Doing business in the USA
Your entity is deemed to engage in a US trade or business when the income from sources within the United States is considered “Effectively Connected Income” (ECI).
This occurs when:
- you perform personal services in the United States.
- you own and operate a business in the United States selling services, products, or merchandise
- you realize gains and losses from the sale or exchange of US property
- you collect Income from the rental of US real property
If this is the case, you will need to determine which state(s) your activity is connected to. Although this varies by state and the nature of the business, it is essentially determined by physical presence such as having employees or an office in the state. However, there are other factors which can trigger such a connection. For example, the use of a local third party to install your product.
US entity formation
Formation of a business entity in the US is done at the state rather than the national level. Thus, the parent company chooses its state of incorporation and the type of entity.
- US subsidiaries tend to be incorporated as corporations or limited liability companies. If there is no state where the operations of the subsidiary have a physical presence, then Delaware is a commonly used. It offers ease of formation, favorable tax treatment and a business-friendly environment.
- If most of the business activities of the US entity will be centered in one state, it is often desirable to just establish the US business entity in that state.
Branch v subsidiary
A branch office is not a separate legal entity and occurs when a foreign corporation is merely operating in the US. This is usually not an ideal arrangement because:
- this structure does not shield the foreign corporation from liability incurred at the branch level.
- a foreign corporation with a US branch will be required to file a US tax return reflecting its worldwide income and subject to tax at graduated tax rates on income effectively connected with the US activity.
- unless reduced or exempted by an applicable tax treaty, a 30% branch profits tax is imposed on after-tax effectively connected earnings and profits that are deemed to be distributed by the branch out of the United States
Owning a US subsidiary
A subsidiary is a separate legal entity which is usually wholly-owned by the parent corporation.
- The directors of the subsidiary could be in the parent’s home country. There is no requirement that a director or officer of a US entity be a US citizen or resident.
- It is quite manageable to have the ultimate decision-makers for the subsidiary be based at the home office of the parent company although it is helpful operationally to have a have a US resident as an officer of the subsidiary as there are additional procedures if a non-US resident wishes to open a bank account for a business.
- Taxation of the subsidiary is on the subsidiary’s income alone, and when properly structured and operated, the liabilities of the subsidiary are not attributable to the parent corporation
- If persons from the parent company are going to come to the US to work for the subsidiary and they are not US. citizens or residents, they will need proper work visas that allow them to be employed for their tasks in the US
How can we help?
It is important that you have access to US based legal and accounting professionals to navigate the formation of your entity and provide support as your business becomes established in the US.
- One of our Directors is a practicing Certified Public Accountant who can assist with entity selection, formation and ongoing compliance matters.
- We have also developed relationships with US attorneys who are ready to assist with a full range of business services including, immigration, contracts, liability and all aspects of business planning.