Companies interested in expanding their reach to the U.S. market have multiple routes of entry to establish their presence. Two most common forms of growing a business internationally are establishing a branch or creating a U.S. subsidiary. There are significant differences between the two approaches and although the branch form may have some notable shortcomings, the ease of entry makes it a solution worth considering.
What is a branch?
A branch is simply an extension of the parent company. It is a way of entering the U.S. market without incorporating under U.S. laws.
How do you form a branch?
There is no formal registration requirement for the creation of a U.S. branch. The process begins with filing for an employer identification number (“EIN”) with the Internal Revenue Service (IRS) prior to commencing business in the United States. The EIN identifies the branch with the IRS (it’s also required to open a bank account or hire employees).
If the branch has an economic presence in one or more states, registration with the division of corporations or department of revenue of each state is required. Local county or municipality registrations must be considered as well. Hiring employees, opening a physical location, or holding inventory in the state are examples of activities that constitute economic presence in that state.
How is a U.S. branch taxed?
Foreign corporations are required to report their U.S. activity to the IRS on an annual basis by filing form 1120-F. A foreign corporation that maintains an office or place of business in the United States must file Form 1120-F by the 15th day of the fourth month after the end of its tax year. A foreign corporation that does not maintain an office or place of business in the United States must generally file Form 1120-F by the 15th day of the sixth month after the end of its tax year. The filling deadline may be extended by filing a request of an extension of time to file. Calendar year-end foreign corporations with physical presence in the United States must file their 2020 Forms 1120-F by April 15, 2021.
The U.S. federal corporate tax rate is currently a flat 21% on income effectively connected with the conduct of a trade or business in the United States. State tax rates maybe applicable as well. Income from U.S. sources not connected to the U.S. trade or business (such as interest or dividends income) is subject to 30% tax rate unless a lower tax rate is applicable under a tax treaty.
U.S. tax law also imposes a 30% branch profits tax—in addition to U.S. corporate level income taxes—on a foreign corporation’s U.S. branch’s earnings and profits for the year that are not reinvested in a U.S. trade or business by the close of the tax year, or are disinvested in a later tax year. However, the branch profits tax may also be reduced under a tax treaty.
What are the advantages of a branch approach?
Ease of setup is the main advantage of entering a market through a branch. Some companies use this approach as an interim step of quickly entering the market while the formalities of creating a subsidiary (a separate legal entity organized under U.S. laws) are being ironed out.
Retention of control is another advantage. Because a branch is simply an extension of the parent company, the management and control of the branch operations is retained with the parent’s headquarters. There is no need to create a new governing board, corporate bylaws or procedures.
What are the disadvantages of a branch approach?
Because a branch is not a separate legal entity, increased liability exposure is the main disadvantage of this easy approach. Companies considering entering a new market through a branch should engage a skilled legal advisor and risk assessment specialist to evaluate the exposure of shared liability.
Operating in the U.S. market as a foreign entity may also come with challenges with establishing credibility with investors and customers. Additionally, it might impair the branch’s ability to obtain financing.
Is branch approach right for your company?
Choosing the right expansion method for your business is a complex decision, and there are many factors to consider. Entering a market through a branch is one of the options but considering others may prove crucial. Get in touch with our international expansion experts today to discuss your options.
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