Indian entities and U.S. taxation – Effectively connected U.S. income
An Indian entity doing business in the U.S., unlike a U.S. incorporated entity, is generally taxable in the U.S. ‘on its taxable income which is effectively connected with the conduct of a trade or business within the United States’ on net basis. Income from additional U.S. sourced income such as interest or certain gains are taxable at flat tax rates.
In our blog series on the taxation of Indian entities in the U.S., we would be presenting the U.S. federal and state tax implications for doing business in the U.S. Before we deep dive into the details lets step back to first understand when an Indian entity can conduct ‘trade or business within the United States’ that can effectively connect its income to the U.S. taxation.
Trade or business within the U.S.
In general, the trade or business that an Indian entity may engage within the U.S. is a factual determination as there is no clear guidance under the U.S. tax code or regulations except in case of personal services or trading securities or commodities within the U.S. at any time during the tax year.
A few examples of the U.S. activities carried out by a foreign entity are treated as ‘trade of business within the United States’ or otherwise are:
– U.S. activities that have been classified as U.S. trade or business:
o activities with a profit motive, be regular and considerable economic activities having a significant degree of presence in the U.S.;
o activities carried by personnel or dependent agents of a foreign entity acting exclusively or almost exclusively for such foreign entity in the U.S.;
o substantial sales through a U.S. distributor on behalf of a foreign entity were attributable to such U.S. distributor.
– Activities that have not been classified as U.S. trade or business:
o mere managerial or clerical activities may be excluded as these activities do not advance the purpose for which the Indian corporation may be formed;
o where the relationship between the U.S. entity and the foreign supplier entity was one of purchaser-seller rather than principal-agent.
Indian corporations should be conscious if and when their U.S. activities may constitute ‘trade or business within the United States’ as the threshold to determine it is factual and interpreted by courts on case to case basis. A preliminary analysis by a tax advisor before conducting business in the U.S. would help you to negotiate the contractual terms and clarify what part of your activities may expose to U.S. taxation.