All questions

Tax residence and fiscal domicile

i Corporate residence

The United States does not generally employ the concept of corporate 'residency' based on the seat of management. Instead, how a corporation is taxed is generally based on its place of incorporation, and not where it is managed or controlled. In some circumstances, a non-US corporation can elect to be treated as a US corporation, or in some cases generally designed to prevent a perceived abuse, a foreign corporation may be deemed to be a US corporation.

In recent years, certain members of Congress have periodically proposed legislation that would define a corporation's residency for US tax purposes based on where it is managed and controlled. This legislation, if ever enacted, would represent a significant change in the US tax treatment of both US and non-US corporations. In addition, the prior Obama administration enacted and the current Trump administration finalised changes to the corporate residence rules that significantly expanded the scope of existing anti-abuse provisions, which potentially cause non-US-incorporated entities to be treated as US corporations for tax purposes, in particular when such non-US-incorporated entities have engaged in cross-border business combination transactions with US corporations.

ii Branch or permanent establishment

If a non-US person conducts sufficient activities in the United States, it will be 'engaged in a US trade or business', and income that is 'effectively connected' to such business generally is subject to net basis tax. The threshold of activities needed to constitute a US trade or business is not precisely defined, but factors derived from case law include whether there are 'regular and continuous' activities within the United States, including through employees or agents. To secure greater tax parity between a US subsidiary and a US branch, a 30 per cent 'branch profits' tax may apply when the US branch makes distributions (or is deemed to make distributions) to its home office. This is the same rate of US withholding tax that applies to dividend distributions by US corporations. Just as US tax treaties may reduce withholding tax on corporate distributions, so do they provide for a common, reduced rate of withholding that applies to branch remittances. Some US treaties even provide for the complete elimination of branch profits tax. The United States no longer imposes a 'secondary' withholding tax on dividends paid by a non-US corporation.

If the non-US entity is a resident of a jurisdiction with which the United States has an income tax treaty, the entity will generally become subject to tax on its 'business profits' that are attributable to a US permanent establishment (PE) maintained by the non-US entity. The PE standard generally requires a non-US entity to have a greater nexus with the United States than is required to be considered 'engaged in a US trade or business'. The relevant treaty and domestic law provide rules regarding the definition of a PE and, if a PE exists, the amount of income and expenses that are attributable to that PE and subject to US tax. The rules for attributing income and capital to a PE are generally based on OECD standards, and may result in differing amounts of income and deduction than under the US rules that apply in determining the non-US entity's effectively connected income. US tax treaties generally require a non-US entity to consistently apply either the PE rules or the US effectively connected rules in determining its income subject to US tax.