owned subsidiariesTen Items to Consider When Expanding into the United States
If you have made the decision, or are in the process of making the decision, to expand your operations into the United States, having the knowledge required to start your business correctly is extremely important. Needless to say, the decisions you make now will set the course for the future of your business. The purpose of this article is to provide an overview of ten key issues experienced American accounting and legal advisors can help you properly navigate to meet United States tax rules and regulations. Our objective is to help make the process of starting your business a little less complicated and help you make your business venture a success.
Entity Structure
The first decision when establishing in the United States is entity structure, which determines how the company will be taxed in the United States. The most common entity types used by businesses entering the U.S. are corporations and limited liability companies. If a business does not file the proper paperwork in the United States to select the entity type, the default regulations will dictate the entity type for your business. While this may not sound like a problem, depending on the ownership structure, the default entity type could have costly tax implications and reporting requirements.
For example: We had a client come to our firm after the initial company set-up was completed. The client had not filed the proper paperwork to select their entity type, and therefore, the default regulations applied, and the company was taxed as a partnership with foreign partners.
Other common issues to consider in this area include: capitalization of the business, special issues related to joint ventures, repatriating profits, and treaty provisions between the United States and Germany.
U.S. Tax Identification Numbers
Paperwork will need to be filed with the Internal Revenue Service to obtain a Tax Identification Number. This will need to be done before operations begin so a United States bank account can be opened, tax returns can be filed, and payroll can be set up. The Internal Revenue Service website, www.irs.gov, may be useful for accessing the required paperwork and forms online.
Hiring Employees
Hiring needs should be determined before expansion. While many inbound companies start by sending a few key employees from the parent company, before long they find the need to hire U.S. employees arises. This is the point where advance knowledge can help avoid some surprises. For instance, having an idea of typical salary ranges can be useful. Also, once U.S. employees are been hired, it is important to understand these employees are generally accustomed to receiving certain employee benefits from their employer. You will want to make sure you factor these costs in to your budget.
Accounting Systems
The entity will need an accounting system to maintain its books and records in the United States. The scope and nature of the business in the United States will help determine the sophistication of the software required. For instance, will the company be manufacturing inventory or just operate as a sales office? What is the vision for the entity five years after start-up? If significant growth is expected in a relatively short period of time, it may be worthwhile to invest in a software package today that can grow with the company and will avoid the cost of retraining staff on new software.
Employee Taxation
The United States taxes an individual based on their residency status. Once a person is deemed a resident, they become subject to tax on their worldwide income in the same manner a U.S. citizen is taxed. If you will be sending employees from Germany to work in the United States for a period of time, you will want to ensure those employees are receiving the proper tax advice.
U.S. payroll tax system - There are several different payroll taxes in the U.S tax system the company will need to understand. Social Security and Medicare taxes are split between the employer and the employee. However, if your employment is temporary (less than five years), the employee may be able to opt out of the U.S. Social system. These costs should all be considered when budgeting expenses for the new entity.
Taxation of resident aliens - Generally an inbound business will send key employees to the U.S. to help establish the new venture. There is personal tax planning issues for these employees due to the nature of the U.S. tax system. U.S residents are taxed on their worldwide income; therefore, it is important for these employees to understand how transactions in their home country could impact their U.S taxes. If the employee is bringing a spouse and children to the United States, it is important to get the appropriate tax identification numbers for each family member to allow them to maximize benefits on their U.S. income tax return.
For example: One of our German owned clients had an engineer from the parent company working on specific projects in the United States over several years. We were able to help the client understand the regulations to identify when this employee would become a U.S. resident for tax purposes well in advance, and were able to properly advise the employee to minimize his worldwide tax liability.
Tax Incentives and Location
When you are deciding where to locate your U.S. entity, it is important to look at the tax incentives that may be available. In addition to possible Federal tax incentives, there are also state and local tax incentives of which you may be able to take advantage. These incentives may depend on the industry, new jobs added to the area, or a specific location within a specific state. Using renewables in Michigan as an example, Federal tax incentives are enhanced with the State of Michigan’s renewables tax incentives and grants.
For example: The application for many state incentives should be submitted prior to expansion. A German owned client of ours was moving into a new facility. We were able to identify certain state and local tax incentives the company would be eligible for during the planning stages of the project. In the first year, this saved the company over $100,000. If the incentives were not identified before the project was started, they would not have been eligible for the credit.
U.S Reporting Requirements
The U.S requires certain foreign reporting requirements for foreign investment in a U.S. business. Failure to comply with these reporting requirements could yield significant penalties. The reporting requirements will vary depending on the level of investment; however certain forms are due within 45 days after the initial investment. In addition, there could be additional reporting requirements due with the Federal Income Tax Return.
Registration Requirements
Federal, state, and local registrations are required when business begins. State and local registrations are unique to each jurisdiction, so it will be important to understand the requirements of the jurisdiction where you locate your business. Most states impose an income tax, franchise tax, or gross receipts tax. In addition, states impose a sales tax on certain goods and services.
Transfer Pricing
If the U.S. entity will be engaging in transactions with the foreign parent company, it will be important to understand the transfer pricing regulations both in the U.S. and in Germany. The U.S. requires that inter-company transactions are priced using arm’s length or fair market value pricing. Certain documentary evidence is required to support inter-company pricing. The U.S. taxing authorities may impose significant penalties if transfer pricing agreements are not arm’s length. Common transactions which require analysis include sales to/purchases from the parent company, management fees, technology fees, royalties, and commissions.
Professional Advice
The individuals in charge of the U.S. entity should probably engage with accounting, tax and legal advisors who are thoroughly knowledgeable of the various legal aspects of starting a company in the United States. Common legal advice needed before you begin operations in the U.S. relates to entity formation, labor laws, intellectual property protection, insurance requirements, and visa matters.
Once the decision has been made to expand, you will want to make sure you surround yourself with legal and accounting professionals who are well versed in the unique needs and requirements of a foreign owned U.S. entity. If you do not file the proper paperwork when you first begin business, you may end up with a structure that is not favorable to your business plan or your worldwide operations. Legal and accounting professionals who specialize in the needs of foreign owned U.S companies can help you navigate the complexities of the U.S system, and will give you peace of mind you have properly structured your company to meet your business goals and minimize your worldwide taxes.
