Expanding to the US? Here's What the IRS Expects From You First

US Expansion Series — Part 1 of 3: Tax & Compliance Foundations

Every year, thousands of foreign companies enter the US market, and a significant number stumble not because their product failed, but because they underestimated how different (and unforgiving) the US tax and compliance landscape is. The US doesn't have a single national business registry or a unified tax authority that handles everything. Instead, you're operating across overlapping federal, state, and local layers, each with its own rules, deadlines, and penalties.

This article covers what you need to understand before (not after!) you start operating in the US.

First Decision: Do You Need a US Entity?

Many foreign businesses assume they can operate in the US through their home-country entity. In some cases, that's technically possible, but it comes with serious tax consequences and practical friction.

Operating as a foreign entity in the US typically means you're subject to US tax on income "effectively connected" with a US trade or business. You'll also face withholding obligations and may be required to file a US corporate return (Form 1120-F) regardless of whether you owe tax.

In most cases, forming a US entity (an LLC or a C-Corporation) is the cleaner approach. Here's the practical difference:

• LLC: Pass-through taxation by default, flexible structure, lower compliance burden. Often preferred for smaller operations or when the foreign parent wants to retain profits without a second layer of US tax.

• C-Corporation: Subject to US corporate tax (currently 21%), but preferred by US investors and VCs. Required if you're planning to raise capital from US institutional investors or pursue certain visa categories.

The entity type also affects how your home country treats the income, so this decision should involve both a US CPA and your home-country tax advisor before you file any formation documents.

Federal Tax Obligations: What You Owe, Who You Register With

Once you have a US entity (or decide to operate without one), several federal obligations kick in immediately:

Employer Identification Number (EIN): This is your federal tax ID. You need it to open a US bank account, file tax returns, and hire employees. Apply directly through the IRS. Most foreign-owned entities will need to do this by phone or fax — the online application only works if you have a US-based responsible party with a Social Security Number.

Federal Income Tax: US entities pay corporate income tax at 21% (C-Corps) or pass income through to owners (LLCs/S-Corps). Foreign-owned LLCs treated as disregarded entities must file Form 5472, even if no tax is owed. Failure to file carries a $25,000 penalty per form per year.

Withholding on Payments Abroad: If your US entity pays dividends, royalties, or certain services fees back to foreign owners or affiliates, 30% withholding tax may apply, unless reduced by a tax treaty between the US and your home country. This is frequently overlooked and creates significant cash flow issues.

Transfer Pricing: If your US entity transacts with related foreign entities (loans, services, IP licensing), the IRS requires those transactions to be priced at arm's length. Inadequate documentation can trigger substantial penalties: 20% to 40% of the underpayment.

State Tax: The Layer Most Foreign Businesses Miss

The US has 50 states, and each one can assert taxing jurisdiction over your business independently of the federal government. This is where many foreign businesses get caught off guard.

Nexus is the legal concept that determines whether a state can tax you. Historically, physical presence (an office, warehouse, or employee) created nexus. Since 2018, most states also assert economic nexus, meaning significant sales into the state, even without physical presence, can trigger tax obligations.

Key state-level taxes to understand:

• State income/franchise tax: Varies by state. Some states (like Texas) have a franchise tax based on revenue, not profit. Others (like California) impose a minimum franchise tax of $800/year regardless of activity.

• Sales tax: The US has no federal sales tax: it's entirely state-administered, with over 10,000 taxing jurisdictions. If you sell taxable goods or services and exceed economic nexus thresholds, you're required to collect, remit, and file in each applicable state.

• Payroll taxes: If you hire employees in a state, you'll need to register as an employer, withhold state income tax, and pay state unemployment insurance.

A common mistake: companies incorporate in Delaware (popular for its favorable corporate law) but assume that means they only deal with Delaware taxes. If you're selling into California, New York, or Texas, those states want their share too.

Key Reporting Requirements for Foreign-Owned US Entities

Beyond standard tax returns, foreign-owned US businesses face additional disclosure obligations:

• Form 5472 (Foreign-Owned Disregarded Entity or 25% Foreign-Owned Corporation): Required annually. Covers transactions between the US entity and its foreign owners or related parties.

• FinCEN 114 (FBAR): If your US entity has signature authority or financial interest in foreign bank accounts exceeding $10,000 at any point during the year.

• Form 8858: If your US entity owns a foreign disregarded entity.

• Form 5471: If a US person (including a US entity) owns 10%+ of a foreign corporation.

These forms are often not intuitive, and missing them triggers automatic penalties that don't require the IRS to prove you owed any tax.

The Bottom Line

The US is a highly attractive market, but it's not a plug-and-play environment from a compliance standpoint. The structure you choose at the start affects your tax exposure, reporting obligations, and operational flexibility for years. Getting it right upfront is dramatically cheaper than unwinding a poorly structured expansion later.

The IB.CPA team specializes in helping foreign businesses establish and manage their US presence from entity selection and EIN registration to ongoing federal and state compliance. If you're planning a US expansion, get in touch with us before you incorporate.

Next in the series — Part 2: The Step-by-Step US Expansion Guide: Entity Setup, Banking, Payroll, and Accounting.

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