Setting Up a US Subsidiary: Branch, Corporation or LLC?

Does a foreign company need a US entity to sell to data center customers?

Selling from abroad needs no US company. A branch makes the parent the taxpayer; a corporation is its own taxpayer (IRS: Form 1120-F).

Resolve any customer's US-entity/W-9 requirement before forming.

US branch vs subsidiary vs LLC: what does each file in year one?

Branches and unelected parent-owned LLCs use parent returns; corporations file their own (classification regulation).

A parent without a treaty permanent establishment has a Form 5472 exception requiring timely Form 8833 treaty disclosure (IRS). State registration follows state law.

Texas franchise tax reaches direct sellers with $500,000 or more in Texas receipts (Comptroller). Below the $2,650,000 no-tax-due threshold, information reports remain required; see Texas franchise tax (thresholds, reporting duties).

Calendar-year returns generally fall due the following year on April 15 for a US corporation or parent with a US office, and June 15 for a parent without one (1120, 1120-F). Form 5472 accompanies that return; missing it can trigger $25,000 (IRS). See filing deadlines and extensions.

Can a foreign corporation own a US LLC and give customers a W-9?

Yes. Its LLC defaults to branch taxation of the parent. The LLC uses the foreign owner's appropriate Form W-8; a US corporation uses W-9 (IRS).

Use W-8BEN-E, or W-8ECI for effectively connected income (IRS); EINs and protective returns: see foreign company US returns.

Form 8832 elects corporate treatment. The owner or an authorized LLC officer, manager or member signs. Its effective date normally falls no more than 75 days before filing or 12 months afterward; late-election relief may apply. See LLC filings.

When does a US warehouse, sales office or sales rep change direct selling?

An office, inventory operation or sales rep can create US business without incorporation. Sales attributable to a US office can become US-source income under section 865(e)(2).

Under a treaty, a dependent agent habitually concluding contracts can create a permanent establishment; an independent distributor generally does not. Storage-only exceptions depend on the treaty and actual activity (China treaty, Article 5). Review actual warehouse functions.

Installation crews can trigger either test; see employees sent abroad. Without a treaty, the domestic business test applies.

Branch vs subsidiary taxation: what happens when profit goes home?

Corporate income tax is 21%. A branch generally faces 30% on after-tax US business earnings not reinvested by year-end or released later. US net equity—qualifying US business assets minus liabilities—measures reinvestment. The dividend-equivalent amount can trigger tax without a remittance. A branch can also owe excess-interest tax in Form 1120-F, Section III, Part II (IRS). A subsidiary generally withholds 30% on dividends unless treaty relief applies (IRS).

Rates require residence, beneficial ownership and treaty qualification: China, Articles 9–10, Korea, Articles 12–13, Japan, Article 10, Japan protocol, and Canada, Articles X–XI.

Japan's dividend exemption requires 50% or more voting ownership for six months plus treaty conditions; the lower taxable rate requires 10% voting ownership. The protocol entered into force on August 30, 2019 (Treasury).

Korea's lower dividend rate requires 10% voting ownership during the prescribed current and prior-year periods, and prior-year interest/dividend income no greater than 25%, subject to exclusions.

China and Korea remain listed in section 1.884-1(g)(3), subject to qualified-resident tests. The foreign parent's ordinary shareholder dividends are generally exempt from US withholding (sections 871(i)(2)(D) and 881(d)).

Does Taiwan have a tax treaty with the United States?

Neither Taiwan nor Hong Kong has a comprehensive US income tax treaty (IRS treaty list). Neither has treaty permanent-establishment protection or reduced parent-payment rates.

Checked October 12, 2026: House-passed H.R. 33 last reached Senate Finance on January 16, 2025; S. 199 on January 23, 2025 (House bill status, Senate bill status).

The proposed United States-Taiwan Expedited Double-Tax Relief Act would reduce interest and royalty tax to 10%, dividends to 15% or 10%, and branch profits tax to 10%, with a permanent-establishment threshold. Relief requires enactment and Treasury's reciprocity determination (House-passed text).

Title II would authorize an agreement; Treasury's October 2024 announcement said negotiations would begin through the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States (Treasury). Proposed relief is not in force.

Does the company or branch file a BOI report?

US-formed corporations and LLCs are exempt. Foreign-formed parents registered in a state generally report non-US individual beneficial owners unless exempt (FinCEN's final rule).

Newly registered foreign reporting companies have 30 calendar days from the earlier actual or public registration notice; non-US company applicants may also be reportable (current regulation).

Should the parent fund the US company with shares or a loan?

Shares suit lasting capital; loans need repayment obligations and capacity. Compare timing, interest limits and withholding, which can apply despite delayed deductions. Combine both if appropriate.

Debt needs a written note, maturity, interest, repayment capacity and actual repayments; debt-to-equity and subordination matter (section 385). Related-party debt funding distributions or group acquisitions can become stock under specific debt rules.

What interest rate should the parent charge, and when is it deductible?

Use an arm's-length rate: independent parties' price for comparable borrowing. For eligible US-dollar term loans, the safe haven is 100% to 130% of the loan date's term-matched applicable federal rate (AFR), the IRS benchmark. Match compounding; demand loans use each day's short-term AFR. Foreign-currency loans and lenders regularly lending to unrelated parties are excluded (regulation, IRS rates).

Interest owed to a related foreign parent generally is deductible when paid (section 1.267(a)-3). Section 163(j) generally limits deductions to business interest income plus 30% of adjusted taxable income, plus floor-plan financing interest. That income again adds back depreciation, amortization and depletion (current IRS guidance).

The small-business exception requires $32,000,000 or less in average prior-three-year receipts, excluding tax shelters (Revenue Procedure 2025-32). Controlled-group aggregation generally includes the foreign parent: a large parent can remove the exception from year one (IRS aggregation rules, section 52(a)).

The safe haven is not a transfer pricing study; we do not prepare studies/documentation. Pricing, withholding, W-8BEN-E and Forms 1042/1042-S: see subsidiary annual filings.

The parent paid for equipment or inventory: contribution or loan?

Identify who bought and owns the goods. Paying the subsidiary's supplier may be capital or genuine reimbursement debt/loan; records must match repayment terms (debt substance). Parent-owned goods follow these property rules.

Property exchanged solely for shares qualifies for section 351 deferral if transferors immediately hold at least 80% of voting power and each nonvoting class (section 351, IRS control test). Normally, the company takes the parent's US basis. Imported net built-in losses require fair-market-value basis; other net built-in losses also reduce basis unless parent and company jointly elect to reduce the parent's stock basis (section 362(e)). Both agree in writing to elect. The parent, if a US-return filer, attaches a Section 362(e)(2)(C) Statement to its timely original return, including extensions; otherwise the subsidiary generally files it (regulation).

Related-party purchases require arm's-length pricing and Form 5472 reporting; imported goods' tax costs cannot exceed the same costs in customs value (section 1059A). Purchases for money go in Part IV; equipment or inventory contributed for shares goes in Part VI even if section 351 defers gain (IRS instructions, reporting regulation). Cash share subscriptions have their own reporting rules.

How does money return to the parent?

Genuine principal repayment generally has no income withholding; interest does. The US company owes tax it fails to withhold (section 1461). Responsible officers who willfully fail to collect/remit can personally owe unpaid tax under section 6672 (IRS); collection generally lasts 10 years after assessment, subject to suspension or extension (IRS). Parents owning at least 10% of voting power cannot claim portfolio-interest exemption (IRS: Publication 515).

Distributions are dividends up to earnings and profits, then reduce stock basis; excess is gain. Withholding generally covers the whole distribution unless the company reasonably estimates the nondividend portion (IRS). Labels cannot change this order (sections 301 and 316).

Example

Illustrative US dollars; ordinary corporate tax; no state/home-country tax.

Branch or subsidiary without a treaty

A Taiwanese switchgear maker earns $1,000,000 US taxable profit supplying Dallas-Fort Worth colocation and hyperscale sites. Assume $790,000 after-tax earnings and profits and unchanged US net equity. Its branch pays $210,000 income tax plus $237,000 branch profits tax: $447,000 total. A subsidiary distributing $790,000 withholds $237,000: the same total, when paid. A treaty-qualified Japanese parent faces at most 5%, or $39,500, on that dividend.

Shares plus a loan

The parent funds McKinney fit-out and inventory with $3,000,000 for shares and a $2,000,000 five-year US-dollar loan. Assume an illustrative 4% semiannual mid-term AFR, not the current IRS rate: the safe haven is 4.0%–5.2% on that basis. At 5% with interest paid semiannually, annual interest totals $100,000; $30,000 is withheld for the Taiwanese parent. With $200,000 adjusted taxable income, no business interest income/exemption, $60,000 is deductible and $40,000 carries forward.

Assume only contributed test equipment has a built-in gain/loss. It keeps its $400,000 US basis if worth at least that. At $300,000 value, its basis generally falls to $300,000: under the imported-loss rule if pre-transfer gain/loss was outside US tax, otherwise section 362(e)(2), unless both elect to reduce stock basis instead.

The LLC route

A Taiwanese server chassis maker operates through a Texas LLC without electing corporate status. The parent files Form 1120-F and faces 30% branch profits tax; the LLC files pro forma Form 1120 with Form 5472 and required Texas reports. Customers receive the parent's W-8ECI for effectively connected receipts. Electing at formation gives corporate treatment. Incorporating an operating LLC or branch later can tax earlier US earnings. Under section 1.884-2T(d), the corporation can elect to take over those earnings on its timely return, including extensions; the parent signs and attaches its future-disposition agreement to its timely transfer-year return.

Different for you?

• Canadian parent: use Canadian business expansion.
• Individual owner: use forming a company from abroad.
• Engineers installing equipment or transferring to US payroll: see employees sent from abroad and the employee's first-year resident return.
• Equipment invoices or exemptions: see servers, installation and maintenance or foreign seller sales tax.
• State choice or setup: see which state to form in and after formation.
• No first-year revenue or missed filings: see first return without revenue or missed foreign-owner filings.
• Structure or funding review: bring ownership, contracts, site activities, group receipts, loan terms and asset records to cross-border tax for company/EIN setup, first Form 1120 with Form 5472, state reports and funding advice.

Export controls, CFIUS review, customs and state restrictions on foreign-owned land purchases or long leases, including Texas SB 17, can apply. We do not advise on these; ask a trade or real-estate lawyer before signing.