date | theme

5 March 2021 | Taxes in the USA for natural persons: Tax liability & taxation

4. March 2021 | Founding a company in the USA – you should know these rules as an investor!

February 2, 2021 | DBA USA

27. January 2021 | Taxation of corporations in the USA: dividends from subsidiaries (this contribution)

Before 2018, US tax law provided for regular taxation of US corporations receiving dividends from foreign subsidiaries. However, in order to strengthen the competitiveness of domestic companies and to make the US more attractive internationally as a business location, the US administration reduced the tax rate at the federal level for US corporations from 35% to 21% from 2018. In addition, special conditions now apply to the taxation of profits of foreign subsidiaries based on the management of intangible assets. On the one hand, a lump-sum special deduction of currently 37.5% on this FDII (Foreign Derived Intagible Tax) income can be set. On the other hand, there is now a separate taxation provision for such foreign income if it is subject to low taxation abroad (GILTI: Global Intangible Low-Taxed Income). In this case, a standard deduction of currently 50 % takes place.

New US Tax Law: Only 11% Taxes for USA Corporation

We explain how corporations in the US tax the distribution of dividends from foreign subsidiaries.

1st corporate tax in the US before 2018

Until the end of 2017, US corporations and other non-transparent companies in the US had a federal tax rate of 35%. But the then still young US administration wanted to significantly improve the competitiveness of domestic companies in an international comparison. Another obvious goal was to promote the USA as a location for international companies from abroad with tax advantages. This is why the Tax Cuts and Jobs Act of 2017 reformed, among other things, the taxation of corporations in the USA.

New Taxation of US Corporations: Lowering the Tax Rate

Where previously a uniform federal tax rate of 35 % was applied, this now fell to only 21 %. While there are other income taxes on corporate profits, they vary from state to state. These so-called “state and local tax rates” also increase the effective tax rate by up to 9%. Often, the actual taxation is in the order of about 27%. Also for this reason, individual US states, such as Delaware or Wyoming, are known as tax havens, because they shine with particularly low own tax rates or even the waiver of these taxes. On the other hand, there is the possibility in certain cases to count the state income tax (state income tax) in the federal tax.

Simultaneously with the lowering of the tax rate, the tax reform in the US also led to the creation of its own tax regime, which applies to the distribution of profits of foreign subsidiaries associated with the management of intangible assets (IP – intellectual property, for example patents, licenses, trademark rights). In such a case, preferential taxation may take place at a rate of 13,1 %. However, this percentage is expected to rise to 16.4% from 2026.

Taxation of US corporations: the GILTI regime

A special case for this is the newly introduced GILTI regime. This also involves income from the management of intangible assets, which are, however, subject to low taxation outside the United States, with 80% of the tax levied abroad and borne by the subsidiary being taken into account. Low taxation is seen as a given if the tax rate abroad is below 13.1%. Thus, the GILTI regime is comparable to additional taxation in that it constitutes a form of criminal taxation.

Taxation of US corporations: the BEAT regime

Finally, a third tax regime is used in the taxation of US corporations, namely the so-called BEAT regime (Base Erosion Anti-Abuse Tax). This involves adding certain operating expenses paid by a US parent company to its foreign subsidiaries. Above all, payments for intangible assets or for administrative services and other services are in the foreground. From the point of view of the US government, this is a means of reducing the domestic tax base, which must be combated. Parent companies should also add these payments up to a certain percentage of their US income. This either compensates for the tax deduction of operating expenses or even a taxation of profit, albeit slightly increased. However, this special taxation only applies to US corporations above a certain level, with the average annual turnover of at least USD 500 million, but at the same time at least 3 % (for credit institutions 2 %) of operating expenses go to subsidiaries.

International tax model with license fees: Google, Amazon, Facebook & Apple

We explain how large international corporations have been able to limit their taxes to 1-6% in the past through complex structures and royalties.

Is it worth returning IP assets to the US?

For many of the major U.S. corporations, such as Apple, Amazon, Facebook, Google and others, avoiding taxes on profits earned in high-tax countries has long been a major motivation for structuring their businesses. In the past, offshore subsidiaries in the Bahamas or the Cayman Islands, for example, have accumulated international profits from their parent companies. As long as taxation of these profits in the US at a high level threatened, there was little reason to arrange for a taxable distribution.

In the meantime, however, these companies are also trying to counteract the associated loss of image as a tax fugitive – and even if it is often only for marketing reasons. However, the tax reform of 2017 has now sent a clear signal from the policy, with which it has significantly reduced the incentive to park international profits at subsidiaries in offshore havens.

Due to the tax reform discussed here, the parent companies are now more flexible in their decision whether to pay out profits. Because now the favorable taxation rules are permanent. But does this also lead, as desired by the Trump administration, to US corporations bringing their intangible assets back to the US? Although this can be made tax-advantageous by buying back the intangible assets from the subsidiaries. But if, at a later date, the transfer of these assets abroad should again make fiscal sense, the potential benefit from the tightened regulations that also came into effect with the Tax Cuts and Jobs Act of 2017, or those that may yet come, may be too limited. Therefore, it can be assumed that the offshore companies as reinsurance of the parent companies will retain their legitimacy for a while.

Taxation of US Corporations: Waiting for the Tax Holidays

A similar effect had in the past the phenomenon of “Tax Cuts”, which are sometimes also called “Tax Holidays”. At the same time, previous US governments permitted the temporary preferential taxation of such and similar profits. Such a privileged taxation of US corporations took place, for example, by the liberal economic administration under US President Ronald Reagan. The Bush administration also granted comparable tax advantages in 2001. So it came within a certain pre-announced period of time to the distribution of now tax privileged profits. After the period of preferential taxation ended, the companies began again with the salvage of profits by their foreign subsidiaries. So they waited for the next opportunity to distribute the profits tax-advantageously to the parent companies. However, if the new regulations remain in force in the long term, this could possibly lead to a rethinking of the companies with regard to the relocation of tax substrate.