A foreign company selling into or operating in the United States faces a structuring decision before it books its first dollar of US revenue: does the US activity live inside a US subsidiary, a branch of the foreign parent, or a US LLC? The answer determines whether you pay one layer of US tax or two, whether the IRS can reach your parent company's records, whether a 30% withholding rate applies to money leaving the country, and whether a tax treaty can cut that rate to 5%, 0%, or somewhere in between. Get it right at the start and the structure runs quietly for years. Get it wrong and unwinding it means liquidations, tax on built-in gain, and a migration of contracts and licenses that clients notice.
The default choice for most inbound companies is a US C-corporation subsidiary, because it caps US exposure at the entity level and keeps the foreign parent out of the direct line of US tax and liability. But "default" is not "automatic" — a company entering with early losses may prefer a branch to use those losses at home, a services firm with no fixed US presence may not need a taxable entity at all under a treaty, and an owner who confuses a disregarded LLC for a corporation can accidentally create a personal US filing obligation. This guide walks the three structures, the two taxes that separate them, and the treaty mechanics that quietly move the numbers.
The three structures, and what changes between them
The choice is really a choice about where the US activity sits. A subsidiary puts it in a new US corporation that you own. A branch leaves it inside your existing foreign company. An LLC puts it in a flexible US entity whose tax treatment you get to elect. Each choice cascades into how you're taxed, what you file, and how exposed the parent is.
| Structure | US tax exposure | Parent exposure | Typical use |
|---|---|---|---|
| US C-corp subsidiary | Corporate tax on the subsidiary; withholding on dividends up | Parent shielded — files little or nothing directly | The default for ongoing US operations |
| Branch of the foreign parent | US tax on ECI plus possible branch profits tax | Parent is the US taxpayer; books exposed | Early loss years; regulated industries |
| US LLC (disregarded) | Income flows to the owner; owner may owe US tax | Owner has a direct US filing obligation | Small, single-owner, or holding uses |
| US LLC (elects C-corp) | Taxed like a subsidiary | Parent shielded like a subsidiary | Flexibility with corporate-style shielding |
The single most important line in that table is the parent-exposure column. A subsidiary or a corporation-taxed LLC keeps US tax and US filing contained inside the US entity. A branch or a disregarded LLC reaches back to the foreign parent or foreign owner and pulls them into the US system directly — which is sometimes what you want and often not.
Subsidiary: the default, and why
A US subsidiary is a domestic C-corporation. It is a separate US taxpayer, so it pays the 21% federal corporate rate on its own taxable income and files its own Form 1120. The foreign parent's involvement is to own the shares and, when the subsidiary distributes profit, to receive dividends subject to US withholding.
The appeal is containment. The subsidiary's liabilities, tax filings, and audit exposure stay inside the subsidiary. The parent is not a US taxpayer merely because it owns a US company. That clean separation is why banks, landlords, and enterprise customers are comfortable contracting with a US corporation, and why most companies planning to be in the US for the long run pick it.
A subsidiary trades a second layer of tax — corporate tax now, dividend withholding when profits go home — for a clean liability and filing wall around the foreign parent. For a company that intends to build a durable US presence, that wall is usually worth the second layer, especially once a treaty shrinks the dividend withholding.
Branch: one entity, two taxes, and an exposed parent
A branch is not a separate entity. It is the foreign parent doing business in the US directly. The parent's US-source business income — its effectively connected income (ECI) — is taxed in the US at the same 21% corporate rate. So far that looks like a subsidiary with less paperwork. The catch is the second tax.
Because a subsidiary bears two layers (corporate tax, then withholding on the dividend home), a branch would otherwise enjoy a one-layer advantage. Congress closed that gap with the branch profits tax — a 30% statutory tax on the branch's "dividend equivalent amount," roughly the after-tax ECI treated as sent back to the home office. The result is that a branch and a subsidiary end up in broadly similar economic territory, but the branch also drags the foreign parent directly into US filing, US audit exposure, and US-source liability.
A branch can make sense when
- The US operation will generate early losses the parent wants to use at home
- The activity is temporary or a market test, not a permanent build
- A regulated industry requires the parent, not a subsidiary, to hold the license
- The parent wants a single consolidated set of books during a short ramp
A subsidiary is usually better when
- The US presence is meant to be durable and grow
- You want the parent shielded from US liability and US audit
- US customers, banks, or landlords prefer contracting with a US entity
- You want to avoid the branch profits tax and keep exposure contained
The two taxes that actually decide the math
Structuring debates get abstract fast. The concrete drivers are two taxes and one threshold. Understand these three and the choice usually resolves itself.
The corporate income tax (21%)
Applies to a subsidiary's taxable income and to a branch's effectively connected income alike. This layer is roughly the same whether you use a subsidiary or a branch, so it rarely decides the structure by itself.
The second layer: dividend withholding vs. branch profits tax
A subsidiary's profit is taxed again when distributed — 30% withholding under statute, often cut by treaty. A branch faces the parallel branch profits tax on repatriated ECI. This is where treaties do their heaviest lifting, and where a well-chosen structure saves real money.
The permanent-establishment threshold
A treaty can mean you owe no US business tax at all unless you have a 'permanent establishment' — a fixed place of business or a dependent agent concluding contracts. Below that threshold, treaty-country companies can serve US customers without a US taxable presence.
Treaties: the lever that moves every number
The United States has income tax treaties with more than sixty countries, and a treaty changes the analysis in two decisive ways. First, it usually replaces the low "any US trade or business" threshold with the higher permanent establishment standard, so a treaty-country company can often sell into the US without creating a US tax liability until it has a fixed place of business or a dependent agent closing deals. Second, it reduces withholding on the money that leaves the country — dividends, interest, and royalties.
| Payment to foreign parent | Statutory US rate | Common treaty-reduced rate |
|---|---|---|
| Dividends (large corporate shareholder) | 30% | 5% or 0% for qualifying parents |
| Dividends (portfolio) | 30% | 10%-15% |
| Interest | 30% | 0%-10% |
| Royalties | 30% | 0%-10% |
A treaty does not lower your rate by itself. The foreign parent must be eligible under the treaty's limitation-on-benefits (LOB) article — a set of tests designed to stop residents of non-treaty countries from routing through a treaty country — and must actually claim the benefit, typically by furnishing a Form W-8BEN-E to the US payer and, where required, filing a US return. Skip the paperwork and the US payer is obligated to withhold at the full 30% statutory rate regardless of what the treaty would have allowed.
Getting the entry structure right the first time
Because migrating a structure later is costly, the work is front-loaded. A short, disciplined setup sequence prevents the two most common inbound mistakes: accidentally creating a taxable US presence you didn't plan for, and accidentally pulling the parent or owner into direct US filing.
- Map the actual US activity — where people are, where contracts close, where inventory sits — before naming a structure
- Confirm whether a treaty applies and whether the parent passes its limitation-on-benefits test
- Choose the entity: subsidiary or corp-taxed LLC for containment, branch only for a deliberate reason
- For any LLC, decide its tax classification on purpose — do not let the default disregarded status surprise you
- Get an EIN, and file the W-8BEN-E so US payers withhold at the correct treaty rate, not 30%
- Model the two-layer tax with the treaty rate applied, so the after-tax cost of repatriation is known up front
Most foreign companies entering the US should default to a US C-corporation subsidiary: it caps US tax at the entity level, shields the parent from US liability and filing, and pairs cleanly with a treaty to shrink dividend withholding from 30% toward 5% or 0%. Reach for a branch only when early losses, a market test, or a licensing rule gives you a concrete reason. And never let an LLC's default classification decide your tax result by accident. The through-line: decide where the US activity sits, apply the treaty, and model both layers of tax before you incorporate — not after.
Enter the US market on the right structure
Choosing between a subsidiary, branch, or LLC — and applying the right treaty rate — shapes how predictable your US tax exposure will be. Talk to our team about the structuring and filing questions before you enter the market.
Talk to a tax proSources
- IRS — Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
- IRS — Taxation of Foreign Corporations and Effectively Connected Income (IRC Sections 882, 884)
- IRC Section 11 — Corporate income tax rate (21%)
- IRS — Branch Profits Tax (IRC Section 884)
- IRS — About Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities)
- IRS — United States Income Tax Treaties A to Z
Frequently asked questions
Most foreign companies choose a US subsidiary — a C-corporation — because it caps US tax exposure at the corporate level and shields the parent from direct US filing and liability. A branch keeps the US operation inside the foreign parent, which can trigger the branch profits tax and expose the parent's worldwide records to US scrutiny. The branch mainly makes sense for early, loss-generating operations where the parent wants to use those losses at home.
The branch profits tax is a second-level tax — 30% under the statute, often reduced or eliminated by treaty — imposed on a foreign corporation's US branch earnings that are treated as effectively repatriated to the home office. It exists to match the two-layer tax a subsidiary pays (corporate tax plus dividend withholding), so a branch doesn't get a one-layer advantage over a subsidiary.
It can. A treaty typically raises the threshold for US taxation to a 'permanent establishment' rather than any US activity, and reduces withholding rates on dividends, interest, and royalties — dividend withholding can drop from 30% to as low as 5% or 0% for qualifying parents. But treaty benefits require passing a limitation-on-benefits test and filing to claim them; they are not automatic.
Yes, but the tax result depends on how the LLC is classified. A single-member LLC is disregarded by default, so its US-source business income flows to the foreign owner and can create a direct US filing obligation for that owner. Many foreign owners instead elect to treat the LLC as a C-corporation, or form a corporation outright, to keep US tax and filing contained at the entity level rather than reaching the individual.
