Entering the U.S. for Business
Branch or Subsidiary
A foreign company entering the United States, which does not intend entering into some form of relationship with a U.S. based entity, must make a determination as to whether it will simply establish a branch office in the United States or a separate subsidiary. The consequences of the choice between a branch and subsidiary are significant. The establishment of a branch immediately makes the foreign parent liable for all acts and omissions of the U.S. branch. On the other hand, the establishment of a subsidiary, by way of incorporation, generally insulates the foreign parent from liability as a shareholder would be insulated in a corporation. It is to be noted that the parent will, however, remain liable for it's own acts and omissions. A classic case in points is the manufacturer of a product that markets it through a U.S. based subsidiary. A lawsuit for product liability will equally expose both the foreign parent and the U.S. subsidiary to liability.
While establishing a branch office has the advantage of minimal corporate governance and administration issues, tax consequences are a significant determining factor in the proper choice.
Under the U.S. tax laws, branches of foreign companies are subject to a flat “branch profits tax,” of thirty percent.
Conversely, a subsidiary incorporated in the United States, will not be subject to the branch profit tax, but will be subject to taxation at the corporate level.
In determining the appropriate entity, a major consideration is the effect of any applicable treaty for avoidance of double taxation. This is to minimize the impact of taxation on revenues realized in the U.S. and again in the country of domicile of the foreign company. As such, the choice of form should be made with the assistance of appropriate tax advisors that can structure the most advantageous tax position.