Setting up a subsidiary of a foreign company

There are various types of business structures and incorporation requirements when multinational companies look to establish foreign subsidiaries, or branch offices, to support their business activities. The benefits of setting up your business in the U.S. are large, but so are the penalties for noncompliance of IRS regulations. By operating a domestic subsidiary, a foreign-based company can control the amount of exposure of the parent company to the amount of capital investment in the domestic subsidiary. The IRS has an array of regulations to prevent parent and subsidiary from shifting taxable income between them. For example, a foreign subsidiary is not permitted to use American intellectual property without having paid the parent company. While you may have been grandfathered in under different regulations, the IRS can demand back taxes and penalties if determined the parent company has been using its subsidiaries to underreport income.

If your US company opts to set up a branch office in a foreign country, you will be subjected to double taxation, that is, you will continue to asses a US tax on worldwide income, as well as taxed in the foreign country. The amount of tax can be mitigated, depending upon the income tax treaty between the US and the foreign country. Establishing a foreign subsidiary directly, or through a joint venture with a foreign partner, on the other hand, will not subject the company to foreign tax. The foreign subsidiary would pay foreign tax on its income, and file income tax returns in the foreign country. Foreign investors should be mindful that some states do not recognize the permanent establishment article of the US tax treaties and do not exempt companies from being subjected to state income tax.