HA&W

Feature

04-29-05

Everything You Never Wanted to Know about U.S. Taxation of Foreign-owned Businesses...

If you are a foreign owned company doing business in the U.S., you already know that the tax laws are incredibly complex. What you should also know is that good tax planning strategies can save your company a great deal of money. Below are the issues you should consider:

TYPE OF LEGAL STRUCTURE
It is very important to discuss your company's business goals and strategy with your tax advisers in the U.S. and home country to determine the type of entity that is best suited for the enterprise. There are several factors that may affect entity choice:

Projected income or loss in the U.S
Company's worldwide income tax situation
Potential foreign tax credits;
Tax treaties available;
Company's exit strategy
Desire to invest money in the U.S. or repatriate profits to the foreign countries

The following are available entity structures:

Domestic Corporation (U.S. subsidiary of the foreign parent company), a corporation organized under the U.S. laws
Branch, a foreign corporation that operates a business in the U.S.
Partnership, a group of two or more entities (including individuals) that form an agreement to conduct business in the U.S.
Limited Liability Company, a Company that is taxed as a partnership for income tax purposes, but its members, like corporate shareholders, are not personally liable for the entity's debts and liabilities
Sole Proprietorship, an individual who conducts business in the U.S.

U.S. WITHOLDING TAX OBLIGATIONS
A business is required to withhold U.S. taxes on amounts paid to nonresident alien individuals or other foreign entities. The amounts subject to withholdings include wages, independent contractor fees, dividends, interest, royalties and etc.

TRANSFER PRICING
Transfer pricing issues can be extremely complicated; every situation is unique and must be evaluated on a case-by-case basis. Taxpayers participating in cross-border inter-company transactions must conduct them according to the terms and conditions that satisfy the "arm's length" standard. That principle requires inter-company prices to be set as if the related parties were independent, unrelated parties.

This is an important issue because the Internal Revenue Service, as well as the taxing authorities of many other countries, wants the ability to tax its fair share of such worldwide profits. Owners and managers of multi-national companies, on the other hand, want to minimize their exposure to tax penalties, double taxation and worldwide taxation. Substantial penalties may be imposed if various requirements are not satisfied.

BRANCH PROFIT TAX
Foreign corporations operating businesses in the U.S. without creating a separate legal entity are required to pay a federal branch profits tax equal to 30 percent or lower treaty rate of the foreign corporation's "dividend equivalent amount". This tax is in addition to the U.S. corporate taxes on the corporation's effectively connected income.

IRS REPORTING REQUIREMENTS
Foreign owned U.S. corporations are required to report certain information about their related parties to the IRS, including the identity of related parties and monetary transactions between the reporting U.S. corporation and foreign related parties.

STATE AND LOCAL TAXES
In addition to filing annual tax returns at the federal level, most states and certain local jurisdictions also have their own annual tax filing requirements and they may compute their tax base differently from the federal tax base. It's important to understand the impact of these states and local taxes before determining which states the company will need to file in.

Yelena Epova can be reached at 404-898-7431 or via e-mail at yelena.epova@hawcpa.com.

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