September 18th, 2025

With the increased infusion of capital, labor and know-how from overseas into the U.S. for conducting business operations, tax planning alternatives or options in making such inbound investment take on critical importance. In many instances consideration of the entity model will be the lead or first factor in determining how the foreign company will "onshore" a U.S. trade or business or perhaps participate in a joint-venture or other existing US trade or business. This subject becomes more exciting when you think that foreign owned companies can realize the same tax incentives under the Tax Curts and Jobs Act of 2017 which were just extended or made permanent under the One Big Beautiful Bill Act, P.L. 119-21. Among the key provisions are the deductions available to U.S. domestic corporations under Section 250. With respect to a domestic corporation's "foreign derived intangible income" or "FDII", may receive a deduction of up to 37.5%. The US corporate income tax rate is a flat 21% and the effective date rate on FDII is 13.5% (plus applicable state and local taxes). There is also the outbound provision for U.S. corporations deriving foreign source income, which could also apply to a foreign corporation's use of a U.S. subsidiary, under the GILTI rules in Section 951A. Section 250 allows a deduction of up to 50% of GILTI for a U.S. domestic corporation that is a U.S. shareholder with respect to a foreign corporation. While GILTI accelerates income through a US subsidiary owning stock in a foreign CFC that the foreign parent company may previously have been able to "block" (unless its home country has a controlled foreign corporation regime as we do), the effective tax rate is low. The OBBBA reduced the FDII deduction from 37.5% to 21.875% and from 50% to 37.5% for GILTI. The post-OBBBA effective rates (before credits for foreign income taxes) will be 16.41% for FDII and 13.13% for GILTI. Consideration of the home county's participation exemption is also important as is whether the home country has a controlled foreign corporation regime, treaty, and its transfer pricing rules.

The extent of the foreign company's geographical presence or "footprint" in the United States must be evaluated as a preliminary matter as well as current and/or anticipated sources of U.S. and non-U.S. source income from such business operations and associated enterprises. That includes careful review of Section 864(b) (trade or business) as well as treaty provisions, to the extent relevant, with respect to the presence of a "permanent establishment' (or not) in the U.S. Transfer pricing rules are required to be applied and properly documented and records maintained. This requires looking at arms-length pricing standards under U.S. tax law, foreign domestic tax law, and related tax treaty provisions to the extent applicable. There are tax compliance issues that must be addressed such as required tax and financial filings, use of GAAP or IFRS financial accounting principles, exposure to franchise and capital stock tax, and other U.S. market entry costs.

From an overall or conceptual perspective, the foreign corporation entering into the United States will decide between conducting operations through use of: (1) one or more U.S. subsidiary corporations and consideration of a U.S. parent corporation, wholly owned by a foreign parent corporation, to file as a U.S. consolidated group; or (2) one or more branch companies or divisions; or (3) a combination of both (1) and (2). There may be third country resident affiliates to factor in as well. Tax treaties and limitation of benefits and permanent establishment provisions are obviously quite important. At times, all the important factors are addressed in advance. In other instances, a foreign corporation engaged in business in the United States may not appreciate the net basis tax regime under Section 11 and may be further unaware of banging into the branch profits tax (and withholding) regime under Sections 884(a) and (f). In such instances the foreign corporation must assess whether it merely is realizing U.S. source income that is not effectively connected with a U.S. trade or business and when it has crossed over that line. The potential risk for the assessment of U.S. branch profits tax may further come as a "surprise" to the foreign corporation making its initial journey into the United States, particularly for a foreign company that is resident in a non-treaty country. There is also the branch tax on interest paid by U.S. branches. Tax treaties must also be taken into account in this area.

For more in-depth information, I have reported regularly on this and related cross-border tax subjects to both U.S. and non-U.S. taxpayers and investors. See, e.g., August, "One Big Beautiful Bill Act Enacted into Law: Initial Observations on Business and International Tax Provisions", Corporate Taxation (Sept/Oct 2025); ‘The Expanding Reach of U.S. Trade or Business Under Section 864: Agent's Activities in United States Imputed to Offshore Private Equity Fund by Tax Court in YA Global Investments, LP,‘ 51 Corp. Tax'n 1 (WG&L) (March/April 2024) (WESTLAW). "The Tax Cuts and Jobs Act of 2017 Introduces Major Reforms to the International Taxation of U.S. Corporations," Prac. Tax Law., Winter 2018; “The Maze of Tunnels and Bridges Pass-Through Entities Must Traverse in Reporting Subpart F and GILTI Income Inclusions and Previously Taxed Income Recoveries,” Corporate Tax'n (WG&L) (Jul/Aug 2021).

I have recently published an article on tax planning for inbound investment for operating a trade or business in the United States in Corporate Taxation (July/August 2025) and in The Journal of International Taxation (Jul/Aug. 2025). It also appears on WESTLAW (52 WGL-CTAX 01) (and RIA Checkpoint).

Please contact my office if you would like to receive a copy of the article.

This post is intended for educational and informational purposes only and may not be relied upon by the reader and further does not constitute legal advice. Please consult with your tax counsel or advisor on this subject should this be of interest to you. Of course, feel free to contact August Tax Law, P.C.