Key Points:
Expanding into the U.S. market presents global companies with a complex tax landscape. Key considerations include:
- Corporate Structure Selection: Choosing the appropriate entity type—such as a C Corporation, S Corporation, Limited Liability Company (LLC), or partnership—affects tax obligations, liability exposure, and operational flexibility. Each structure has distinct implications for federal and state taxes.
- Transfer Pricing Compliance: Transactions between U.S. operations and foreign affiliates must adhere to the arm’s length principle to ensure fair market value pricing. Non-compliance can lead to significant penalties and adjustments by tax authorities.
- State and Local Taxation: Beyond federal taxes, companies must navigate varying state and local tax regimes, including income, franchise, sales, and property taxes. Understanding the nexus—sufficient connection to a state—is crucial for determining tax liabilities.
- Employment Taxes and Withholding: Hiring U.S. employees entails responsibilities for payroll taxes, Social Security, Medicare, and unemployment taxes. Proper classification of workers and adherence to withholding requirements are essential to avoid legal issues.
- Tax Incentives and Credits: The U.S. offers various tax incentives, such as the Research & Development (R&D) Tax Credit and the Foreign-Derived Intangible Income (FDII) deduction. Leveraging these can reduce tax burdens but requires thorough understanding and compliance.
Navigating these tax considerations effectively necessitates comprehensive planning and consultation with tax professionals to ensure compliance and optimize tax positions.
Main Article:
For international companies, expanding into the US, the world’s largest economy, is a logical target for growth. However, effectively taking advantage of this promising market to realize the full economic potential of the move can be anything but straightforward. The US tax landscape is complex, and global businesses need to be aware of the implications of their decision-making to understand their tax obligations, minimize taxes where possible, and meet all applicable compliance requirements.
If your international business is moving into the US market in 2025, here are the main points to consider:
Global Entity Structure
The entity structure you choose to support your US operations must be selected with your tax planning goals in mind. Options include:
- Corporation
- Limited liability company (LLC)
- Controlled foreign corporation (CFC)
- Uncontrolled foreign corporation
- Unincorporated branch
- Disregarded entity
- Foreign partnership
Each type of entity has differing tax implications, as well as liability protection and administration considerations that must be taken into account. Specific tax obligations may apply at the federal, state, and local level, depending on which is chosen. For example, as a pass-through entity, an LLC is not required to pay federal income tax, but may be taxed at the state level depending on where it is registered.
State, Local, and Sales Tax Obligations
Location can make a serious difference in what a company owes in taxes. In addition to being responsible for state taxes (if any) in the state of incorporation, a foreign company may have state tax obligations in other states depending on their operations. A state tax nexus is formed when a company has people or property in that state, even if only on a temporary basis. It is not uncommon for a company to be subject to state income tax in multiple states for this reason. Keep in mind that state income tax rates can vary considerably, and local taxes may apply as well. International companies should also be aware of potential sales tax obligations that might apply.
Tax Reform and Changing Global Tax Provisions
A growing number of countries support the Two-Pillar Solution developed by the Organisation for Economic Co-operation and Development to address the tax challenges of a digital economy. Pillar Two, in addition to other reform measures, is meant to ensure that large multinational corporations pay a minimum level of tax (15%) on their income in the jurisdictions where they operate, no matter where they are headquartered.
To date, the US has not implemented Pillar Two rules, meaning that it still applies international tax rules. Potential factors to be aware of include:
Global Intangible Low-Taxed Income (GILTI): This tax is applied to U.S.-controlled foreign corporations. It requires businesses to pay a minimum tax on intangible assets earned overseas. In regard to GILTI, it is possible for a global company’s foreign affiliates to be subject to US tax jurisdiction, even if they are not directly owned by their US business, due to the US being a holding company location with downward constructive ownership rules.
Foreign Derived Intangible Income (FDII): This tax applies to earnings from the sale of products related to intellectual property (IP) and is meant to incentivize companies to hold their IP in the US. Exported products and services created from that IP are provided a special lower tax rate of 13.125%.
Internal Revenue Code (IRC) Section 367: Under this section of the IRC, certain restrictions constitute an exit tax on assets being transferred out of the US.
Almost inevitably, tax laws will continue to change. Constant planning and adjustment are necessary to maintain accurate compliance and improve outcomes.
Compliance with International Tax Treaties
The US has adopted tax treaties meant to promote foreign trade and investment and to prevent double taxation, as do many other countries. Under these treaties, those who live in foreign countries may be exempt from taxes or enjoy a reduced tax rate, but only for those who meet the stringent qualification requirements. Global companies should evaluate their eligibility for treaty benefits and take care to comply with their provisions to avoid an unexpected or unnecessary tax liabilities. Further, in addition to tax treaty qualification, compliance and reporting requirements must be followed to establish eligibility and avoid penalties. This can include reporting foreign income and submitting specific forms such as Form W-8BEN, Form 8233, and Form 8833.
Tax Incentives and Credits
To encourage business investment and growth, the US tax code offers a range of tax incentives and credits. Foreign companies expanding into the US should look at the potential to reduce their tax burden by taking advantage of incentives like research and development (R&D) Credits, investment tax credit (ITC), deductions for qualified business expenses, job creation or retention programs, and export-related tax benefits.
Expert U.S-Based Tax Advisory Law Firm for International Businesses
If your global company is contemplating an expansion into the US in 2025, your tax strategy can have a profound impact on the success of your venture. At Bridge Law LLP, our international tax advisory attorneys have the expertise you need to choose the right business structure, minimize your tax obligations, and stay in regulatory compliance. To schedule your consultation, contact us here today.