Company Formations: A jurisdictional guide to setting up a business
QUESTION ONE – What are the most common structures used when international clients want to form a company in your jurisdiction? Any examples?
Foreign companies investing in the U.S. often form either a C corporation or a limited liability company (LLC) that elects to be taxed as a C corporation. The corporate structure provides distinct separation between the international and U.S. activity, which can prevent the foreign owner from being subject to U.S. tax at the international owner level. The corporate owner would not be subject to U.S. tax and withholding on annual earnings in the way an international owner of a U.S. partnership would unless a dividend or similar payment was made to the owner.
Foreign individuals often choose a partnership (or LLC taxed as a partnership) over the corporate structure, due to the tax rate efficiency of only one level of income tax versus two levels of income tax that a corporate owner would have (income taxed once at the corporate level and again when income is distributed.) However, the foreign partnership owner may be subject to a U.S. personal income tax filing for his or her U.S. income.
In addition to Federal filings, foreign persons must consider state registrations and report. Each state maintains a unique set of legal and tax laws. The best state to form a U.S. operation depends on the facts and circumstances of the company. Before formation, a foreign person should consult both an attorney and a tax accountant.
Recently, CCK Strategies advised a Singapore company on forming a Delaware holding corporation with subsidiaries in Indiana and Oklahoma. The newly formed company maintains physical assets and employees within Indiana and Oklahoma, which necessitated that the company register in each of the States. Delaware gained popularity as a formation domicile due to a rich legal history. However, Oklahoma was one of the first states to create LLC statutes and those statutes are very similar to Delaware.
QUESTION TWO – Please detail some of the favourable and unfavourable legislation that businesses considering establishing a presence in your jurisdiction should be aware of? How can you help them to streamline the process?
Effective in 2018, the U.S. passed a number of favourable tax measures. The corporate tax rate dropped from 35 per cent to 21 per cent, and newly acquired equipment may be 100 per cent expensed for income tax purposes (100 per cent bonus depreciation). While corporations are still subject to double taxation (income taxed once at the corporate level and again when income is distributed), the overall tax burden is reduced. A foreign corporation receiving a dividend from a U.S. subsidiary may be subject to only the one layer of U.S. tax if an income tax treaty exists. Partnership structures now benefit from a qualified business income deduction in many cases corresponding with the tax rate reduction for regular corporations. Oklahoma adopted the 100 per cent bonus depreciation for state-level taxation and continues to maintain low tax rates.
The 2018 tax reform brought a number of unfavourable changes too, including the anti-hybrid rule and broader controlled foreign corporation rules.
After a recent U.S. Supreme Court case, many U.S. states have been aggressively imposing sales tax on remote sellers. Foreign companies selling to U.S. customers may be required to collect and file sales tax returns if sales within that state exceed USD100,000, even when no U.S. physical presence exists. Not all have adopted this threshold, but states continue to pass legislation following the Supreme Court ruling.
CCK Strategies works with clients around the world, including U.S. businesses in every state. With offices in Oklahoma and Texas, CCK operates in two of the states with the lowest effective tax rates in the country. On top of the low effective tax rates, Oklahoma created the Quality Jobs Program, which provides incentives to foreign and U.S. investors. This program gives quarterly cash payments up to 5 per cent of new payrolls for up to 10 years for meeting certain criteria.
QUESTION THREE – What due diligence is required to be undertaken by company formations agents under anti-money laundering laws in your jurisdiction?
Establishing a business in the U.S. is simple, even as a foreign person. Once established, the U.S. requires informational filings for transparency.
For example, foreign companies investing in the U.S. may be required to file form 5472, Information Return of a 25 per cent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The form is filed with the U.S. income tax return and discloses the indirect and direct foreign owners and any related party transactions. Beginning in 2018, the failure to file penalty increased from USD10,000 to USD25,000, which also includes late tax filings. The U.S. requires U.S. persons, including U.S. companies, with a foreign bank account that exceeds USD10,000 at any point during the year, to file an annual report electronically. The requirements expand to capture those with signature authority over those accounts. If the person fails to file this annual report, they may be subject to a penalty of up to 50 per cent of the maximum value of the account during the year.
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Contributing Advisors
