Contact Us
International
Tax Specialist Group
Corporate Tax Guide: USA
USA

Members:

The information is valid for the entire country except where indicated. For example, in the case of Malaysia, Labuan is part of Malaysia but has a special tax regime, so this is noted.
The information outlined below is valid for the United States of America, including the District of Columbia, but does not include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the Northern Mariana Islands, or any other United States possession or territory.
The corporate tax rate shown is the typical corporate tax rate that a domestic corporation owned by non-resident persons would pay. The tax rate does not include withholding tax on dividends, but does include a distribution tax shown separately if applicable. Certain countries have a low corporate tax rate, but charge an additional tax when a dividend is distributed. Because this tax is paid by the corporation, and not deducted from the amount of the dividend itself, it is not a dividend withholding tax. As a result, it typically cannot be reduced by an international tax treaty.
U.S. Federal income tax is imposed at graduated rates of up to 35% for corporations (34% if income is less than $10 million). See below for a potential additional Branch Profits Tax.
State and local taxes will likely apply as well. Each state and some cities impose income or franchise tax. This tax is often treated as a deductible expense when computing the Federal tax base.
The basis of taxation for a corporation will typically be one of:
  • World income (i.e. income from all sources)
  • Territorial (i.e. only income from within the jurisdiction)
  • Territorial and remittance (income earned within the jurisdiction and income remitted into the jurisdiction)
Other basis of taxation are possible, and, if applicable, they are noted.
U.S. corporations are taxed on worldwide income.

Foreign corporations are taxed on U.S.-source investment income and income that is effectively connected with the conduct of a U.S. trade or business.

For income derived from sales of inventory, interest derived in a financial business, and royalties derived in an active licensing business, foreign-source income may be taxed when effectively connected to a U.S. business.
Where non-resident corporation carries on business in a country, business profits may be subject to corporate tax. In addition, a branch profits tax may apply in lieu of dividend withholding tax. This branch profits tax applies to the after tax profits, typically at a fixed percentage. An international tax treaty may reduce the rate of branch profits tax, typically to the rate provided for dividend withholding.
A foreign corporation deriving income effectively connected with a U.S. trade or business (E.C.I.) is subject to a second level of tax, the branch profits tax. This tax is levied at a 30% rate on the adjusted E.C.I. (essentially E.C.I. reduced by any increase in net U.S. assets and increased by any decrease in net U.S. assets). This tax can be deferred if the investment is made through a U.S. partnership or L.L.C. and profits are retained in that partnership or L.L.C.
The common forms of business entity are noted. In addition, the entities which are flow through entities for U.S. tax purposes are indicated.
  • Corporation
  • Partnership (flow-through) and partnership equivalent such as a multi-owner Limited Liability Company
  • Single-member Limited Liability Company (disregarded as an entity separate from its member).
  • Elections to be treated otherwise for tax purposes are available under certain conditions.
Capital gains may be fully taxed, partially taxed or not at all. In certain countries, an exemption, called the participation exemption, will apply to exempt from tax a capital gain from disposition of a substantial holding of shares of a subsidiary. Where a participation exemption is applicable, it is noted together with a summary of the main conditions.
Net capital gains realized by a corporation are fully taxed at ordinary income tax rates. Net capital losses may be carried back 3 years or carried forward 5 years to reduce capital gains in the carryover year.
Certain countries allow group taxation, otherwise known as consolidated tax filing. Here the tax returns of a group of corporations in the country may be combined together, which can be useful. If group taxation is permitted, it is noted along with the main conditions.
Consolidated tax filing is generally available for U.S. corporations. However, non-U.S. corporations, U.S. tax-exempt corporations, U.S. insurance companies, U.S. corporations electing the possessions tax credit, regulated investment companies, real estate investment trusts, domestic international sales corporations and S corporations are not eligible U.S. entities.

An affiliated group is formed when a group of eligible entities has a common eligible parent that owns at least 80% by vote and value in at least one other eligible entity.
Every eligible entity within the group must be owned in this same proportion by one or more other members of the group.
Countries offer various kinds of special exemptions and incentives. Examples are a reduced tax rate, a tax holiday, a tax credit on the purchase of equipment, special accelerated deductions for deprecation, incentives for R&D, and various others. Here the major items are noted.
Several exemptions and incentives exist. For purposes of this chart, and with a multinational approach in mind, only the most commonly sought regimes are mentioned.

Accelerated Depreciation - Accelerated depreciation is allowed for most types of tangible personal property used in a business under the Modified Accelerated Cost Recovery System (MACRS).

R&D - A current deduction is allowed for research and development expenditures. Alternatively, these expenditures may be deferred and ratably allowed as a deduction over at least 60 months.

Goodwill Amortization - When businesses are acquired through the purchase of assets, goodwill may be amortized over 15 years.

Credit - A 3-point credit is allowed for taxable income from production activities.
Many countries have thin capitalization rules which limit or deny the deduction of interest expense in certain circumstances. For example, if debt exceeds three times equity, a proportionate amount of interest expense may not be deductible. Limitations take various forms, restricting the interest expense deduction to a percentage of profit, deeming the debt to be equity and the interest to be a payment of dividends, and various other rules which may blend of these principles. Where a country has thin capitalization rules, they are briefly described.
There is a body of tax common law created in cases that allows the U.S. Internal Revenue Service (I.R.S.) to challenge the treatment of debt for tax purposes and seek to re-characterize the debt as equity for tax purposes. The common law applies a facts and circumstances test, which includes a review of the company’s debt-to-equity ratio, the company’s capacity to repay the debt, the presence of a fixed rate of interest, the presence of a fixed maturity date for repayment of the loan, whether the loan is made from a shareholder or other related person or is from a disinterested third party, whether there is a written agreement evidencing the loan, and other factors with no one factor being dispositive.

Once the debt is acknowledged as debt for U.S. tax purposes, the earnings stripping rules place substantial restrictions on the amount of certain related-party interest expense deductions that a foreign-owned U.S. corporation may claim when computing its income tax. The rules generally apply to a U.S. corporation that has a debt-to-equity ratio in excess of 1.5:1 and pays interest to a related foreign person that is not subject to the otherwise applicable 30% U.S. withholding tax. A related person includes a foreign person who owns more than 50% of the value of the stock of the U.S. corporation. If applicable, this provision denies a current deduction for the related-party interest expense equal to the lesser of (i) the related-party interest expense or (ii) the total interest expense of the corporation that exceeds 50% of the company’s adjusted taxable income for the year (the “50% income limitation”). Any interest that is not currently deductible under this provision is carried forward to the next year where it may then be deducted subject to application of the earnings stripping rules in that year.

For large corporations, special regulations apply to recharacterize debt as equity in certain circumstances where the debt instrument is not executed on a timely basis or where the debt is issued to fund a dividend or acquire equity in a related entity. It is important to note that under other Code provisions and under case law, debt can be recharacterized as equity for U.S. tax purposes.
Many countries have transfer pricing rules. They very often follow the OECD guidelines and the arms length principle. Some countries have specific rules which apply in certain cases. In addition, some countries allow for a selection of the most appropriate transfer pricing methodology in the circumstances, while other countries follow a hierarchy of methods, with the CUP method (comparable uncontrolled price) often ranking first. The transfer pricing rules are briefly explained.
In the case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) that are owned or controlled by the same interests, the I.R.S. can re-allocate income, gain, loss and deductions among related parties in order to properly reflect the income of each party or prevent tax evasion.

A taxpayer must select the best method among the pricing methods specified in the regulations to test the arm’s-length character of its transfer prices. No hierarchy of methods exists.
Many countries tax passive income earned in controlled foreign corporations (CFC’s) on an imputation basis while active income is not taxed. Such CFC rules are usually complex and vary significantly in what is considered passive income, and how foreign tax paid is taken into account. Some countries approach CFC rules on the basis of whether or not the foreign corporation is resident in a low tax jurisdiction or a tax haven. This may be done through a black list of countries.
The general overview of CFC rules is described in simple terms.
A controlled foreign corporation (C.F.C.) is a non-U.S. corporation in which shares of stock representing more than 50% by vote or value is owned by 5 or fewer “U.S. Shareholders”. A U.S. Shareholder is a U.S. person that owns or is considered to own stock possessing 10% or more of the total combined voting power of all classes of stock entitled to vote.

The C.F.C. regime is an anti-deferral regime that essentially requires a U.S. Shareholder to include in income the pro rata share of the C.F.C.'s passive-type income, certain income from related-party transactions, certain other mobile income, or certain intercompany loans on an annual basis for purposes of computing U.S. federal income tax liability, even absent an actual distribution from the C.F.C.
Profits repatriated by way of dividends from a subsidiary to a parent company are typically taxed in one of three ways:
  • The dividends are exempt of tax.
  • The dividends are deductible from taxable income, but not fully (90%, for example, of the dividend is deductible).
  • The dividend is taxable, grossed up to the pre-tax amount, and a foreign tax credit claimed for foreign taxes paid.
The applicable method is noted.
For U.S. tax purposes, not all amounts of distributions received by a shareholder in its capacity as shareholder constitute dividends. A distribution constitutes a dividend to the extent of available current-year or accumulated earnings and profits. The amount in excess of those earnings reduces the shareholder’s basis in the stock. The amount in excess of basis, if any, is treated as a gain from the sale or exchange of property and is taxable as such.

The U.S. has different rules for dividends received from foreign corporations and dividends received from U.S. domestic corporations. A U.S. corporation (Recipient Corporation) that receives a dividend from another U.S. corporation (U.S. Paying Corporation) is generally eligible to claim a dividends received deduction (D.R.D.) equal to all or a part of the dividend that is received depending upon the percentage ownership that the Recipient Corporation has in the Paying Corporation.
  • If the Recipient Corporation owns 80% or more of the U.S. Paying Corporation, the D.R.D. equals 100% of the dividend.
  • If the Recipient Corporation owns 20% or more of the U.S. Paying Corporation, but less than 80% of the Paying Corporation, then the D.R.D. equals 80% of the dividend.
  • If the Recipient Corporation owns less than 20% of the U.S. Paying Corporation, the D.R.D. equals 70% of the dividend.
Relief for dividends from foreign corporations is as follows:
  • If the foreign distributing corporation’s gross income is effectively connected with a U.S. trade or business, the dividend may qualify for the D.R.D. to the extent that the earnings arise from the U.S. trade or business.
  • If the recipient corporation owns 10% of the foreign distributing corporation and the earnings are not derived from a U.S. trade or business, a foreign tax credit is allowed for the underlying foreign corporate income taxes paid by the foreign corporation.
Most countries allow a foreign tax credit based on a formula, typically net foreign income over the net income times taxes payable. This limits the foreign tax credit to roughly the domestic tax otherwise applicable to the foreign income. There are numerous variations and technical rules in the details of foreign tax credit calculations. Where a foreign tax credit is allowed, the general principles are described.
A U.S. corporation or other U.S. taxpayer may be able to claim a foreign tax credit (F.T.C.) for foreign taxes that are imposed on it by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the F.T.C. There are also other restrictions on claiming the F.T.C.

Alternatively, a U.S. corporation may take a deduction for foreign taxes paid on its income. Taken as a credit, foreign income taxes reduce U.S. tax liability on a dollar-for-dollar basis and are, thus, generally preferable to claiming a deduction.
14. Losses
Losses typically can be carried forwards for a period of years, and sometimes can be carried back. Losses may be segregated into capital losses and non capital losses.
A corporation that has a net operating loss (N.O.L.) in a taxable year may elect to carry back the N.O.L. for up to two years prior to the year of the loss and may carry forward the unused N.O.L. for up to 20 years. Limitations exist in the case of changes in ownership, certain changes in control and consolidated filings.
It is not practical to list all of the tax treaties which a country has in a simple guide like this. Accordingly, a link is provided in each case to the tax treaties.
Some countries have entered into Tax Information Exchange Agreements (TIEA).
Treaties are more and more containing provisions that limit benefits (LOB provisions).
The I.R.S. webpage has a link to all income tax treaties entered into with the U.S.
www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

The vast majority of these income tax treaties contain L.O.B. provisions.

The I.R.S. webpage also has a link to any TIEA entered into with the I.R.S.
www.treasury.gov/resource-center/tax-policy/treaties/Pages/treaties.aspx

Under the Foreign Account Tax Compliance Act (FATCA), the U.S. has entered into Inter-Governmental Agreements (IGAs) with numerous foreign countries. A link to countries having IGAs is at
www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx
Withholding tax rates vary considerably from treaty to treaty, and countries may have domestic exemptions applicable in certain circumstances (for example copyright royalties, interest paid to arm’s length persons, etc.). A table shows the typical rates but cannot adequately summarize all of the details. The applicable treaty should be consulted.
Dividends30%
Interest30% (0% if portfolio interest, bank deposit interest, or short-term original issue discount)
Royalties30%
Certain gains, including from the disposition of intangible intellectual property where proceeds are based on sale, consumption or use of the intangible property30%
Branch Profit Tax30%
Capital gains from the sale of shares of stock and most other capital assetsNil

The above rates can be reduced under an applicable treaty provision.

Note that the U.S. also levies a withholding tax on the disposition by a foreign person of a U.S. real property interest. The withholding tax is 15% of the amount realized (10% for sales of private residences for less than $1.0 million) and can be refunded if the actual tax liability on the gain recognized is lower. The withholding rate is increased to 35% of the gain recognized in the case of a foreign corporation distributing the property to its shareholders.
Some countries allow for the selection of year-end while other countries specify a particular year-end which all business entities must have. Normally the taxation year cannot exceed 12 months. Where it can exceed 12 months, this is noted.
Corporations can use the calendar year or choose another 12-month period as their fiscal year.

Partnerships must choose their fiscal 12-month period based on their partners’ tax year.
This is the due date for filing a tax return. Where extensions are available, this is noted.
  • A U.S. corporation, or a foreign corporation that has an office or place of business in the U.S., must file its income tax return by the 15th day of the 3rd month after the end of its tax year (i.e., 15 March for a calendar year taxpayer). An automatic 6-month extension can be requested.
  • A foreign corporation that does not have a U.S. office or place of business must file its U.S. tax return by the 15th day of the 6th month after the end of its tax year (i.e., 15 June for calendar year taxpayers).
  • A U.S. partnership that keeps its books and records in the U.S. must file its income tax return by the 15th day of the 4th month following the end of its tax year (i.e., 15 April for a calendar year taxpayer). A 5-month extension can be requested.
  • A partnership that keeps its books and records outside the U.S. and Puerto Rico has an automatic 2-month extension to file its tax return. An additional 3-month extension can be requested.
The typical tax instalment requirements are noted.
  • U.S. and foreign corporations must make 4 estimated tax payments if they expect to owe tax of $500 or more. These estimated tax payments are due on the 15th day of the 4th, 6th, 9th and 12th months of the corporation’s tax year.
  • Partnerships are flow-through entities and, hence, do not make estimated tax payments, although they make withholding tax payments for foreign partners in a way that is functionally equivalent to estimated tax payments. U.S. persons that are partners are liable for their own estimated tax payments.
This is the date when the corporate tax owing for the year must be paid. It may be different from the tax return filing due date.
If a corporation did not pay its full tax liability through its estimated tax payments, the balance is due at the time it files its yearly tax return.
This is the period after which the tax department cannot in normal circumstances reassess a taxation year. It is sometimes referenced to the end of the taxation year and sometimes to the date of the first assessment of that taxation year.
  • As a general rule, the Statute of Limitations runs out 3 years after the return was filed.
  • The Statute of Limitations is extended to 6 years if there was a substantial omission of items on the tax return.
  • In the case of a fraudulent return, a willful attempt to evade tax or the absence of a tax return, the Statute of Limitations does not run.
If a country has exchange controls, this is noted, together with the main requirements.
The U.S. has no exchange controls legislation.
23. VAT
A VAT tax system typically provides that the supply of goods and services is classified as taxable, tax exempt, or zero rated. Where a business is engaged in an activity which is taxable, it must charge VAT on its revenue, and can claim a refund of VAT on its expenditures. Where the activity is exempt, it does not charge VAT on its revenue, and cannot claim back VAT paid. Where the entity is engaged in activities which are zero rated (typically agriculture, food services and exports), then it can claim back VAT which it has paid on its expenditures, and does not charge VAT on its revenue.
If a country has a typical VAT system, this is noted. If a country has no VAT system but a sales tax system, this is indicated. Some countries may have a mixture, and taxes may apply at different levels (federal and state for example).
The U.S. has no V.A.T. or similar indirect tax. However, sales and use taxes may exist at the State and local level.
Stamp duty, or land transfer tax, can apply on such things as the transfer of shares, land, or the issuance of bonds or debentures. This is described together with the applicable rates.
There is no Federal duty on transfers of land. State and local transfer taxes generally apply based on value.
If capital tax is payable, this is described. Capital tax may apply in specialized industries, such as banking and insurance, even if a country does not generally apply a capital tax to corporations.
There is no Federal capital tax in the U.S. However, certain states require a capital tax to be paid upon formation or on an annual basis.
Where significant, other taxes are noted.
Some states and local governments impose business license taxes. Many states impose alternative tax bases such as allocated capital in lieu of income to compute a State franchise tax. Most states determine their tax base by adjusting Federal taxable income under State law and then allocating that income to the state based on one or more factors such as sales, payroll and property.
Anti-Avoidance Rules take many forms, the most common ones are a general anti-avoidance rule, treaty shopping limitations, the requirement for economic substance (or a business purpose in carrying out transaction) and specific anti-avoidance rules for particular purposes. A very brief overview of the anti-avoidance rules is described.
  • Economic Substance Doctrine – A court may deny tax benefits arising from transactions that do not result in a meaningful change to the taxpayer's economic position other than a purported reduction in Federal income tax. Whether a transaction has economic substance will be determined based on the taxpayer’s subjective intent and the objective economic substance of the transaction
  • Sham Transaction Doctrine – Advantageous tax treatment is denied if carried out primarily for tax avoidance purposes and lacking a bona fide business purpose:
    The following factors from case law are what the government and the courts will consider in deeming whether a valid sale transaction or a sham has taken place:
    • Was the price associated with the transaction reasonable or overstated?
    • Was there a common control over the property being retained?
    • Was there a genuine intent to pay the full purchase price by the buyer?
    • Was the seller receiving a real economic benefit from the sale of the property other than purely tax benefits?
  • Step Transaction Doctrine – The different separate steps of a transaction can be analyzed by the court as a single transaction. It can be analyzed as a single transaction, in particular, because it is interconnected steps.
  • Treaty benefits may be limited in the case of certain payments through hybrid entities.
Where a non-resident person holds shares of a corporation established in the country listed, the capital gain which results may be taxable or not taxable depending on the circumstances and, possibly, the existences of an international tax treaty. The general rules are noted.
  • If a U.S. corporation holding mainly real estate is sold by its non-resident shareholders, a 15% withholding tax must be levied on the amount realized. The actual gain realized constitutes effectively connected income by default. If the gain realized would give rise to a lower tax liability, a refund must be requested.
Where a corporation is acquired through the purchase of shares, sometimes a step up is allowed so that the cost of its assets can be revalued. The main rules are briefly summarized.
  • If a corporation’s shares are purchased, the basis in the shares will be stepped up or down to the purchase price. The basis of the assets remains the same, except as provided below.
  • An election to step up the basis in the acquired corporation’s assets is available when 80% of the control of the target corporation is acquired within a 12-month acquisition period. This election can have adverse consequences at the State and local level and can be taxable for the purchaser or the target corporation.
In some countries, rulings are commonly used (and sometimes even required). In other countries the system is either unavailable or not commonly used except in special circumstances.
The I.R.S. issues rulings on matters of law. Rulings on factual matters are not available.
31. Other
Other important aspects of the tax system are noted.
N/A