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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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European Company wants to establish a branch office in Pittsburgh,

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European Company wants to establish a branch office in Pittsburgh, PA USA. The entity formed should serve the following purposes: 1. Allow for some of the company's products be shipped and stored in the US office, (sold from there), 2. Allow for European employees get appropriate visa status and be able to work in the US. The entity should be owned by its European parent. What is the best type of entity to serve those purposes? What taxes will apply in that situation roughly?
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear Vandeta,

 

Thank you for your question.

 

the best entity for this purpose is a C-corporation fomred as a seperate enity of the parent. This protects the parent form U.S. taxes on world wide income.

 

when you say what kind of taxes, I do not know the meaing of that question. let me explain.

 

We have along list of taxes which would be paid regardless of the type of entity you have.

 

1. Corporate income taxes on corporate earnings. (an LLC that is taxed as a partnership would not have corproate taxes, but could. BUT an LLC does not offer the protections you need as a foreign corporation. An LLC would sujcect indiviudal partners to tax libalilites in the U.S. so keep it as a C-corp)

 

2. Sales and use tax on items purchased that are not for resale. (all business forms)

 

3. Sales and use tax collected from customers and then passed on to the state as part of the corporate sales tax return. (all business forms)

 

4. Act as a collecting agent for the Internal Revenue Service to collect and pay estimated payroll taxes for your employees. (all business forms)

 

As a domestic corporation owened and operated by a foreign entity it would be taxed at the same rate as other corporations. (as an LLC your taxes for the foreign partners would be required to withheld at 15%, if single owner it would be at 30%)

 

The best visa for this type of activity is the E-Visa (treaty trader or treaty investor). After one year, you would be eligible to sponsor people in to the U.S. on an L visa.

Customer: replied 5 years ago.
Can you please further explain why is it better to form C-corporation compared to LLC. There is a lot of bureaucracy involved in running a C-corp that doesn't exist for LLC.

Also, what is this about protecting the parent from US taxes, can you elaborate please?

I talked to another lawyer earlier today who told me that it is possible just to register the foreign company here in the state of Pennsylvania and do business with it. According to him there is no need to establish a whole new entity? What taxes would apply to this option?

Is it possible for an LLC to be owned completely by a foreign company & operated by it as well? Do I understand it right that the Income Tax in this case would be 30% of Taxable Income.


Expert:  Ed Johnson replied 5 years ago.

Dear Vandeta,

 

In order to answer more specifically about the advantages of an LLC versus C corp for a foreign entity owned and operated in the U.S., I need to know more about the company. I made an assumption based on your description of the level of business you proposed to do. So i need the following:

 

1. Number of employees currently in your company.

2. Annual Gross Revenues of your company.

3. What kind of product(s) will you be warehousing and distributing?

4. How many employees would you be hiring here in the United States?

5. How many corporate officers or owners do you now have overseas?

6. What form is your company in your home country, for example: ltd

 

The attorney you talked to was correct, but that was not your Question. I do not think that would be a wise decision, as I will describe later. Right now to adequately discuss this part I need to know the country of registration for the business. your attorney neglected to consider tax treaty implications.

 

 

 

 

Customer: replied 5 years ago.
There are a bunch of companies part of Aiger Group AG (Aiger Group Ltd.) registered in Switzerland. This is their ultimate parent. The main line of business is production, design and engineering of high-tech machines for the tobacco industry.

1. The production facility employs about 200 people in Bulgaria, Eastern Europe. This is where most of the operations are. The company there is Aiger Engineering Ltd. It has for a parent Aiger Group AG.

2. The annual gross revenues are between 5-10 Million USD. For the whole group.

3. In Pittsburgh we hope to warehouse and distribute, warranty service spare parts, crucial spare parts that in case of emergency need to be deliver fast etc. Mainly different Spare Parts for the machines. Also employ our expert technical service engineers who will be able to travel around the US and provide fast and reliable service for our products. Also we will have 2-3 people working in the office for Marketing Campaigns, Customer Account Manager and probably Office Manager. It is possible to hire US citizens as well for other jobs such as internships, office secretary etc.

4. The US company at the beginning will likely have 1 full-time employee. Then after we sort all the immigration issues we believe we will have about 7-10 full-time employees working for the US branch at all times.

5. Aiger Group AG has Administrative Council - 1 President & 1 Member, who are responsible for the administration of the group. The actual ownership is by private investors.

6. Aiger Group AG (Aiger Group Ltd.) registered in Switzerland. Aiger Engineering Ltd. Registered in Bulgaria (subsidiary of Aiger Group AG)

I need to find the best entity and establish it. Then proceed with the other questions of immigration, logistics and financial accounting. That is why i thought that a good tax advise on applicable taxes and costs of this would be a good place to start.
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

This is a good place to start. In the end you will need to work directly with a good tax attorney. for your needs I would recommend Price Waterhouse Coopers or KPMG.

 

but here are my concerns for you.

 

1. Tax Treaty: No matter how you cut it, there will be tax treaty consequences of establishing a foreing entity in the U.S. What you attorney apparently neglected was the effects of the tax treaties on corporate or business income, world wide. If you register your company in the U.S., then after 183 days of physical presence of any of your sales reps, storing of product in warehouses, and or exploiting the U.S. market place (makes sales and signing of contract for services etc), then the company is treated as a resident company for tax purpose and there exists, a potential of exposing your company's world wide income to u.s. taxes.

 

Most country tax treaties are closley similar because they use either the U.S. or UN tax treaty models as a template.

 

So to protect your company assets world wide, you would want to form as a seperate entity eventually in the U.S. That entity could be an LLC or a C corporation.

Take ICI paints for example: ICI (Impericakl Chemical) is a large UK corporation. When they came to the U.S. they initially started out on E-trader visas operating registered in the U.S. They eventually incorporated by acquisition, acquiring National Starch. As a member of the HR Team in the role of international immigaration and cross boarder tax, we planned and explored expansion of business operations, from the U.S. company into the Carribian. At every turn it became evident, that because of consistent tax laws world wide, it became better to incorporate in foreingn countries seperately, even if the Parent was from the UK.

 

When you incorporate seperately either as an LLC or C-corp, you maintain seperate U.S. operations, and have a seperate U.S. Payroll, and there for you offer further protections regarding world wide income and cross boarder tax issues. Your corporation is only liable for U.S. sourced income, or income derived world wide that is essentailly connected to a business located in the U.S. Without a seperate corporation, as soon as you have a sales rep who can emdemnify the company signs contracts and has accumulated six months of operations in the u.S. then you open the door to potentially have world wide income taxed by the U.S. (all income world wide that can be determined to have arisen world wide from the u.s. operation)

 

You have 10 million dollars world wide to protect from taxes.

 

Now whether or not you incorporate in the U.S. as an LLC, or a C corp is largely a subjective matter. LLC's are states inteites that are taxed as either corporation, S-corp, single owner (disregarded entity), or partnership. Since you are non-resident aliens the S-corp is not available. So your LLC would be taxed as a passthrough entity (partnership or disregared), or as a corporation.

 

The primary two reasons people form corporations in the U.S. is to gain a tax advantage and to protect personal assets from litigation and liability of company failurs and law suits. A C-corporation gives the best liabiltiy protections, while the LLC gives the best tax protections.

 

However with both forms, LLC or C-corp, the protections for liablity can be piereced. (piercing the corporate veil) The protections are pierced for things such as: public trust fund obligations, which are taxes. However it is also pierced for liability issues related to business operations, where presonal gaurantees are proviced to obtain credit, or where the corporate officers and owners have direct control over an activity or operation. So in this regard, your personal assets are better protected with a C-corp. this is because the LLC is a passthrough entity to the owners personal tax returns.

 

As a foreign owned LLC, each owner/partner in the LLC would incur a tax liablity in the U.S. for all U.S. sourced income. this is defined as income associated wtih a u.s. based operation or business activity located in the U.S. The tax savings for the LLC for Residents and Citizens versus the C-corp is that a C-corp has to pay taxes on net profits in the form of corporate taxes, and then it pays emloyees and owners a paycheck and reports income ona a W2 form, where it must then have taxes paid again by the employees including SS and MC withholding.

 

.

The tax savings for citizen and residents becomes only paying taxes one time on the individual return. But they must pay their own SS and MC taxes in the form of Self employment tax.

 

As Non-resident owners of an LLC, not taxed as a corporation, you do not have to pay self employment taxes. But you still have to pay payroll taxes for any employees, and for owners, and each owner pays income taxes on their share of net profits originating from U.S. sources, and if the company does international business form the U.S. location, from that worldwide income as well.

 

The complexity of filing taxes as an LLC partnership or as a C-corporation is a fairly level playing field. The complexity comes when you decide to become a publicly traded company on the stock exchange. Also no matter whether you are an LLC or C-corporation, when you start doing additional investments outside your routine basic corporate or business activities additional forms and processes are always required. Fore example: complicated real-estate deals, reinvesting profits into securities markets, etc. In some respects LLC taxes can become more complicated because of allocation rules for expenses, and income, owner equity, and good will.

 

So what you save when you form an LLC is really only the MC and SS taxes. But this is worth 15.3 percent of net profits. (percent of which is tax deductable), so net savings for your situation is about 8 to 12 percent.

 

With 10 million in annual revenues and 200 worldwide employees, you are at the upper margin of small business in the U.S., by definition (http://www.sba.gov/) Strategically, you would need, I would think, to think more globally about the incorporation style beyond the mere saving of income taxes and Medicare taxes for the U.S.

 

I tried to quantify if for you, but it is still a subjective call.

 

Here are some links and information that may help:

 

Taxation of aliens: http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00000871----000-.html

 

Third party outline of incorporation as LLC which includes statements regarding aliens: http://www.us-llc-for-non-residents-of-the-usa-incorporate-llc-in-us.offshore-companies.co.uk/

 

LLC tax return documents: http://www.irs.gov/businesses/small/article/0,,id=158448,00.html

 

C-corp tax return documents: http://www.irs.gov/pub/irs-pdf/f1120.pdf

 

 

Immigration issues: Without establishing an entity in the U.S. your only visa choice for employment purposes is an E-1/E-2 treaty trader visa. However once you establish an entity, either an LLC or C-corp, you can now sponsor people for any available work visa except for an L visa in the first year. This includes H-1B, F-1 and J-1 students on curriculum and optional practical training, and O-visas, and TN visas. After one year of operation in the U.S. as a sister or affiliated corporation of the parent, you can start bringing workers in to the U.S. to work in the U.S. facility in status L1/2 visa.

 

 

 

 

 

 

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank you very much for the great answer.

I also thought it makes more sense to incorporate in each country we expand, since by the end of 2009 we will have two more offices in Dubai and Indonesia, however this is our first place to begin.

I will look into those links you have given and finalize if i want a C-corp or LLC.

Thanks again for your time.
===================================================================
Regards,
Yanko

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