John Marcarian | 14 Sep 2023 | 4 min read
Expanding to the US means you are entering a complex tax system. From international tax concerns, to different Local, State, and Federal requirements, there are many factors to consider. The type of legal structure you choose will impact your compliance and tax considerations obligations.
Type Of Entities
C Corporation (C Corp)
- Separate Legal Entity that works like an Australian private company does.
- Offers some asset protection due to legal structure.
- Taxed at the corporate level and when profits are distributed as dividends, these are taxed in the hands of shareholders.
- Has Directors, shareholders (stockholders) and a separate tax identity to the shareholders.
- Federal income tax rate is currently 21%. State income taxes may also apply.
- In some instances dividends may have a reduced withholding rate of 5% when paid to foreign shareholders.
- Allows for capital raising, new shareholders or selling the business completely by selling shareholdings to new investors.
- High compliance requirements including meetings, quorums, minutes, and other management formalities.
Limited Liability Company (LLC)
- This is a simplified form of a company. In operation it is similar to an Australian partnership where control is in the hands of the members and profits flow through to the owners rather than being taxed at the entity level.
- Provides similar protection, and more flexibility than a C Corp.
- LLCs are not managed by Directors. They are managed by the members or an appointed Manager.
- It is possible for an LLC to have a sole member.
- Members do not need to be US residents.
- Tax returns need to be filed if there are two or more members, however the profits are distributed to the members who pay tax on their share of the profits.
- Can elect to be taxed as a C Corporation instead of being taxed in the hands of the members.
- Can elect how profits are distributed to members. For instance, profits may be split equally between members, based on capital contributions, or in other agreed ways.
- If foreign tax is paid on the profits to an Australian member, they can claim the foreign tax paid as a tax credit on their own assessment of profit distribution received.
Branch (No New Entity)
- No separate legal entity, meaning Australian entity is directly responsible for tax and compliance requirements.
- Branch profits may be subject to US tax as well as Australian tax, depending how the branch is established in the US. In this instance the Australian company can typically claim the foreign tax paid as credits to reduce the impact of double taxation.
- As there is no additional entity there may be less compliance issues to consider with transferring profits from the US to Australia.
- Whether you need to establish a US entity or not, will depend on the nature of the business you are operating.
Taxation Issues To Consider With Your Chosen Legal Structure
Both Australian and US tax laws need to be considered regardless of the legal structure used to establish the US business operations. International tax issues will also need to be considered where members, Directors or owners remain residents of Australia.
Australian Taxation
- If the US entity is controlled in Australia it may be treated as an Australian tax resident.
- The Australian parent company will need to consider how the fees paid between the US and the Australian entities are taxed in Australia.
- US generally imposes a 30% withholding tax on payments to foreign entities.
US Taxation
- The US may tax income earned from any business established in the US, regardless of whether the operating company is a US or Australian resident.
- Australian resident members or Directors may be subject to US taxes before considering Australian taxes on income generated from the US branch or entity.
Fees Between Entities
- US transfer pricing rules require transactions between related parties to be at arm’s length. This means that the value of fees may be adjusted where it is not arm’s length.
- Proper documentation is essential for consulting or management services between entities, including basis for fees charged. This can assist in ensuring that fees paid between the US and Australian entities are treated as required for tax purposes.
- Fees must be ordinary and necessary business expenses in order to be tax deductible to the paying entity.