FAQ’s FOR BUSINESSES COMING TO THE US
Everyone will agree that the world is much smaller now than it has ever been, and it continues to shrink. It is becoming more and more common for Us companies to have international operations, and conversely, for non-US companies to operate in the US.
This is the second in a series of blogs about the tax aspects of non-US companies doing business in the US.
What are the available structures?
The first decision when setting up in the US is entity structure. Considerations in this decision would include who owns the company, capital requirements of the business, plans for profit repatriation, taxes and whether or not there are tax treaties. Here are some of the common entity types used by businesses entering the US:
- LLCs or Partnerships
The domestic US corporation (commonly evidenced by the suffix ‘Inc.’) is the most common form of business entity utilized by foreign investors. Corporations are generally taxed as separate legal persons, filing its own tax returns and paying taxes without regard to the tax status of its shareholders. US corporations are taxed on their worldwide income. A shareholder of a corporation is normally not personally liable for the acts or obligations of the corporation.
A limited liability company (LLC) is an entity also formed under the laws of one of the 50 states. An LLC, like a corporation, has an existence separate from the persons who own, control, and manage it. Its owners are called ‘members’, rather than stockholders. LLCs are a hybrid entity in that they provide limited liability protection for legal purposes. They can also choose to have ‘flow through” treatment for US federal income tax purposes. If an LLC chooses pass-through treatment for tax purposes, each member must file a US federal tax return to report his/her income share.
Sometimes non-US corporations decide to set up a branch or division in the US without establishing a separate US entity. The branch would have no separate legal status in and of itself, since it is merely a part of the foreign company. The branch will be required to register and pay a fee to do business within the state in which it is located, so the actual cost of operating as a branch may not be significantly less than that of setting up a separate US entity.
What are the tax rates?
For corporations, US Federal tax rate is 21%. This contrasts with rates ranging from 15% and 35% before the 2018 tax law changes. There is no favorable rate difference for corporation long-term capital gains.
For branches, the US Federal tax rates are the same as for corporations. Additionally, as just mentioned, there is also a branch profits tax – the rates for this range up to 30%.
For LLCs, these are usually treated as flow through entities, so there would normally not be any federal taxes, as any tax effects are borne by the underlying owners. For example, if the owners are individuals, the income would be taxed to such owners at individual tax rates. Or if ownership is by a corporation, the income would be taxed at the owner’s corporate rate.
For individuals, the US Federal tax rates range between 10% and 37%. There is also the self-employment tax and the net investment income tax [“NIIT”], which may apply. There are reduced rates for long-term capital gains [tax rates up to 20%], so if you are a US individual resident who is required to pay the special Medicare related NIIT, your long-term capital gains could be taxed at a 24-percent net rate.
In the coming weeks, we will provide a continuation of the ongoing blog series on doing business in the US. If you have questions about how you or your business may be impacted, please contact Daniel Won, at: [email protected]