Tax Planning/Foreign Branch in the US
I recently established a LLC in Peru with the objective to sell handmade boots from Peru to US customers. Because I want to sell directly to US customers-no distributors or retailers- I am planning to set up a branch of the Peruvian company in the US. I will sell the products online through the US business based in Virginia. I have no employees. My questions are the following:
- In general: What state and federal taxes does a branch of a foreign company in the US pay?
- In the case that I establish the branch in Virginia and then I want to sell my products online to customers in other states, what federal and state taxes would the company need to pay?
-And then, in the case that I establish the branch in Virginia and decide to assist to a trade show or market to sell my products in New York, for example, what federal and state taxes would the company need to pay?
Let me start by directly answering your question. But understand that your plan is flawed. For instance, Peru does not have Limited Liability Companies, similar to what is defined in the US. You probably purchases a "Limited Company", which according to English common law is close to what we consider a corporation.
When you bring the Peruvian company to the US, it will be subject to all US laws, including tax laws.
As you have laid it out: The US business would pay US federal taxes and any state taxes, on 100% of the profit. Then, since it is owned by a foreign entity the remaining profit will be subject to a 30% withholdings as it goes back to Peru. Then the business would be subject to Peruvian taxes on what is left.
And Finally, you as a US citizen are obligated to pay tax on your worldwide income. On your tax return you would be required to declare your ownership of the Peruvian Limited company and effectively pay taxes on the profits personally, here in the US.
While not fully disclosing is an option, but the risks are very high.
US tax rates change as income increases. Let's say the business made $100,000 in the year as net profit. The Peruvian business registered to do business in the US would be taxed as a real corporation. Federal Corporate tax would be 22.25% average. leaving $77,750. If you operate in Virginia that takes another 6% or $6000 #$71.750#. That net amount is transferred to Peru, 30% withheld #$50,225#. Peru's tax rate is 30%, If Peru has a tax treaty with the US you would get credit for the 30% withheld, creating a wash. You still have $50.225. But you are in the US, you have to declare the value of that Peruvian income personally here and pay taxes on it. That will depend on your personal tax rate which could be 25, 28, 33, 35, 39,6% plus Since you live in Virginia you get to add that tax rate. since the top tax rate kicks in at $17,000 we can reasonable assume that all of that $50,225 would be in highest tax bracket of 5.75%. I'd say you are looking at keeping maybe $32,000 when it is all done.
I think there are better ways.