One parent company. Two ways the US taxes what it sends home.
Set up a domestic subsidiary and profits are taxed once inside it, then again as a dividend when they leave. Operate as a direct branch instead and the branch profits tax stands in for that second layer, with no dividend ever paid.
Subsidiary
A separately incorporated domestic corporation. Liability sits inside it, and it is currently exempt from FinCEN beneficial ownership reporting.
Branch
The foreign corporation operating directly. Faster to open, but liability runs to the parent, and beneficial ownership reporting currently still applies.
Neither path avoids US tax. They just collect it differently
Four things worth knowing before you pick a side of the fork.
Three stages, followed down both sides
Setup decides what you are dealing with. Annual filing is where the branch profits tax and Form 5472 sit. Pricing and treaty position decide what actually gets paid.
Choosing the structure
Incorporated in a US state. Treaty access is generally cleaner, and liability stays inside the entity rather than reaching the parent.
No separate entity to maintain. Quicker to stand up, but the parent is directly exposed and the parent is the one that registers to do business.
Annual filing
Form 1120, due 04/15. Tax is owed inside the entity every year the entity has income, whether or not a dividend is ever paid.
Form 1120-F reports effectively connected income, due 04/15 with a US office or 06/15 without one. The branch profits tax is computed separately, in Section III.
Pricing and treaty position
Dividend withholding on repatriation — 30% or the treaty rate, reported on Forms 1042/1042-S and claimed via a W-8BEN-E.
Branch profits tax on the dividend equivalent amount — 30% or the treaty rate, claimed on Form 8833 alongside the 1120-F.
FIRPTA withholding and the net-basis election sit alongside a subsidiary or branch structure, not instead of it. That combination is handled by US Real Estate CPA — our property practice, and a Taxule firm.
What is missed costs more than what is owed
Read like a bill, because that is close to how the IRS treats it.
Without a timely Form 1120-F on record, the IRS can tax gross effectively connected income with no offsets.
Per form, per year, regardless of whether any tax was actually owed on the underlying transactions.
Reduced rates on the branch profits tax or dividend withholding apply only when properly disclosed.
Revisited differently each filing season instead of set once with the full picture in view.
Before you pick a structure
Should we set up a subsidiary or operate as a branch?
It depends on liability protection, how cleanly you can access treaty relief, and your appetite for beneficial ownership reporting, which currently applies to a branch but not a domestically incorporated subsidiary. There is not a universal right answer — it comes down to your group’s facts.
If the subsidiary never pays a dividend, do we still owe anything?
Yes. Corporate tax inside the subsidiary is due every year the entity has income, regardless of whether profits are ever distributed. Dividend withholding only becomes relevant when an actual distribution happens.
We are not sure our activity counts as a US trade or business. Do we need to file?
That uncertainty is exactly what a protective Form 1120-F is for. Filing late, or not at all, risks losing every deduction against the income if the IRS later determines you did have a US trade or business.
Does the branch profits tax apply every single year?
Only where after-tax branch earnings are not reinvested in the branch’s US net equity for that year. If the branch increases its US-invested capital, the dividend equivalent amount can fall to zero.
Tell us how the US operation is structured.
A short set of questions about the parent, the structure and where you trade. We come back with a scope and a fixed price. If we are not the right firm for you, we will say so rather than quote for it.
Start scoping