Foreign entities frequently consider expanding their activities in the U.S. market due to its significant opportunities. However, this opportunity comes with many tax and regulatory challenges, ranging from choosing the right entity type and understanding the multijurisdictional systems to anticipating all the tax implications related to transactions between the U.S. entity and its foreign group. Planning and understanding the U.S. tax environment can help entities avoid penalties and unnecessary tax liabilities. This article provides a general road map to help you achieve compliance when expanding in the United States.
- Choosing the Right Business Structure
The first step is to set up the appropriate business entity. The entity type determines tax obligations, exposure for owners, and operational flexibility. The most common structures include:
- C corporation: The C corp is taxed at the federal and state levels (and local, if applicable), depending on each state’s laws and regulations.
- Limited liability company (LLC): The LLC offers pass-through taxation and provides more flexibility than a C corp. However, a foreign-owned LLC will be subject to taxation in the U.S. if no election is made.
- Understanding U.S. Tax Obligations
Foreign-owned U.S. entities are required to comply with multiple levels of taxation, including federal, state, and local taxes.
- Federal level:
- The first step after incorporating the entity is to obtain an employer identification number (EIN) from the IRS. Be sure to reference our FORsights™ article, “Entering the U.S. Market: Essential Steps for Business Success,” to learn more about this step.
- Once the EIN is received, the entity is required to file tax returns based on its structure:
- C corps and LLCs elected to be treated as C corps need to file a Form 1120 three-and-a-half months after the year-end closing (an exception to that rule: June year-end entities are filing two-and-a-half months after closing).
- LLCs and partnerships with multiple partners need to file a Form 1065 two-and-a-half months after the closing date.
- Single-member LLCs are considered “disregarded entities,” which exempts them from filing a tax return but requires their activity to be reported under the owner’s tax return. The form to file will depend on the type of the owner (individual or entity).
- The IRS allows entities to apply for an extension of the filing of the tax return for a period of six months.
- As an example, for a C corp with a December year-end, the tax return is due by April 15 of the following year and can be extended to October 15.
- However, the extension is for the filing of the tax return only. If any payment is due, it is due by the original due date.
- State and local tax level:
- Each state has its own tax laws and regulations, and a company’s tax obligations depend on its nexus (a business presence). This presence could be established by one of the following transactions:
- Delivering sales above the state threshold
- Hiring employees
- Having an office, inventory, or providing services in this state
- The company that establishes nexus in a state may file and pay taxes based on the allocated income and activity in each state. The rates and rules vary by state.
- There are a few cities in the U.S. that impose a city tax, such as New York City.
- Each state has its own tax laws and regulations, and a company’s tax obligations depend on its nexus (a business presence). This presence could be established by one of the following transactions:
- Regulatory Compliance in an International Structure
Foreign businesses operating in the U.S. will often have transactions with the parent and sister companies overseas. They should adhere to specific requirements:
- Foreign reporting requirements: Certain foreign-owned businesses must report their transactions with significant shareholders (more than 25%) and related parties in Form 5472. Failure to timely file may result in a penalty of $25,000 per form.
- Withholding tax on U.S. income: Non-U.S. entities earning U.S.-sourced income (dividends, interests, royalties, etc.) may be subject to withholding taxes, typically 30% unless a tax treaty applies. This should be reported using Form 1042.
How Forvis Mazars Can Help
We specialize in assisting international investors with establishing U.S. entities and providing outsourcing services, including setup, accounting, taxation, and payroll. We also help guide our clients through key considerations such as banking setup and payroll registration. For more information about payroll and initial setup, please refer to our previous articles, “Entering the U.S. Market: Essential Steps for Business Success” and “Key Considerations for Foreign Businesses Establishing US Payroll.”
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.
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