Any foreign company with business activities in the United States may also need to file a U.S. corporate income tax return. The filing requirements exist even if the business doesn't believe that its activities create a permanent establishment in the U.S. As a result, it's important to consult a U.S. tax attorney to ensure that your business can avoid the top tax compliance mistakes foreign businesses make when doing business in the U.S.
The Internal Revenue Service will consider any business with a large enough connection or nexus with the United States to have a U.S. trade or business for U.S. income tax purposes. To determine if a company has a business “effectively connected to the U.S.,” the IRS will look at whether the activities are “considerable, continuous, and regular” and the purpose of engaging in the activities must be for income or profit.
Failing to File Form 1120-F
Every foreign company engaged in business or trade in the U.S. must file a corporate income tax return, Form 1120-F, even if all its income is exempt under a tax treaty or it has no U.S.-source income. Failing to do so can result in the IRS disallowing deductions and penalties. Foreign companies with no permanent U.S. establishment with U.S.-source income where tax was withheld will still need to file to request a refund of the withheld taxes.
Income Not Effectively Connected to a U.S. Business
If a foreign business has income that isn't “effectively connected” to a U.S. trade or business, it's subject to tax on a gross basis. This income is called Non-Effectively Connected Income (NECI) by the IRS. Being taxed on a gross basis means your company may not take any deductions on this income, and it's subject to a flat 30% income tax.
Not Consulting Tax Treaties
In some cases, international tax treaties may change the way U.S. tax laws apply to your business. While the IRS code may tax your business income in the U.S., the terms of a tax treaty can change that and allow an international jurisdiction to tax your business income instead. It's important to consult an experienced tax attorney to determine if any international treaties apply to your business.
Failing to File Information Returns
Just like U.S. businesses, your foreign business may also need to file information returns. For example, your business may need to file Form 1042 for certain payments made to foreigners or Form 1099 to report payments for interest or dividends.
Consult an Experienced Tax Attorney
Don't make these avoidable mistakes when doing business in the U.S. Contact immigration attorneys at Delgado Law at 561-342-1429 to schedule a consultation.