US TAXATION OF FOREIGN CORPORATIONS WITH BUSINESS ACTIVITIES IN THE UNITED STATES
Foreign corporations may be subject to tax in the United States if they have business activities in the United States or if they receive income from U.S.-sources. Corporations organized under the laws of the United States are subject to tax in the U.S. on their worldwide income. Foreign corporations with business activities in the United States may be required to file a U.S. corporate income tax return, even if the corporation takes the position that its business activities do not constitute a permanent establishment under the terms of the tax treaty between the United States and the country of which the foreign corporation is a tax resident.
Income Effectively Connected with a U.S. Trade or Business
When a foreign corporation has sufficient nexus or connection with the United States it may be determined to have a U.S. trade or business for U.S. income tax purposes. A foreign corporation’s U.S. trade or business is subject to tax in the United States on a net basis at normal graduated corporate tax rates.
The determination whether a foreign corporation has a U.S. trade or business is made based on the relevant facts and circumstances. For a U.S. trade or business to exist, the activities must be ‘considerable, continuous, and regular’. A U.S. trade or business can be found to exist even if the activities are carried out indirectly (i.e. through an agent or representative).
Income earned by a foreign corporation that is not effectively connected with a U.S. trade or business (non-effectively connected U.S.-source income) is subject to tax on a gross basis. This means that no deductions are allowed. This income is taxed at a flat rate of 30%.
When a foreign corporation is entitled to the benefits or the tax treaty concluded between the United States and the country of which the foreign corporation is a tax resident, the way in which U.S. domestic tax laws apply may change. For example, where a foreign corporation is subject to income tax in the United States under the provisions of the Internal Revenue Code, the terms of the applicable tax treaty may allocate the right to tax the activities that the IRC seeks to tax to another taxing jurisdiction.
Every foreign corporation that is engaged in a trade or business in the United States is required to file a U.S. corporate income tax return (Form 1120-F), even if the foreign corporation has no U.S.-source income or all of its income is exempt from tax under the terms of a tax treaty. Furthermore, even if the foreign corporation takes the position that it has no permanent establishment in the United States, it may still be required to file a tax return. Foreign corporation that do not have a permanent establishment in the United States, but do have income from U.S.-sources on which tax was withheld, need to file a tax return when seeking a refund of (part of) the tax that was withheld.
Failing to timely file a true and accurate tax return may result in deductions being disallowed, as well as penalties.
In addition to the requirement to file a U.S. corporate income tax return, just like domestic corporations, foreign corporations may be required to file information returns. For example, a foreign corporation may be required to file Form 1099 to report the payment of certain amounts such as interest or dividends. Form 1042 may be required when certain payments are made to foreign persons.
Tax Identification Number
Foreign corporations may be required to apply for an Employer Identification Number (EIN) for use on tax related documents by filing Form SS-4 with the IRS. An EIN is a tax identification number.
US Corporate Tax Services
If you have any questions about the U.S. tax filing requirements of a foreign corporation or if you would like us to prepare your U.S. corporate tax return, please contact us.