This blog is a subpage “Avoiding the Form 1120F- Foreign Corporation Branch Profits Tax Trap” on this link.
At thirty percent, the branch profits tax worth avoiding. There are some options foreign corporations use for minimizing or eliminating the branch profits tax and U.S. corporate income taxes. They are:
(1) Increase salaries and bonuses within the reasonable compensation rule limit to the shareholders/employee. To the extent they work outside the U.S., the salary is exempt from U.S. taxation.
(2) Provide more fringe benefits (e.g., a qualified pension plan). The plan can be a domestic plan or a foreign plan. Certain tax savings are available if the plan is funded with assets in a foreign trust.
(3) Have the corporation pay a “stewardship fee” to the home office. A “stewardship fee” is a payment for the benefit provided by the home office.
(5) Pay dividends, including, perhaps, a consent dividend.
(6) Redeem stock, using a deferred payment obligation as consideration. Accumulating money to pay for a redemption is not considered a valid purpose for accumulating earnings but redeeming now and paying off the debt later is permissible.
(7) Establish a qualified pension plan. A resulting unfunded pension liability should reduce unreasonable accumulations. The plan can be within the U.S. or outside the U.S. If many of the U.S. branch employees are not U.S. citizen, the foreign pension plan will have an advantage in the long run.
(8) Recapitalize the corporation to shift dividends to selected shareholders such as those residing in a treaty partner country.
(9) Buy business assets instead of leasing them.
If you want to increase the quality of your tax planning, then email me, Brian Dooley, CPA, MBT, at firstname.lastname@example.org.
 The following is from an IRS web page: Foreign Corporations (FC) may operate in and earn taxable income in multiple jurisdictions including the U.S. In the case of an FC operating in the U.S. through a formal or de facto branch, the FC is required to file a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, and may have a U.S. tax liability.
The FC is required to calculate its taxable income and report the earnings of the U.S. branch (USB) that are effectively connected with the conduct of a Trade or Business within the U.S (Effectively Connected Income, or ECI). As part of this calculation of ECI, the U.S. branch is allowed to deduct expenses associated with the earning of such income. The amount of expenses related to the ECI is generally deductible in the calculation of ECI based on normal domestic principles such as “reasonable” and “ordinary and necessary.”
Taxpayers should report total expenses that are related to ECI on line 11, Part I, and line 39(a), Part IV, of Schedule H (Form 1120-F). Indirect expenses, such as those expenses incurred by the foreign headquarters, or a brother-sister branch, on behalf of the U.S. branch, and related to the trade or business of the U.S. branch in earning its ECI, may also be deductible in part, or possibly, in whole. It is necessary that the FC make an allocation and apportionment to the U.S. branch of these types of expenses to clearly reflect ECI.
The methods and principles of Treas. Reg. Secs.1.861-8 through 1.861-17, 1.861-8 through 1.861-14T, and 1.882-5 ( the 861 and 882-5 regulations), as well as the general rules for deductibility as stated above, apply. In general, the regulations require that deductions be allocated to gross income based on a reasonably close factual relationship. Taxpayers should report total indirect expenses apportioned to ECI on line 16, Part II, and line 40(a), Part IV of Schedule H (Form 1120-F).
This means that in earning gross income of a particular type or class, certain expenses may be necessary. The deductions resulting from such expenditures are allocated and apportioned to such gross income to the extent that a reasonably close factual relationship exists. As always, the resulting taxable income must be clearly reflected.
 6/ Mountain State Steel Foundries, Inc. v. Commissioner, 284 F.2d 737 (4th Cir. 1960); C.E. Hooper, Inc. v. Commissioner, 539 F.2d 1276 (Ct. Cl. 1976).