Indian entities and U.S. taxation: Operating in the U.S. as a branch or subsidiary
The business activities of an Indian entity operating in the U.S. may or may not create a physical presence. Before expanding your Indian operations in the U.S., a commercial objective taking into consideration your long-term and short-term goals can help your advisor to evaluate the best subsidiary structure options for you.
An Indian entity can operate its business in the U.S. either through a branch or by setting up a subsidiary in the U.S. The extent of the U.S. entity’s liability, banking or other business operations conducted in the U.S. helps in deciding between a branch or a subsidiary.
In general, the tax implication for a U.S. branch falls on its owner. In certain situations, a second level branch tax for any remittances and interest payments are levied. It is simpler to set up a branch in comparison to a corporate subsidiary. Please note that there are certain instances when an Indian entity having a U.S. branch may not be taxable at federal level but may be taxable at state level.
A U.S. subsidiary corporation may be the most advisable corporate structure to establish where on ground presence in the U.S. is required for conducting business as it provides ease of administration and less on-going compliance costs than a branch. However, a close monitoring of its activities is required to ensure that there are no inadvertent tax consequences. The tax implications for a U.S. subsidiary corporation falls on the entity itself, i.e. a subsidiary corporations pays U.S. federal and state taxes on its net taxable income.
In addition to branch vs. subsidiary, an Indian entity has an option to operate through partnership in the U.S. The U.S. tax law also provides flexibility of entity election that can change the classification of treating an entity for U.S. tax purposes. The forms of each entity are distinct and there are specific tax and reporting compliances in India and the U.S. The interaction of tax laws can also add tax implications to the business structure, for example, a U.S. subsidiary incorporated in the U.S. may be subject to taxes in India if it is presumed to have a place of effective management in India in addition of doing business in the U.S.