When is a foreign company subject to tax in the U.S.?
A foreign company is generally subject to U.S.taxation only on U.S. source income.
That is, if a foreign company is engaged in a trade or business or has a permanent establishment (under a treaty) in the U.S.
or if it has U.S. source fixed determineable and periodic (FDAP) income (e.g. dividends, interest income, royalties) may be subject to U.S. income tax.
Income that is effectively connected with a U.S. trade or business (ECI) is generally taxed on a net basis (after deductions).
FDAP type income is generally taxed at a flat 30% (or other lower treaty rate), on a gross basis (i.e. no deductions allowed).
When is a foreign company required to file a U.S. tax return?
A foreign company will be required to file an income tax return if:
- The foreign company overpaid U.S. taxes and is interested in a refund
- The foreign company has a U.S. trade or business, regardless of whether the company had income or not.
- The foreign company has U.S. source business income including income from the sale of real estate assets held indirectly through partnerships and/or other transparent entities such an LLC
- The foreign company has U.S. source income as defined under the Internal Revenue Code
- The Company has U.S. office
- The Company has a dependent agent
Is there a statute of limitations on unfiled U.S. tax returns?
- There is no statute of limitations on delinquent returns.
- In addition, a foreign company’s failure to timely file a tax return may result in disallowance of credits and deductions. Thus under such case the foreign company may end up being subject to tax on a gross basis.
- If a foreign corporation is uncertain whether it is engaged in a U.S. trade or business, the office continued, it may file a protective return
- If a foreign company is entitled to an exemption from tax based on an Income Tax Treaty with a foreign country, a U.S. tax return must be filed to disclose such treaty position and claim the benefit.
- Note that while a Foreign Company may be exempt from tax on a Federal Income tax level, it may be required to file income tax returns on a state level.
- There are only few certain very specific exceptions to the general rule requiring tax reporting
When are the tax returns of a foreign company due?
- Generally, March 15 following the end of the calendar year being reported
- A foreign company with no U.S. office, whose books and records are outside the U.S. may be entitled to an automatic 3 month extension to June 15
- An additional extension to September 15th may be requested