Foreign Corporations
Our team specializes in helping foreign corporations navigate complex U.S. tax obligations, ensuring IRS and state compliance while utilizing treaty benefits.
What is a foreign corporation
A foreign corporation is a business entity incorporated outside of the United States but engaged in certain activities within the U.S. that may trigger tax or reporting obligations. This includes organizations operating in their home countries while having a U.S. presence, such as conducting business, owning assets, or engaging with customers in the U.S.
Navigating U.S. tax laws as a foreign corporation can be daunting, with complex rules and potential penalties. TMP provides expert support to help you meet IRS and State compliance requirements and minimizing risks.
Tax Obligations for Foreign Corporations
Effectively Connected
Income (ECI)
- Income directly linked to a trade or business within the U.S.
- Example: A foreign corporation earning business income from services provided in the U.S.
- Tax Rate: 21%
Non-Effectively Connected Income(non-ECI)
- U.S.-source income not tied to a trade or business, such as interest, dividends, or royalties.
- Example: A foreign corporation earning royalties from U.S.-based intellectual property licensing.
- Tax Rate: 30% (reduced by tax treaties)
Branch Profits Tax
- What is taxed?: “Dividend equivalent amount” (after-tax
earnings not reinvested in U.S. operations) - Example: A foreign corporation repatriating U.S.
branch profits to its home country - Tax Rate: 30% (reduced by tax treaties)
Canadian corporations
Due to the US-Canada tax convention, a Canadian corporation doing business in the U.S. is generally subject to U.S. federal tax on:
Business profits attributed to a permanent establishment in the U.S. at a rate of 21%
- Permanent establishment is a higher threshold than a trade/business.
Dividend equivalent amount at a reduced branch profits tax rate of 5%, when the Canadian corporation operates a branch in the U.S.
- A cumulative branch profits exemption of $500,000 is available.
Services we offer
State Nexus Study: Ensuring Compliance
with Sales and Income Tax Requirements
U.S. A nexus study helps determine your business’s tax obligations and ensures
compliance with state-specific requirements.
Sales Tax Nexus Analysis
- Evaluate your business activities to determine if they create a sales tax nexus in any state, such as physical presence, employee locations, or economic thresholds (e.g., $100,000 in sales or 200 transactions).
- Provide guidance on registering, collecting, and remitting sales tax in applicable states to avoid penalties and interest.
Sales Tax Nexus Analysis
- Assess whether your business has a state income tax filing obligation based on factors such as employee locations, office space, or sales activity.
- Ensure compliance with income tax requirements by preparing and filing the necessary state tax returns.
Tracking State Thresholds for Nexus
- Monitor thresholds for economic nexus laws to ensure timely registration and compliance when thresholds are met..
- Offer continuous updates on changing state tax regulations to keep your business ahead of compliance risks.
Custom Tax Strategy and Planning
- Provide recommendations to minimize state tax liabilities while maintaining full compliance.
- Assist with voluntary disclosure agreements (VDAs) to mitigate past liabilities and penalties.
Why Us
Educating Clients
We focus on empowering our clients with the financial knowledge and resources needed to make informed decisions and achieve long-term success.
Seasoned Experts
Our team of experienced professionals brings extensive expertise in accounting and tax regulations, delivering reliable and thorough solutions tailored to your needs
Personalized Solutions
We customize our services to fit the unique financial circumstances and goals of each client, offering targeted solutions that effectively address their challenges.
Modern Approach
Leveraging the latest technologies and innovative strategies, we deliver efficient, forward-thinking accounting and tax services designed to meet the evolving demands of businesses and individuals.
Frequently Asked Questions (FAQs)
Find answers to common questions about Democracy
A foreign corporation is considered to be engaged in a trade or business in the U.S. when it has business activities within the U.S. (e.g. selling products, providing services, operating a branch). Income connected with that U.S. trade or business (ECI) is subject to the standard corporate income tax rate of 21%.
The penalty for filing Form 1120 after the due date (including extensions) is 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25% of the unpaid tax.
U.S. source income that is not connected with a trade or business in the U.S. is generally income that is passive in nature and commonly includes interest, dividends, rents and royalties. The U.S. payer will withhold tax at 30% (or a lower treaty rate) of the income.
Yes, if the foreign corporation is engaged in a trade or business in the U.S., it needs to apply for an EIN in order to file Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
Yes, Form 1120-F needs to be filed when the foreign corp was engaged in a U.S. trade/business, even if there was no income generated from that trade or business.
A “PE” means having a fixed place of business or dependent agents within the U.S. When your Canadian corporation leases an office space or hires employees in the U.S., among other activities, it shall have established a PE in the U.S.
Yes, Form 1120-F needs to be filed when the Canadian corp was engaged in a U.S. trade/business, even if the income from that trade/business is exempt under the tax treaty. In this case, the Canadian corporation only needs to file a protective return, which is a simplified Form 1120-F, and attach Form 8833 Treaty-Based Return Position Disclosure.
For foreign corporations with an office or place of business in the U.S., Form 1120-F is generally due on the 15th day of the fourth month following the end of a corporation’s tax year.
For foreign corporations with no office or place of business in the U.S., Form 1120-F is generally due on the 15th day of the sixth month following the end of a corporation’s tax year.
The corporation can request a 6-month extension by filing Form 7004.
The foreign corporation has to pay any U.S. corporate tax owed by the tax return due date of Form 1120-F. If the corporation filed Form 7004 to extend the return due date, it must still pay the tax owed by the original return due date.
Yes, many countries (including Canada) allow foreign tax credits for taxes imposed by a foreign country on income earned from that country. The foreign tax credit serves as a tax offset against the tax imposed by the foreign corporation’s home country on the same income.
No, you do not have to accept the default federal tax classification. A single-member LLC can elect to be treated as a corporation instead of as a disregarded entity. A multi-member LLC can also elect to be treated as a corporation instead of as a partnership. To change the classification, Form 8832 is used.
Yes, a U.S. company can be wholly or partially owned by a foreign company or individuals. However, ownership may trigger additional reporting requirements, such as filing Form 5472 to disclose foreign ownership and certain related transactions.
Yes, foreign companies operating in the U.S. are subject to U.S. laws, including federal and state tax laws, labor regulations, and industry-specific compliance requirements, depending on their activities within the country.
Yes, a foreign corporation can open a U.S. bank account. Most banks require documentation such as the corporation’s articles of incorporation, proof of business activity in the U.S., and an Employer Identification Number (EIN) from the IRS.
Yes, foreign corporations can own real estate and other property in the U.S. However, they may face additional tax and reporting requirements, such as the Foreign Investment in Real Property Tax Act (FIRPTA) for real estate transactions.
Foreign corporations may benefit from access to the U.S. market, business-friendly regulations, and tax treaties that reduce withholding taxes on certain income. Structuring as a foreign corporation can also help manage global tax liabilities.
A controlled foreign corporation (CFC) is a foreign corporation where U.S. shareholders own more than 50% of the total combined voting power or value. CFCs are subject to specific U.S. tax rules, such as Subpart F income and Global Intangible Low-Taxed Income (GILTI), which aim to tax income earned abroad by U.S. shareholders.
It depends. A nexus analysis is needed to determine if a foreign corporation has sufficient ties to a state to be subject to tax.
Nexus can be established through:
Physical presence (offices, employees, or property),
Economic activity (meeting revenue thresholds), or
Affiliations with in-state entities.
Since each state has different rules, a detailed Nexus Study is essential to ensure compliance.
How much will it cost for TMP to calculate my cryptocurrency gain and loss?
Basic Package
Treaty Waiver Filing:
Includes one treaty-based filing (e.g., Form W-8BEN-E or Form 8833).
Nexus Filings:
Compliance filings for one state.
Form 1120-F:
Preparation of foreign corporation income tax return.
Expert Package
Treaty Waiver Filing:
Includes multiple treaty-based filings.
Nexus Filings:
Compliance filings for up to three states.
Form 1120-F & 5472:
Preparation for up to one related party.
Premium Package
Treaty Waiver Filing:
Includes multiple treaty-based filings.
Nexus Filings:
Compliance filings for up to 5 states.
Permanent Establishment Assessment:
Advanced analysis with strategic recommendations.
Form 1120-F & 5472:
Preparation for up to 3 related parties and branch profits tax calculation.
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