This article provides some basic ideas and thoughts for foreign corporate investors that are planning to invest into the U.S; to create import and export opportunities; build partnerships; and make profits.

One foreign corporate investor, who would like to make investments into the US, will consider two possible options: direct and active investment into the US via Foreign Branch or through a US Subsidiary. Each option will provide the pros and cons related to the tax issues.

First of all, a foreign corporate investor that is engaged or deemed to be engaged, in the active conduct of a U.S. trade or business (a US branch) is subject to branch profit tax; branch interest and excess interest tax. The main purpose of branch profit tax is to reduce the disparity in U.S. Income tax between a foreign branch and U.S. subsidiary. In according to Section 884(a), the branch profit tax imposes at 30% of dividend equivalent amount for the taxable year. The dividend equivalent amount means the foreign corporation’s effectively connected earnings and profits for the taxable year adjusted by reduction for increase in US net equity and Increase for decrease in net equity.

The tax rate 30% of the branch profit tax can be reduced by the Tax treaties between the U.S and foreign countries if the foreign corporate investor is a qualified resident of the foreign countries. In some cases, if there are no articles in the tax treaties related to the branch profit tax rate, the foreign corporate investor is allowed to apply the dividend tax rate. For example: based on the tax treaty between the US and China, the dividend tax rate is 10%. Therefore, the branch tax rate can be reduced to 10%, instead of 30%, if there are no further regulations the branch profit tax rate.

In addition to the branch profit tax rate, the foreign corporate investor may be subject to branch level interest tax.  Similar to the purpose of branch profit tax, branch level interest tax is imposed, effective from 1986 to eliminate the discrimination of US branch and US Subsidiary of a foreign corporation. Interest paid by a US branch may be subject to 30% withholding tax. The US tax laws also impose excess interest tax rate of 30% on the excess interest. Excess interest is the interest apportioned to effectively connected income of the foreign corporation under regulations section 1.882-5 less branch interest.  The branch interest and excess interest tax rate will be reduced by the tax treaties.

How to compute the branch profit tax and branch level interest tax is a complicated and time consuming process. Also, a foreign corporation with a US branch may be required to file the form 1120-F (U.S. Income Tax Return of a Foreign Corporation) and to disclose the worldwide assets, liabilities, and equity of the whole corporation to the US tax authorities.

Secondly, Due to the burden on tax and compliance of a U.S. Branch of a foreign corporation, a lot of foreign corporate investors consider to conduct the business with the U.S. through a US domestic Subsidiary.   

A US subsidiary will not be subject to the branch profit tax or Excess interest tax of a US Branch. The income of a US Subsidiary is subject to the US corporate tax rate. In case that the US subsidiary distributes the dividends to the foreign shareholders or pays the interest to the foreign investors, the withholding tax on the dividends and interest is required. The tax treaties will be applied on those withholding taxes. With a US subsidiary, the foreign corporation may not be required to file their income tax or disclose its worldwide assets, liabilities, and equities

To establish a US subsidiary, a foreign corporate investor can choose two different entity types of a Corporation or Limited Liability Companies (LLC), depending on the legal liabilities and tax consequences.  

A corporation is formed under state law by the filing of articles of incorporation with the state and is a legal citizen of the state of its incorporation. The corporation is legally separate and distinct from its shareholders and protects its owners from being personally liable in the event that the corporation is sued. Therefore, with a US domestic corporation subsidiary, the foreign company does not directly liable in the US courts for the actions of the subsidiary. As a statutory person, a corporation can only be terminated by filing the article of termination with the state of its incorporation.

The other type of entity is LLC, which essentially combines the partnership and corporate characteristics. LLC is not totally separate from its owners and can be terminated without action by the state of its corporation.

In conclusion, there are several choices for a foreign corporate investor, who is planning to conduct a business in the US. Each option results different pros and cons relate to the tax complications. Therefore, the foreign corporate investor needs a lot of factors, including its own country’s regulations and advice from its consultants in order to make the proper decisions.

1 comment

  1. Heya i am for the first time here. I came across this board and I find It really useful & it
    helped me out much. I hope to give something back and aid others like you helped me.