax compliance

• U.S.payroll taxes
• Sales and use taxes
• State and local taxes
• Transfer pricing and documentation

 Tax Forms

Some of common IRS forms required for foreign corporation engaged in U.S. trade or business includes: