Home > Features > Considering Inbound Transactions • Bookmark   • Newsletters   • Register Search Options

FEATURE

Considering Inbound Transactions

Considering Inbound Transactions

December 6, 2008
Text size: 
Get XBIZ News
XBIZ Research
Will virtual reality boost the paysite market?
Yes, it will soon
  39.66%
Yes, but in a few years
  36.87%
No
  23.46%
Out of 179 votes. Results based on votes submitted by members of XBIZ.net social network.

" Income that is effectively connected with a U.S. business is subject to federal tax just like any other U.S. business. "

Is your company in Canada or the Netherlands Antilles but doing business in the U.S.? Are you considering a company outside the U.S. that would be using an office in the U.S.? Then this brief overview should be of interest to you.

Too often we run across owners of a business or a web-based site who think that just because they set up their company outside the U.S. they do not need to pay U.S. tax (or file U.S. corporate income tax returns). When they learn they must, the IRS imposes steep penalties, interest and even criminal penalties.

Inbound transactions involve foreign persons or companies investing or doing business in the U.S. The U.S. imposes a tax on foreign persons on most nonbusiness investment income that originates from the U.S. and income that is connected with U.S. businesses or branches.

Nonbusiness investment income will be subject to a U.S. withholding tax, rather than the U.S. income tax. This withholding tax can be much more severe than the income tax, as there are no deductions or credits against the withholding tax. The withholding rate can range from zero to a whopping 35 percent, depending on the type of income and whether the income is being paid out to a resident of a country in which the U.S. has negotiated a bilateral tax treaty.

Income that is effectively connected with a U.S. business is subject to federal tax just like any other U.S. business. The income may also be subject to the U.S. withholding tax when it is removed from the U.S.

Foreign businesses that operate a U.S. branch or office may be subject to the U.S. branch profits tax in lieu of the U.S. withholding tax. This tax mimics the tax imposed on foreign companies that receive income from U.S. subsidiaries. The branch profits tax differs from the U.S. withholding tax in that it is based on an estimation of the U.S. branch's assets to determine what income accrued to the foreign owner.

With inbound transactions, the emphasis is usually on how the foreign company can structure its investment or business affairs so that it generates income that is not subject to tax in the U.S. This will usually be decided by what activities are carried out in the U.S. For example, a foreign software company may opt to locate its design, manufacture, support and/or distribution activities outside of the U.S., using an agent or third parties in the U.S., or through a wholly owned subsidiary.

If the investment or business cannot be structured so that it is not subject to U.S. tax, the focus shifts to how the funds can be removed from the U.S. in a tax-advantaged manner. There are a number of ways to remove funds from the U.S.

For example, earnings from a U.S. subsidiary may be removed from the U.S. by paying interest to the foreign parent company. The U.S. subsidiary may be able to deduct this interest payment thereby eliminating its U.S. tax liability. Moreover, the U.S. subsidiary may not have to withhold any or a portion of the interest payment under current law or applicable treaties. The interest may even be paid to a foreign country that does not impose a tax on the interest income. This is often referred to as "interest stripping."

Similarly, earnings of a U.S. subsidiary may be removed from the U.S. by paying a royalty to the foreign parent company. This royalty may be for the use of the parent's foreign-owned intellectual or intangible property, such as computer software, trademarks or patents. The U.S. subsidiary may be able to deduct this royalty payment and thereby reduce its U.S. tax liability and it may be able to reduce the amount of U.S. withholding tax that applies by having the payment made to a country that has a favorable bilateral tax treaty with the U.S.

The foreign parent company, depending on the laws of its state, may not be subject to tax on the income in its own country. Companies often set up foreign intellectual property holding companies for this very purpose.

The laws involved in structuring inbound transactions can be complex, yet many of the solutions need not be. The tax savings from properly structuring inbound transactions are usually more than sufficient to cover the cost of planning the transactions. With proper planning, individuals can accumulate wealth faster than they otherwise would and businesses can obtain a financial advantage over others who fail to properly structure their transactions.

Montage Services provides international and domestic tax consulting and advisory services primarily for corporations. To inquire about a particular tax issue or seek consulting services, contact Scott Wentz, managing director, at (415) 963-4016 or scott@montage-services.com.


OPINIONS & VIEWS

Differences Between Static, Smart Links

Affiliate marketing, the concept of paying commission for referred business, was employed long before the internet. But just four years after the invention of the World Wide Web, it made the jump into... More »

How to Exploit Video Banner Advertising

The video banner ad format is becoming more and more popular with marketers. Online research company eMarketer states that in the U.S., by 2019 digital ad spending for video banners will rise to $6.82... More »

The Skinny on the New DMCA Requirement

The requirements under the Digital Millennium Copyright Act (DMCA) have changed, but the sky is not falling. We have, even as a law firm, been hit with an unbelievable amount of spam sent out by law firms... More »
XBIZ NEWSLETTERS
Stay informed of the latest industry developments. Get XBIZ newsletters delivered to your inbox. Subscribe today!
Enter email address:

* To manage existing subscriptions click here.






POPULAR PRODUCTS & SERVICES
Submit your press release to
multiple news outlets with 1 click.
Subscribe to RSS news feeds or
add free content to your website.
Access XBIZ news and articles
with your mobile device.
Subscribe to XBIZ Premiere magazine, the industry's leading adult retail trade publications, delivering the most timely and comprehensive business news and information to producers and retailers of adult products.

UPCOMING EVENTS

The European Summit

Mar 04 - Mar 07
Barcelona-Sitges, Spain

The TEA Show

Mar 05 - Mar 06
Hollywood, CA

Phoenix Forum 2017

Mar 23 - Mar 26
Tempe, Arizona

EXXXOTICA Denver

Mar 31 - Apr 02
Denver, CO.
Everyday thousands of business professionals browse XBIZ's industry directory for quality products and services. Not listed yet? Your company could be losing potential new business. Submit your company today!
Use XBIZ RSS feeds to stay informed of the latest industry developments or as a content syndication tool for your website!