Tax Structures
of United States Foreign Owned Corporations
A guidebook that takes a simplistic approach to explaining the U.S. tax implications of Foreign-Owned Corporations. This book is designed as a primer for understanding the fundamental concepts of international tax transactions for Foreign-Owned U.S. Corporations.
By Marcus Marcial
Visual solutions for tax optimization…
Corporate FDAP Withholding
FDAP (Fixed, Determinable, Annual, or Periodical) withholding refers to the U.S. tax imposed on certain types of passive income earned by non-resident aliens and foreign entities from U.S. sources. This includes interest, dividends, rents, royalties, and certain other types of income that are not effectively connected with a U.S. trade or business. Generally, this income is subject to a 30% withholding tax, unless a lower rate or exemption applies under an applicable income tax treaty.
Special Tax Treaty Rates
Dividends paid by U.S. corporations to foreign shareholders are generally subject to a 30% withholding tax under the Fixed, Determinable, Annual, or Periodical (FDAP) income rules. However, this rate may be reduced or eliminated under an applicable income tax treaty between the U.S. and the shareholder’s country of residence. Many treaties lower the withholding rate on dividends to 15%, 10%, 5%, or even 0%, depending on ownership percentage and qualifying resident of the treaty country.
Branch Profits Tax
The Branch Profits Tax is a U.S. tax imposed on foreign corporations engaged in a U.S. trade or business through a branch rather than a subsidiary. In addition to regular U.S. income tax on effectively connected income (ECI), the branch profits tax—generally 30%, unless reduced by a tax treaty—is levied under IRC §884 to mimic the dividend withholding tax that would apply if the foreign corporation operated through a U.S. subsidiary and repatriated profits to its foreign parent. The tax is assessed on the corporation’s “dividend equivalent amount,” which roughly equals the branch’s U.S. earnings not reinvested in U.S. operations.
Need to Plan Your Own Structure?
Work with us to develop tax charts that visually detail inbound and outbound International Tax transactions in relation to the United States taxing system.
With a given scenario, the deliverable will highlight the flow of income, expenses, other cash distributions, and summarize the tax implications and filing compliance.
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