Tag: branch profits tax

By Anthony Diosdi The United States taxes foreign corporations and nonresident individuals on the net amount of income effectively connected with the conduct of a trade or business within the United States. Therefore, under the Internal Revenue Code, the existence of a trade or business is the touchstone of U.S. taxation of a foreign business profits. Despite its importance, there is no comprehensive definition of the term “trade or business” in the Internal Revenue Code or its Regulations. The relevant case law suggests that a U.S. trade or business exists only if the activities of the individual within the United States are considerable, continuous, and regular. A foreign corporation or nonresident alien individual engaged in a U.S. trade or business is subject to U.S. taxation on the income effectively connected…

By Anthony Diosdi By introducing the U.S. branch profits tax, Congress substantially reduced the desirability of a foreign corporation as the vehicle for operating a U.S. trade or business. Previously, foreign corporations often were the vehicle of choice for U.S. investments, since (as now), use of a properly established and maintained foreign corporation generally avoided U.S. estate tax issues, and dividends often could be repatriated free of U.S. withholding tax. Withholding tax on dividends from a foreign corporation applied only if earnings and profits from U.S. trade or business were greater than 50 percent of worldwide earnings and profits, and then only a proportionate amount of the dividend suffered the withholding tax. U.S. income tax treaties with intermediary countries offered the possibility of repatriation of earnings totally free of second-tier…