Question

International Taxation Question

A foreign corporation can structure its U.S. operations as either a branch or a subsidiary. What are the tax advantages of operating in the United States through a separately incorporated subsidiary? What are the tax advantages of operating in the United States through an unincorporated branch? What general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the United States?

Answer 1

Introduction:

A branch is not a separate legal entity. It operates just as an extension of foreign parent in United States. On the other hand, a subsidiary, even though owned by the foreign parent is seen as a separate legal entity from that of its parent.

Tax advantages of operating through separately incorporated subsidiary:

1. The branch is subjected to tax on its entire corporate profit. It means that rather than subjecting only the branch income to tax in US, the entire income of the parent becomes liable to tax in US. However, in case of a separately incorporated subsidiary only the subsidiary's profit are liable to tax in US.

2. The parent company is liable for all the liabilities incurred by branch. Thus, in case of default in payments of say tax to the US revenue authority the same can be called from the parent. However in case of subsidiary, only the subsidiary is liable for the liabilities incurred by it.

3. Separately incorporated subsidiary will be subject to the law of United States in entirety unlike branch offices. This enables the subsidiary to take advantage of favorable tax policies in US. It also enables the subsidiary to effectively manage tax burden.

Tax advantages of operating through a branch:

1.Double taxation avoidance treaties: The branch office gets tax benefits due to the double taxation avoidance treaties signed by a country. In this globalised world, USA has treaties with almost all the countries. Thus branch offices can take advantage of these treaties.

2. The branch office will be subject to the laws in the parent company’s country: The branch office is primarily governed by the legislation of that country where parent is incorporated. The laws in US will have a limited effect. This will ensure a more effective management of the parent company and it's worldwide operations.

3. Losses incurred at the branch level can be offset against the profits of the parent

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