U.S. Tax Planning for Foreigners: Setting Up Your Business in the U.S.

Establishing a business presence in the United States as a foreign entity can be complex, with multiple options available depending on your business’s nature and scale. Here’s a quick overview of the primary structures you can consider: subsidiaries, branches, and partnerships or LLCs.

1. Subsidiary

A U.S. subsidiary is treated as a separate entity for tax purposes, meaning it is subject to U.S. federal and state taxes on its income. It must file tax returns and pay taxes on income generated within the U.S. Notably, dividends sent to the foreign parent company incur withholding taxes, often reduced through tax treaties.

Creating a subsidiary typically protects the foreign parent from being seen as engaged in U.S. business, as long as the subsidiary acts independently and not as an agent. However, transactions between the subsidiary and the parent must follow the IRS’s arm’s-length standards to prevent tax evasion.

2. Branch

Alternatively, a foreign company can establish a branch in the U.S. This option subjects the branch’s income to U.S. taxes, including a branch profits tax on after-tax earnings deemed repatriated to the parent company. A U.S. branch usually creates a permanent establishment for tax purposes, meaning the parent is considered engaged in U.S. business.

Branches also have tax obligations, including the need to file specific forms, such as Form 1120-F, to report their income and pay applicable taxes.

3. Partnership/LLC

Operating as a partnership or LLC allows for pass-through taxation, where the business itself does not pay federal income tax. Instead, income and expenses pass through to the partners, who report them on their tax returns. This structure can help foreign partners avoid double taxation, although U.S. tax obligations still apply to effectively connected income (ECI).

Partnerships have their own set of filing requirements, including Form 1065 and Schedule K-1, among others.

Key Considerations

When deciding how to establish your U.S. presence, consider these factors:

  • Tax Obligations: Each structure has different tax implications, including filing requirements and potential withholding taxes.
  • Compliance: Adhering to U.S. tax laws, including transfer pricing rules and state-level regulations, is critical.
  • Tax Treaties: Evaluate the implications of any applicable tax treaties, which can significantly affect withholding tax rates and overall tax liabilities.

Conclusion

Navigating the U.S. tax landscape as a foreign business can be challenging, but it’s essential for minimizing tax liabilities and ensuring compliance. Each structure—subsidiary, branch, or partnership—comes with its own set of advantages and challenges.

For a more detailed explanation of the specifics of U.S. tax planning for foreigners and to explore tailored strategies for your business, email us for the complete whitepaper. Equip yourself with the knowledge needed to make informed decisions and succeed in the U.S. market!