Preparing the Branch Profits Tax section of the IRS form 1120F has trapped many foreign investors in U.S. real estate and with US business operations.
In addition to paying income tax on your profit, the foreign corporation pays tax again on the change in the value of its U.S. business.
The branch profits tax is based upon a law from the 1950’s. The section 531, tax on accumulated earnings, was deadly to a small business. However, now most small businesses operate in S-corporations or limited liability company. Since entities of this type are pass through, avoid section 531 does not apply. Because of this many tax professionals are unaware of this law.
The branch profits tax is just as deadly to the foreign business. This tax applies if the foreign corporation has income effectively connected with a U.S. business. The applies if the corporation has either a permanent establishment of a fixed place of business.
If you want help preparing your Form 1120F, then call me Brian Dooley, CPA, MBT at 949-939-3414.
Some CPA’s are advising their clients that keeping assets on the American branch office balance sheet avoids the branch profits tax. Just holding assets on the books, does prevent the branch profits tax. The assets must be continued to be used in an active corporate business.
Section 531 (a tax on accumulated distribution) is the concept used when the branch profit tax was enacted. Under this section, the corporation must prove the business reason for keeping liquid assets. The point of section 531 is to cause the second tax. This is a tax on a dividend that the corporation has refused to distribute.
Likewise, the IRS can impose the branch profits tax when a foreign corporation with a US branch merely retains liquid assets just to avoid the tax.
Upon a distribution of property to the shareholder of a foreign corporation, the 30 percent branch profits tax apply. Similar to section 531, corporation needs to maintain ongoing director minutes, shareholder minutes and business plans explaining why assets are not distributed to the shareholder or the home office.
Learn about winning the IRS audit of the branch profits tax on this link. On this link, find out more innovative methods to eliminate both the branch profits tax and foreign corporation income tax on this link. If you need help with an international tax audit, then contact me at [email protected]
If you would like to us to prepare your Form 1120F, then please call me, Brian Dooley CPA, at 949-939-3414.
Learn move about international tax planning with my easy to read book, International Taxation in America for the Entrepreneur available at Amazon on this link. The book takes about two hours to read.