Corporate Tax 2010 - BMR Advisors

Cravath, Swaine & Moore LLP
USA
USA
(This election is available only if the foreign corporation is not a
type of entity that is required to be treated as a corporation under
applicable U.S. tax regulations.) If the election is made, the
subsidiary’s income, gains, expenses and losses flow through to its
U.S. parent and, thus, appear on the consolidated return.
4.6 Is tax imposed at a different rate upon distributed, as
opposed to retained, profits
No. A corporation is generally taxed at the same rate on its
distributed and undistributed earnings. There is, however, a second
level of tax imposed at the shareholder level when earnings are
distributed by the corporation.
The earnings of certain types of specialised corporations are not
subject to this double taxation. Specialised corporations do not pay
an entity level tax on their earnings, but their distributed or
undistributed earnings flow through to their shareholders and are
taxed at the shareholder level. RICs and REITs do not pay
corporate level tax on their distributed earnings, but they are subject
to tax on some of their retained earnings.
In certain cases, an extra “accumulated earnings” tax applies to
retained earnings; the purpose of the tax is to discourage
corporations from accumulating excessive earnings to avoid the
shareholder level tax on distributed earnings. Also, certain personal
holding companies are subject to a 15% tax on their undistributed
personal holding company income (generally income from passive
activities). This tax can be completely avoided by distributing all
personal holding company income each year.
5.3 Is there a participation exemption
There is no participation exemption in the United States. A U.S.
corporation is fully-taxed on dividends received from a foreign
subsidiary and on gain from the sale or exchange of stock in a
foreign subsidiary. A foreign tax credit is generally available,
subject to complex limitations, for foreign taxes paid by the U.S.
corporation and for its allocable share of the foreign taxes paid by
the foreign subsidiary.
Non-U.S. shareholders are generally exempt from U.S. tax on
capital gain from the sale of stock of a U.S. corporation, subject to
certain exceptions for U.S. corporations that own substantial
amounts of real estate.
5.4 Is there any special relief for reinvestment
Several means of relief are provided under U.S. law. For example,
many mergers and other transactions involving stock consideration
are exempt from immediate taxation as tax-free “reorganisations”
under the theory that the transaction represents a mere change in
corporate form. Also, corporate sellers of publicly-traded securities
may defer recognition of gain if they reinvest the proceeds in a
“specialized small business investment company”. Finally, certain
exchanges of “like-kind” or replacement property are exempt from
immediate taxation.
6 Branch or Subsidiary
4.7 What other national taxes (excluding those dealt with in
“Transaction Taxes”, above) are there - e.g. property taxes,
etc.
There are a number of federal excise taxes on various activities and
industries including fuel, tobacco and telecommunications. There
are also federal taxes paid on wages (12.4% on wages up to
$106,800 for Social Security, and 2.9% on all wages for Medicare);
these taxes are generally assessed 50% against the employer and
50% against the employee.
4.8 Are there any local taxes not dealt with in answers to
other questions
There are a host of state and local taxes that might apply to
corporations conducting business in the United States.
6.1 What taxes (e.g. capital duty) would be imposed upon the
formation of a subsidiary
There are no federal taxes upon incorporation of a subsidiary.
There may be state filing fees and state franchise taxes imposed
upon formation, the magnitude of which depends upon the
particular jurisdiction of incorporation.
6.2 Are there any other significant taxes or fees that would be
incurred by a locally formed subsidiary but not by a
branch of a non-resident company
No. There are no additional federal taxes that would be incurred by
a locally formed subsidiary but not by a branch of a non-resident
company. Annual state franchise taxes and filing fees may differ,
depending upon the particular jurisdiction of formation.
5 Capital Gains
6.3 How would the taxable profits of a local branch be
determined
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5.1 Is there a special set of rules for taxing capital gains and
losses
Corporate taxpayers may deduct capital losses to the extent of capital
gains. Excess capital losses may be carried back three years and
carried forward five years to offset capital gains from such years.
5.2 If so, is the rate of tax imposed upon capital gains
different from the rate imposed upon business profits
While individual taxpayers are entitled to preferential rates on gains
derived from the sale or exchange of a capital asset held for more
than one year, corporate taxpayers bear tax at the same rate on both
capital gain and ordinary operating income (maximum 35% rate).
In the absence of an applicable treaty, a U.S. branch of a foreign
corporation will be subject to U.S. corporate income tax at regular
rates on net income that is “effectively connected” with the conduct
of a trade or business within the United States (“ECI”). Generally,
ECI will include gross income and expenses properly allocable
thereto. Complex regulations apply to the apportionment of interest
expense on worldwide debt to a branch.
If a treaty applies, then a branch will be subject to U.S. federal
income tax only on the profits attributable to a “permanent
establishment” in the U.S., as defined in the treaty. The tax burden
may be reduced (but never increased) if a treaty applies.
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