When expanding into the U.S., DeutschCo faces several key tax issues. First, DeutschCo must decide whether to operate as a subsidiary or a branch. Second, DeutschCo will try to minimize the burden of a variety of state taxes. Finally, DeutschCo will want to minimize the tax burden on its German personnel in the U.S.
The federal tax impact of operating as a USSub or as a branch is fairly comparable. If the sales are purely U.S. sales, both will pay tax at marginal rates of fifteen to thirty-five percent of their income while paying a five percent tax on repatriation through either the branch profits tax or withholding on dividends from USSuub. A branch will result in several administrative inconveniences, such as accounting for all the branch taxes, while a subsidiary will require a review of transfer pricing.
With respect to state taxes, if DeutschCo decides to operate in the U.S. through a USSub, USSub will incur income tax in the state of incorporation. If USSub or DeutschCo has sufficient nexus in other states, those other states may impose tax based on their apportionment rules. Most states have a sales and use tax for which the U.S. activities may create nexus, resulting in registration to collect and remit the tax, unless a specific exemption applies.
Assuming that the German employees are nonresident aliens in the U.S., they will incur tax on their U.S. source income unless both the employees are in the U.S. for less than 183 days and DeutschCo bears the cost. The U.S.-German totalization agreement on social security may exempt the German employees from any U.S. social security tax.
Despite the presence of these new issues, prudent planning will enable the tax professional to provide for an efficient U.S. operation.
Learning Objectives in in the free webinar at March, 9th 2016 at 3 pm CET:
- Understand the basic requirements of the U.S. tax system
- Learn to properly structure investments to repatriate cash and minimize U.S. taxation while taking advantage of the German-U.S. Tax Treaty
- Avoid unpleasant surprises by understanding the compliance requirements
(From: German American Trade, Vol. 12 No. 5)