For many international business owners, the US market is the holy grail of consumer markets. Technology is making it easier than ever to incorporate and start operating in the US.
Every day we are approached by foreign business owners who have established US entities without a proper understanding of that tax, legal and compliance issues associated with operating in the US. Getting it wrong can result in substantial unforeseen costs and penalties.
Based on this experience we have collated a list of our top 10 tax questions to ask and obtain answers to when you are looking to expand into the US. They are a list of things to do, not do, or just be aware of:
1. When forming an entity which state should I choose? All states have their own corporate laws. Delaware is the gold standard when it comes to corporate law in the US. The selection of which state is best should not be a decision that is based solely on whether state income tax or sales tax is payable on your business and should also take into account the corporate laws that best suit your needs and which state is the most geographically relevant to your business;
2. How is my entity taxed? Despite being a complex business tax system, the US system is also a flexible one. For example, in most countries you cannot choose your tax status, whereas in the US if you are an ‘eligible entity’ you can choose to be taxed as a sole proprietor or company if you have one shareholder or a partnership or company if you have two or more. Make sure you choose a status that interacts in a tax effective manner with the tax rules of the country in which your parent company or major shareholders are located;
3. How has have the Trump tax changes made the US more attractive? With the introduction of the trump tax changes the US has become an attractive holding company jurisdiction. This is because the US will no longer tax foreign sourced profits derived by US companies (that are not GILTI) that are repatriated to the US and because the corporate tax rate has been reduced to a flat rate of 21%;
4. Does my entity need a resident director? While US entities do not require resident directors whereas most other countries do, we always recommend that you appoint one as it may be difficult to get a bank account opened;
5. Do all entities need to file income tax returns? Entities that are active or dormant need to file tax returns. Be sure you are on top of tax preparation and compliance deadlines as failure to timely file returns can result in significant penalties;
6. What is the tax year in the US? The tax year in the US is the calendar year so make sure your global tax plan accommodates this if it is different for the tax year in your home country;
7. How do I repatriate US sourced profit? Form a repatriation plan. You need to know how the US tax rules are going to interact with the tax rules of the country in which your parent company is located and have a strategy for repatriation of US sourced profit to the country of your parent company. Profit can be repatriated through a combination of dividends or related party payments such as service fees, interest or royalties;
8. I have formed a repatriation plan does it need to be documented? Ensure your related party dealings are documented. If foreign companies are assisting your US operations in the US you need to document and appropriately price the related party transactions. Failure to do so can trigger costly penalties under US transfer pricing regulations.
9. Can my US entity be a resident in a second country? Understand the tax residency of your US entity. While a corporation can only be a resident of the US if it is incorporated in the US that is not the case in a lot of other countries. You need to ensure that any actions being undertaken by your US entity do not result in it being a resident in another country.
10. I have an independent contractor in the US do I have payroll tax obligations? You need to understand the difference between an independent contractor and employee. In many states in the US an independent contractor can be classified as a common law employee and as a result you will be liable for payroll tax.