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The United States (US), the world’s largest and most diverse economy, is one of the leading destinations for investment from around the globe and offers opportunities for doing business with a minimum of bureaucracy.
However, there are a number of issues which you must consider when you are looking to set up your business in the US. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.
What type of Business Structure should we use?
There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:
Establishment (a branch of your overseas business):
- Not a separate legal entity but an extension of the overseas parent company
- No limited liability or ring-fencing of the US operations
- If you have a permanent establishment (PE) in the US then profits from this PE are liable to US Corporation tax
- Parent must file income tax returns with:
- The Internal Revenue Service to report and pay US Corporation tax on the taxable profits of the branch if there is a PE or to claim treaty protection if there is no PE
- Each of the states where the branch is doing business if there is sufficient presence or “nexus” (This may be required in some cases even if there is no PE.)
- These returns and accounts of the parent company are not available for public inspection
- Provides limited liability and ring-fencing to US operations
- Gives a perception of a local business, with longevity
- Corporation tax to be paid on company profits unless company qualifies for transparent treatment (Such elective “S” Corporation status is not typically available for foreign investment in the US.)
- Returns must be filed with the Internal Revenue Service and each of the states where there is nexus
- Accounts for non-public companies are not required
Limited Liability Company:
- Members have limited liability
- Profits are allocated to members who then pay Income tax on these profits personally
- The tax residence of the member, and where the profits in the LLC originated, will determine in what jurisdiction and how these profits are taxed
- Partners have limited liability
- Profits are allocated to partners who then pay Income tax on these profits personally
- The tax residence of the partner, and where the profits in the LLC originated, will determine in what jurisdiction and how these profits are taxed
How much Corporation Tax will the business pay?
Current Corporate Tax Rates in the US are:
|Tax rate (%)||Taxable profit (USD)|
NB: (corporate tax tables are not indexed for inflation)
What if we use the US to set up our holding company?
For US federal income tax purposes, consolidated return filing is permitted for groups consisting of US corporations under a single US parent. Some but not all states allow a similar approach.
For this reason, for operations in the US, such a structure is advantageous because losses incurred by a member of the consolidated group can offset income from other members within the group. Also, dividends paid within the group are not taxable federally and by most states. However, gain on the sale of shares in a subsidiary corporation in the group to a non-group member is taxable. For a foreign parent company with subsidiaries in other foreign countries, it is generally not desirable from a tax perspective to have those subsidiaries owned by a US holding company.