In a global economy, businesspeople encounter many challenges. In an effort to better understand the world, Leading Edge Magazine is providing an ongoing series of articles to clear up misconceptions about doing business in a certain country.

10. Investing in U.S. property is always a safe, simple and cheap option for foreigners.

The United States is one of the few countries, if not the only country, that imposes estate taxes on nonresidents. All U.S. property (real estate and shares of U.S. corporations, for example), passed on to resident and nonresident heirs is subject to U.S. taxation on its market value, and only $60,000 can be exempted by nonresident heirs.

9. Corporations and general partnerships are the only two forms of business entities available.

In addition to widely known corporations and general partnerships, U.S. state and tax laws also allow for the formation of limited liability companies (LLC), limited partnerships (LP), sole proprietorships and S-corporations. Each entity has its unique legal liability and taxation characteristics; the best option depends on factors such as liability protection, owner flexibility and business plan.

8. Profits from foreign subsidiaries of U.S. companies will not be taxed in the United States.

The United States applies worldwide taxation to the profits of its companies as opposed to the most commonly used territorial system. This means that U.S. profits received by U.S. companies from subsidiaries operating abroad will be taxed in the United States when those profits repatriate in the form of dividends, and in some cases even earlier due to anti-deferral rules under Subpart F of the tax code. The competitive disadvantage to U.S.-based companies caused by such a system led to U.S. companies relocating abroad in past years (corporate inversions).

7. Creating a legal business entity (i.e., corporation) is complicated and takes a long time to complete.

The legal procedures to open up a U.S. entity can be done in less than a week with the assistance of any U.S. resident. Unlike many other jurisdictions, the paperwork and procedures can be accomplished fairly quickly with little additional cost.

6. The federal government is the only level of government with the authority to tax income.

Income taxes in the U.S. can be charged not only by the federal government, but also by state and local authorities. However, not all states and local governments tax income. For example, a corporation set up in Philadelphia will file income tax returns and pay taxes to the federal government, the state of Pennsylvania and the city of Philadelphia. A holding corporation set up in Delaware or certain other states, on the other hand, may only pay income tax to the federal government. Proper planning is essential.

5. An annual audit of financial reports is required for all legal entities doing business in the United States.

Audits are required only for publicly traded companies, and optional for all other entities. Banks, creditors and investors may require audited financial statements as conditions for loans and investment capital, but audits of financial reports are not required otherwise. Audits of public companies must follow the provisions of the Sarbanes-Oxley Act while audits of private entities generally are not required to follow provisions of that Act (except under certain circumstances.)

4. Residency for tax purposes is determined by legal immigration status.

U.S. tax residency for individuals is based primarily on physical presence in the country. Nonresidents who spend more than 183 days in the country are automatically considered tax residents and taxed in the same manner as U.S. citizens. Citizens and permanent residents (green card holders) are automatically considered tax residents and taxed on worldwide income.

3. The Sarbanes-Oxley Act created new U.S. accounting standards.

Sarbanes-Oxley Act was enacted to improve the reliability and credibility of audits and audited financial statements as a response to major accounting scandals, as well as ensure trust and reliability. Accounting standards—U.S. GAAP—are set by the Financial Accounting Standards Board (FASB) and not by legislation enacted by Congress.

2. Corporate profits will be taxed only one time.

Corporate profits in the United States are taxed twice, first at the corporate level at effective tax rates of generally 34 percent, and second as income taxes paid by shareholders on dividends received at generally 15 percent. Profits from partnerships are taxed only once because those are considered conduit entities; income is passed on to partners who are personally responsible for declaring and paying taxes.

1. 100 percent of foreign taxes paid can be used to reduce U.S. taxes.

Although the United States allows individuals and corporations a tax credit for foreign taxes paid on foreign-source income, the fundamentals of the calculation usually cause less than 100 percent of foreign taxes paid to be used as a credit against U.S. taxes in the same year. The remainder of the foreign tax credit can be used in future years only if foreign-source income is available in those years. Income tax treaties and proper planning can significantly reduce the risks of income being taxed both by the United States and the foreign country. e

Rafael Carsalade is a tax manager with PKF Texas. Contact him at rcarsalade@pkftexas.com or (713) 860-5412.