US Branch Profit Tax

[inector]

Seems that branch profit tax in USA only applies if there is effectively-connected income...or am I wrong?
https://taxsummaries.pwc.com/united...e of the branch,US branch to foreign lenders.
If US LLC is owned by a holding in like Estonia / Cyprus / etc., the tax is only paid by the holding...no tax is due in US?

 

[JustAnotherNomad]

Old thread, but you are correct.

This was done to close a loophole:
If you have a US-resident corporation that is owned by an Estonian company, you pay US corporate tax and then 15% WHT on the dividends that are paid to the parent.
So if the US-resident company has $1M in profits, it pays e.g. 21% CIT in the US, and then 15% WHT on that.

If you have a transparent US entity, then the income passes through and is paid in the hands of the Estonian company. You only pay US corporate income tax on the ECI.
So if the Estonian company has $10M in profits and $1M are from ECI (US-source income), then it only pays 21% on the $1M - and then the money could flow tax free to the Estonian company.
So the transparent entity (branch) would have a 15% tax advantage over the corporation. This was not intended.
So the branch profit tax was invented instead, taxing the profits like dividends, even if they're not dividends.
So in this case you would also pay the 15% tax on the $790k profit that is repatriated to the Estonian company.
But like with dividends, you only pay it on money that flows back to the parent/member. If you keep the money in the US LLC, it is not taxed, just like with the US-resident corporation.

 

[sinos]

If you have a transparent US entity, then the income passes through and is paid in the hands of the Estonian company. You only pay US corporate income tax on the ECI.

If a single member US LLC has a business office in the US (apart from the regular registered agent address) as required by numerous US-based EMI's , then will that LLC be considered as tax resident in the US?

 

[JustAnotherNomad]

If a single member US LLC has a business office in the US (apart from the regular registered agent address) as required by numerous US-based EMI's , then will that LLC be considered as tax resident in the US?

There are several questions here:

1. Is it ECI? If it's only an office and no profit is generated there (no employees/dependent agent, no work done in the US) - probably not? But I don't know for sure.

2. Is the LLC transparent or taxed as a corporation? If it's taxed as a corporation (your choice on the form), then it pays tax on all income in the US, unless a treaty says otherwise. If you choose for it to be transparent (like most single-member LLC's are), then you only pay tax in the US on ECI. If it is owned by an individual, no further tax applies. If it is owned by a foreign corporation, then branch profit tax applies on the after-tax profit that is paid out to the parent entity.

If you own a single-member LLC as an individual (not through a corporation), there can never be BPT.
If you own it through a corporation, then there is BPT if there is ECI. So if you want to reduce the risk, you should either own the US LLC in your own name, or you should make sure that there cannot be ECI.

 

[JustAnotherNomad]

The way I understand this article:

https://www.journalofaccountancy.co...ew-of-effectively-connected-income-rules.html

It would not constitute ECI if you have only rented an office for banking compliance purposes and no actual work is carried out in the US.
But you will probably want to double check this with a US CPA or tax lawyer.

I would also expect states like California to be more aggressive here, for example.

 

[daniels27]

It would not constitute ECI if you have only rented an office for banking compliance purposes and no actual work is carried out in the US.
But you will probably want to double check this with a US CPA or tax lawyer.

If you can prove that the office is empty without any dependent staff, you are fine. But you have to ensure that only some janitor goes there for post and cleaning and that he is working for many other companies.

I would also expect states like California to be more aggressive here, for example.

Isn't federal tax matter handled by the national IRS anywhere?

 

[JustAnotherNomad]

Isn't federal tax matter handled by the national IRS anywhere?

I actually don't know. But you would be looking at state taxes as well.
And if California is successful in claiming state taxes, then there will also be federal taxes.

 

[daniels27]

I actually don't know. But you would be looking at state taxes as well.
And if California is successful in claiming state taxes, then there will also be federal taxes.

Yes, but afaik, states have their own tax code and their view may again differ from what the IRS decides?

 

[JustAnotherNomad]

Yes, but afaik, states have their own tax code and their view may again differ from what the IRS decides?

I guess OP will want to avoid having ECI anyway, so not sure if this matters...