Purchase of shares in US resident company
A purchase of shares in a US company generally is not subject to US federal income tax as a result of the purchase. US withholding tax (WHT) or state and local taxes may apply with respect to the purchase.
US tax residence
A company is treated as tax resident in the United States if it is incorporated in the United States.
Corporate income tax rate
The current US federal corporation income tax rate is 21%.
Equity financing from Chinese resident parent company to US resident subsidiary
Generally, a Chinese resident company can contribute cash to a US subsidiary without a US federal income tax cost. If property other than cash is contributed, there may be US tax consequences.
Withholding tax on dividend payments to Chinese parent company
Generally, the United States imposes a 30% WHT on payments of dividends by US corporations to non-US persons. If the payee qualifies for benefits under the US-China income tax treaty, this 30% rate may be reduced to 10%.
Debt financing from Chinese resident parent company to US resident subsidiary – tax deductibility of interest payments
The US subsidiary may claim deductions with respect to interest expense paid to the parent, subject to certain limitations. For example, a US corporation generally may only deduct interest expense up to the sum of 30% of its adjusted taxable income and any interest income.
Debt financing from Chinese resident parent company to US resident subsidiary – withholding tax on interest payments
The payment of interest may be subject to US WHT imposed at a 30% rate, unless reduced to 10% by the US-China income tax treaty or another exception applies.
Intellectual property – withholding tax on royalties paid to Chinese parent company
The payment of royalties may be subject to US WHT imposed at a 30% rate, unless reduced to 10% by the US-China income tax treaty. For purposes of the treaty, in the case of royalties paid for the rental of industrial, commercial or scientific equipment, the reduced 10% tax is imposed on 70% of such royalties (as opposed to the full amount of the royalties).
Intellectual property – tax treatment of licence granted by Chinese parent company to US resident company
Transactions granting rights to intellectual property may be treated as either (i) a sale of the intellectual property, resulting in gain or loss; (ii) a license of the intellectual property, resulting in royalty payments; (iii) the performance of services with respect to intellectual property, resulting in fees for services; or (iv) a combination of these categories. The US federal income tax treatment will depend on the facts and circumstances. The legal form of the transaction is not controlling.
Intellectual property – tax incentives
Under the US Internal Revenue Code provisions related to Foreign Derived Intangible Income (FDII), a US corporation may deduct a portion of its income related to deemed intangible income with respect to certain property sold to non-US persons and certain services provided to non-US persons.
Intra-group transactions – anti-avoidance rules including transfer pricing
Under the US Internal Revenue Code, various anti-avoidance rules may be relevant to intra-group transactions (including with respect to transfer pricing).
Sales tax/VAT
The United States does not have a Goods and Services Tax (GST) or Value Added Tax (VAT) regime. Sales tax applies at the state level. Depending on the US company’s nexus or connection with a US state, a state or local sales tax may apply to goods and services the US business provides or receives.
Pillar Two
The United States has not yet enacted legislation implementing Pillar Two.
Use of business losses (including trading losses)
A US company that has incurred a business loss (net operating loss, or “NOL”) in an accounting period can, in general, use that loss to reduce its US federal corporate tax liability by deducting it against gross income from the same accounting period. Generally, a US company may carry forward its NOLs indefinitely, but those deductions are limited to 80% of taxable income. Generally, a US company may not carry back NOLs. Strict rules limit use of tax losses following a change in control.
Surrendering losses within group
If a US resident company is a member of a consolidated group, generally taxable income and loss is reported on a consolidated basis and the rules discussed above with respect to business losses continue to apply. Losses arising prior to a US company joining a US group generally cannot be shared to offset the income of other companies in the group.
Payroll taxes relating to employing staff in the US
In general, the employees of a US company who work in the United States are subject to US income tax and Federal Income Contributions Act (FICA) withholding in relation to their employment wages.
The US company is responsible for deducting these amounts from employees’ pay and remitting them to the US Treasury.
The US company is also responsible for remitting the employer portion of FICA and Federal Unemployment Tax Act (FUTA) tax related to the employee’s wages from employment.
Tax issues relating to secondees sent from China to US resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in the United States may be taxed in the United States. However, the remuneration is instead generally taxable only in China if:
- the secondee is not present in the United States for more than 183 days in the calendar year in question;
- the secondee’s remuneration is paid by, or on behalf of, a non-US resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the United States.
The US’s tax authority, the Internal Revenue Service (IRS), interprets the term ‘employer’ in this context to mean the ‘economic employer’ rather than the legal employer. Therefore, the exemption does not apply if the US resident company using the secondee’s services bears the cost of the secondee’s salary.
The United States does not have a reciprocal social security agreement with China, and therefore, the secondee’s earnings in the US will be liable to US FICA withholding.
Tax on disposal of shares in US resident company
The gain arising from the sale of shares of a US company by a non-US shareholder generally is not subject to US federal income tax, subject to certain exceptions, for example, if the US company holds a sufficient amount of US real property interests.
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