U.S. Taxation of Foreign Branch Profits A Guide for ACME Inc. (2024)

U.S. Taxation of Foreign Branch Profits A Guide for ACME Inc. (2024)

I’m a foreign owner of ACME, Inc., a corporation registered in Delaware, with business operations in both the US and Hungary. Our company earned $10,000 in Hungary and $90,000 in the US. I’m trying to navigate the tax implications of our earnings across these countries and have several questions regarding our situation in 2023.

  1. What are the corporate income tax rates in the US and Hungary for my company, ACME, Inc., with earnings of $10,000 in Hungary and $90,000 in the US?
  2. Considering ACME, Inc.’s status as a Delaware corporation, how are our US earnings and the profit made by our foreign branch in Hungary taxed by the US?
  3. Is ACME, Inc. eligible for any tax relief on the foreign branch income taxed in Hungary?
  4. How do I calculate ACME, Inc.’s total tax liability in both the US and Hungary?
  5. If ACME, Inc. were to operate in Hungary through a foreign subsidiary instead of a branch, how would this affect our tax liability?

As a Delaware-registered corporation with U.S. and Hungary operations, ACME, Inc. faces a complex international tax landscape in 2023. Here, we provide a clear, concise overview of the U.S. tax implications for ACME, Inc., using applicable examples to illustrate how earnings in Hungary and the U.S. are taxed, the impact of operating through a foreign branch versus a subsidiary, and detailed tax liabilities and credits calculations.

U.S. and Hungary Corporate Income Tax Rates

In 2023, ACME, Inc. is subject to a 21% corporate tax rate in the U.S. and a 9% rate in Hungary on its respective earnings in each country.

Taxation of U.S. Earnings and Foreign Branch Profit

As a corporation registered in Delaware, ACME, Inc.’s global income, including profits from its foreign branch in Hungary, is taxed in the U.S. The company can claim a credit for taxes paid in Hungary against its U.S. tax liability to avoid double taxation.

Example Calculation:

  • Hungarian Income: $10,000 taxed at 9% = $900 tax liability in Hungary.
  • Total U.S. Income (Including Hungary): $100,000
  • U.S. Tax Before Foreign Tax Credit: 21% of $100,000 = $21,000
  • U.S. Tax After Foreign Tax Credit: $21,000 (U.S. tax) – $900 (credit for Hungarian taxes) = $20,100

Tax Relief for Foreign Branch Income Taxed in Hungary

ACME, Inc. is eligible for a foreign tax credit on the income taxed in Hungary, which directly reduces its U.S. tax liability on the same income.

Calculating ACME, Inc.’s Total Tax Liability

ACME, Inc.’s worldwide tax liability, including both U.S. and Hungarian operations, is calculated by adding the tax paid in Hungary and the net U.S. tax liability after the foreign tax credit. In this case, ACME pays a total of $21,000 in income tax on its $100,000 global profit.

Operating Through a Foreign Subsidiary (GILTI Calculation)

When ACME, Inc. operates in Hungary through a subsidiary, the US taxes its shareholder on GILTI from the Controlled Foreign Corporation (CFC):

GILTI Calculation Details

  1. Gross Income of CFC: $100,000.
  2. Hungarian Corporate Tax: $9,000.
  3. Net Tested Income: $91,000 ($100,000 – $9,000).
  4. Deemed Tangible Income Return (QBAI): Assumed to be $0 for simplicity.
  5. GILTI Inclusion: $91,000 (Net Tested Income – QBAI).

US Tax on GILTI (Before FTC)

  • Inclusion in US Taxable Income: $95,500, which includes a gross-up for the Hungarian tax paid ($4,500, representing the Section 78 gross-up).
  • Section 250 Deduction: $47,750 (50% of $95,500).
  • Taxable GILTI in the US: $47,750.
  • US Tax on GILTI: $10,027.5 (21% of $47,750).
Foreign Tax Credit (FTC) Calculation

The FTC calculation differs significantly under the GILTI regime compared to direct foreign income:

  • Deemed Paid Foreign Tax: $3,600 (80% of the $4,500 gross-up under GILTI).
  • FTC Limitation: Specifically calculated for GILTI, ensuring that only taxes related to GILTI income are credited.
  • Net US GILTI Tax Liability: After applying the deemed paid foreign tax, ACME faces a reduced US tax on GILTI income but must navigate the complex FTC limitations.

Why the Difference Matters

The choice between operating through a foreign branch or a subsidiary impacts ACME, Inc.’s tax liabilities due to the distinct mechanisms of taxing foreign income under US law:

  • Foreign Branch: Provides a straightforward application of the FTC against US tax liability.
  • Foreign Subsidiary (GILTI): Introduces a multi-step calculation for GILTI, including the Section 250 deduction and a more complex FTC application, potentially leading to different tax outcomes.

This analysis highlights the importance of careful tax planning and understanding the nuances of the GILTI provisions and the FTC. For corporations like ACME, Inc., choosing the optimal structure for foreign operations can have significant tax implications.

Engaging with a tax professional is crucial to navigate these complexities and optimize your tax strategy.

For more detailed guidance tailored to your specific situation, schedule a consultation with O&G Tax and Accounting Services. Our experts are ready to help you understand your tax obligations and opportunities under the current tax law.