Are Foreign Companies Taxed in the US?

Taxation of Foreign Corporations in the US

Foreign companies with US income are taxed up to 30% on these earnings. This includes income from any trade or business in the US or the receipt of any US dividends, interest, or royalties. The branch profits tax is imposed on foreign corporations engaged in the conduct of trade or business in the United States and is equal to 30% of the dividend equivalent amount for the tax year.

Company Formation and Social Security

Generally, there are no restrictions on foreign ownership of a company formed in the United States. The procedure for a foreign citizen to form a company in the US is the same as for a US resident. US Citizens, Resident Aliens, and Nonresident Aliens employed outside the United States by a foreign employer are not generally subject to Social Security and Medicare tax withholding.

Property and Capital Gains Tax

The IRS will withhold 15% of the gross purchase price of the property. Federal capital gains tax for US residents and companies is 15% – 20%. Foreign companies may be able to claim a foreign tax credit for taxes paid to foreign governments on their U.S. source income, which can help reduce their U.S. tax liability.

Additional Obligations and Tax Benefits

U.S. businesses that are foreign-owned have additional tax obligations to consider, both in the United States and their owners’ home countries. For a US citizen or resident owning a foreign LLC, the report summarizes the tax principles that come into play. The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows exclusion of a certain amount of FOREIGN EARNED income from US tax – for the tax year 2020, the exclusion amount is $107,600.

Sales Tax Compliance

Sales tax liability is a question of nexus. For example, in Kentucky, any seller who makes more than $100,000 in sales, or who made more than 200 sales transactions in the state in the previous or current calendar year, is required to comply with Kentucky’s sales tax laws.

Tax Reporting and Treaties

A foreign corporation engaged in a US trade or business must file a return on Form 1120-F. When entitled to benefits of a tax treaty, the application of U.S. domestic tax laws may change for foreign corporations.

Understanding US Taxes for Foreign Corporations

Below is a comparison between the US taxation of domestic corporations and foreign corporations. A domestic corporation is taxed on its worldwide income and files Form 1120 to report taxable income and pays federal corporate taxes, currently 21%, plus any state and local taxes.

Consultation and Legal Assistance

For detailed guidance, foreign corporations can seek a confidential reduced-rate consultation with tax law offices.

Tax Planning and Legal Assistance

  • To schedule a consultation: Law Offices of David W. Klasing, call 800-681-1295 today or contact online.

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