Corporate Tax - Foreign Corporation Branches

Foreign Corporation Branches

Most jurisdictions tax foreign corporations differently than domestic corporations. No international laws limit the ability of a country to tax its nationals and residents (individuals and entities). However, treaties and practicality impose limits on taxation of those outside its borders, even on income from sources within the country.

Most jurisdictions tax foreign corporations on business income within the jurisdiction when earned through a branch or permanent establishment in the jurisdiction. This tax may be imposed at the same rate as the tax on business income of a resident corporation or at a different rate.

Upon payment of dividends, corporations are generally subject to withholding tax only by their country of incorporation. Many countries impose a branch profits tax on foreign corporations to prevent the advantage the absence of dividend withholding tax would otherwise provide to foreign corporations. This tax may be imposed at the time profits are earned by the branch or at the time they are remitted or deemed remitted outside the country.

Branches of foreign corporations may not be entitled to all of the same deductions as domestic corporations. Some jurisdictions do not recognize inter-branch payments as actual payments, and income or deductions arising from such inter-branch payments are disregarded. Some jurisdictions impose express limits on tax deductions of branches. Commonly limited deductions include management fees and interest.