Foreign corporations looking to do business in the United States have the option of setting up representative offices, branches, or full subsidiaries in the U.S. to facilitate the growth of their operations. However, the tax implications associated with setting up an office in the U.S., and the impact it may have on the business, is not always considered in advance.
What is a Foreign Branch?
As per the U.S Internal Revenue Services, an entity is considered to be a foreign branch if it is not created or organized in the U.S., similar to a foreign corporation. To set up a foreign branch, you will need to register with the state in order to do interstate or foreign business by certifying the name and address of the resident agent in the state. If you obtain a certificate of “good standing” from the federal or particular state government, you may qualify to do interstate business. With this structure the parent foreign corporation is liable for the losses and activities of the branch office which may or may not be desirable depending on the circumstances.
What is Branch Profit Tax?
Foreign corporations’ branches situated in the United States may need to file a branch return statement (Form 1120-F: U.S. Income Tax Return of a Foreign Corporation) every tax year, and report the income generated through trade or business effectively connected with the United States. These branches need to pay a Branch Profit Tax (BPT) at a 30% tax rate (unless reduced by a Tax Treaty) on the after tax profits of the branch. BPT is an extra form of tax on the foreign corporations’ profits which have not been reinvested in the United States or if the profits are disinvested in a future year. Under certain circumstances a branch may be able to claim an exemption under the US-Canada Tax Treaty to the first $500k of branch income.
Why was Branch Profit Tax Introduced?
BPT was introduced in 1986 to hold foreign branches and a foreign subsidiaries to similar tax standards in the U.S. Previously, the dividends paid by a foreign corporation’s subsidiary attracted withholding tax whereas remittances made by a branch to the head office did not attract any tax, making the branch system a more advantageous way of carrying out business in the U.S.
How is Branch Profit Tax Calculated?
BPT is imposed on the after-tax net profit of the foreign corporation. It is charged (along with any required federal and state income tax) on the income effectively connected with the U.S and calculated as follows:
• Firstly, the foreign corporation determines the income that is generated from the United States investments and business
• Once this has been determined, the regular corporate tax is assessed, the remaining amount is the ‘net after tax income’; known as the ‘dividend equivalent amount’ since it is generally distributed as a dividend.
• The 30% Branch Profit Tax is applicable on this remaining amount (after tax profit).
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
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