In this four-part series, Antoine Guillaud, President of International Management Solutions (IMS) and Advisor to the French Ministry of Foreign Commerce, shares key tax and HR issues related to expansion into the United States.
- State vs. Federal Taxation
- Use of Independent Contractors and Employee Transfers
- Setting up a Legal Entity
- Business Models and Transfer Pricing
Setting up the Right Legal Entity
If your US business activity is creating state nexus and or federal permanent establishment in the absence of a US subsidiary, the UK parent company must qualify to do business as a non-resident corporation in the various states. As well as register with the IRS etc. as having an unincorporated US branch.
This is not necessarily a bad tax situation. However, it may be time to consider setting up a US entity to (1) prevent the UK corporation from becoming a US taxpayer (2) and take advantage of a limited liability entity in the US to provide some legal protection to the parent company.
In most cases, and in our experience, a UK corporation starts up its US business by (1) establishing a “C” corporation subsidiary (an Inc.) (2) in the state of Delaware, (3) wholly owned by the parent company. Here, we’ll take each in turn.
Antoine Guillaud at our US East Coast Expansion Workshop gives advice on legal, accounting and tax issues to UK brand Skyline Chess.
The alternative to a “C” corporation is a limited liability company (LLC). However, for US tax purposes an LLC is a fiscally transparent entity. This means that the LLC does not exist for tax purposes and the LLC’s owner(s) pay the tax directly on their share of the profit. Consequently, avoiding one level of taxation.
As a result, this attribute makes the LLC the entity of choice for US taxpayers. Despite this, foreign taxpayers generally do not enjoy this advantage. The LLC is deemed a US branch or partnership (depending on the number of owners), and the owners are pulled into the US tax regime. The IRS requires that the branch or the foreign partners are subject to the same taxation as a “C” corporation, which might require payment of withholding tax by the LLC on behalf of the foreign owners to assure collection of the tax. Generally, it is not such a good idea that your foreign entity files US tax returns.
State of Delaware
Let us return for a minute to where we started. Companies are taxed at two levels. Firstly, at the federal level in every case for all your US business. Secondly, at the state level where you have nexus. You are not, however, taxed in the US based on your state of incorporation.
While it is not the “tax paradise” that many people think, the State of Deleware does provide companies with some flexibility in terms of incorporation. For example, if you incorporate in most states other than Delaware, you will need to file returns for the life of the corporation – whether there is a state presence or not. This would be a major administrative obligation for a large percentage of IMS’s clients, who can and do relocate after gaining a better understanding of desirable business locations or when conditions demand change.
For example, if you incorporate in Delaware and set up an office in New York, you would still need to qualify to do business in the state of New York. But this qualification to do business could be closed if you moved out of New York; all compliance obligations would be terminated.
“Delaware seems to us the lingua franca of state incorporation law in the US. Of the dozens of business lawyers IMS has worked with across the US, our experience is that they almost universally understand their state laws — and Delaware.”
Wholly Owned by the UK Parent
A few points here. If the US corporation is owned by the individual who ultimately owns the UK corporation (i.e., a sister company), they may need to obtain a US tax ID and file US tax returns at some point. And the double taxation treaty offers more benefits to corporate owners.
Typically, a US subsidiary is going to be financed by the trade credit with its UK counterpart. The foreign corporation can easily transform its trade receivable into loans and or capital if it is the parent company. However, this is not so easily done if the foreign corporation is only an affiliate.
Find out More
To find out more, you can meet Antoine and his team at one of GTM’s FREE USA Expansion Workshops that are held on a regular basis. Forthcoming events are shown below. If there are no upcoming events, you can contact us here or visit our events page here to view the latest schedule.