Getting into the US Market: Corporate Tax Issues | Gibney Anthony & Flaherty, LLP

As a manufacturer, selling your products through an independent reseller is a way to enter the US market without paying US taxes. The US will try to tax you if you have a business presence in the US

Agency relationship

Under general US tax law, creating an agency relationship (independent or otherwise) is viewed as establishing a US business presence that may subject you to US tax and filing US tax returns. However, a purchase and sale agreement between a dealer and a manufacturer does not contain an agency relationship and should not itself constitute a US business presence. Also see the US tax treaty for information on US tax exemption.

US model tax treaty

Under the US model tax treaty, a contract-based contract (e.g., manufacturer) is not subject to US tax on corporate profits unless it has a permanent location or “permanent establishment” such as a US office through which it operates runs a business. The use of a “dependent” agent with the power to legally bind him / her on an ongoing basis constitutes a “permanent establishment”. Whether an agent is “dependent” or “independent” on a contractor depends on issues such as economic dependency and the degree of Control together. You should stay exempt from US tax even when using an agent to market your products, provided the agent’s authority is limited to promoting sales. The US is now investigating relationships with agencies more closely and is asserting dependent status in agreements that previously involved independent agencies.

Filing a US tax return

If your basis for not paying any US tax is on a contractual exemption, you must file an annual corporate tax return detailing the basis for the exemption. The return does not have to show the results of your US operations. Submitting a return also protects your right to offsetting any deductions if it is later determined that the indemnity claim was incorrect.

US tax treaties do not cover state and local activities. It is therefore possible to be subject to state and local taxes even if the state activity does not subject the company to federal tax. Accordingly, in addition to determining federal tax treatment, you need to determine treatment under state and local tax laws.

Employee taxes

In the early stages of your business, your employees can travel to the United States on a regular basis to aid in marketing efforts. This needs to be carefully monitored so that the authority, presence, and activities of the employees do not result in your being considered a permanent place of business in the United States. Employees receive salaries for services performed in the United States and may be subject to US income tax. The U.S. model tax treaty provides that a person who spends no more than 183 days in the U.S. in a calendar year will not be taxed if their salary is paid by the manufacturer.

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