Corporate Tax

Coming into the US Market: Company Tax Issues | Gibney Anthony & Flaherty, LLP

As a manufacturer, selling your products through an independent dealer 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 buy-sell agreement between a dealer and a manufacturer does not contain an agency relationship and should not itself constitute a US business presence. See also 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 contract resident depends on issues such as economic dependency and the degree of Control together. You should stay exempt from US tax even if you use 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 asserting dependent status in agreements in which independent agencies were previously involved.

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 domestic 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 must be carefully monitored so that the authority, presence, and activities of the staff do not result in your being classified as a permanent establishment in the United States. Employees receive salary for services performed in the US and may be subject to US income tax. The US model tax treaty provides that a person who spends no more than 183 days in the US in a calendar year will not be taxed if their salary is paid by the manufacturer.

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