When foreign companies start operating offshore, they might not always be aware of the tax laws of the foreign country where they are doing business. To raise awareness, our AG Tax experts have prepared an overview of the various types of tax issues a foreign corporation may face while operating in the U.S.
What is a Foreign Corporation?
A foreign corporation is an eligible entity that is not created or organized in the U.S. or under the laws of the U.S. or any State, but was created or organized under the laws of a foreign country. In order to do business in the U.S., a foreign corporation must be registered at the federal level of a country and at the state/provincial level (if required). By registering, a corporation can operate as the same organization in multiple jurisdictions.
What are the Potential Tax Obligations for a Foreign Corporation?
A foreign corporation pays U.S. tax not only on its income that is effectively connected with a trade or business in the U.S., but also on the income that is US sourced and is fixed, determinable, annual, or periodic (FDAP). This applies to both active and passive income. Without the proper treaty beneficial rate applied, the tax rate ranges from a minimum of 15% for taxable income below $50,000 to a maximum of 35% when the taxable income is more than $10,000,000.
Deductions are only allowed to be taken if they are associated with effectively connected income from the U.S. trade or business. Charitable contributions and gifts to a qualified charity are also deductible regardless of whether the contributions are related to the U.S. trade or business.
Additional Tax issues for Foreign Corporations
In order to avoid double taxation, foreign corporations are eligible for Foreign Tax Credits (FTCs) relating to qualified income taxes paid on foreign source income that is effectively connected with a U.S. trade or business.
There are certain additional taxes that should be kept in mind as a foreign corporation operating in the U.S.:
• Foreign Corporations doing business in the U.S. are liable to a 30% tax rate (unless reduced by an international income tax treaty) on a U.S. branch, including partnerships that generate effectively connected income (ECI). This is known as the ‘Branch Profit Tax’ (BPT details).
• Foreign corporations which during the taxable year derive any income from real property located in the United States (or from any interest in real property, including gains from the sale or exchange of real property or an interest, or rents or royalties from mines, wells, or other natural deposits) can be subject to taxes under the Foreign Investment in Real Property Tax Act (FIRPTA details).
• A flat 30 percent tax (or lower treaty rate) applies to investment and other fixed or determinable periodical income (non ECI) regardless of whether the recipient engages in a trade or business in the United States.
AG TAX LLP CAN HELP
Setting up a business in a foreign country could be confusing and risky, which is why we recommend you arrange a meeting with your AG Tax advisor to go over the proper planning required to mitigate potential tax issues. With effective tax planning one can take advantage of the beneficial tax treaty rate, various credits, and deductions available.
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 associates are dedicated to assist you 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
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
