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Corporate tax

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The world today can be described as a global village, and thus, cross-continent business activities are quite common. Many Israeli businessmen choose to expand operations or copy the center of their operations overseas – both in a desire to conquer new markets and in the hope to enjoy many new business opportunities.

This practice is not limited to major tycoons but is prevalent among all Israeli businessmen. The United States, which is the land of limitless possibilities, is, naturally, a focal point that attracts the activity of many Israeli businessmen.

Most business activities (in the United States and in other palaces) are done through a corporate organization. However, in the United States, this activity is subject to dozens of unique taxation provisions that have the power to influence the profitability of the transaction.

This is all the truer in light of the revolutionary tax reform that has taken place in the United States over the past two years.

Professional tax planning can contribute to the peace of mind of the clients by diminishing the need to deal directly with the tax authorities and can also save unnecessary tax costs, help maximize profits and avoid tough sanctions.

In this article, we would like to introduce you to the five most important things you need to know before you decide to expand or to copy business activities to the United States.

 

1: The importance of corporate organizing

When it comes to choosing the appropriate form of corporate organizing It is important to choose wisely since the correct form will ensure a minimum tax burden and the nature of the tax, its rates, and the manner of reporting may vary according to the form of organization.

We recommend choosing the most suitable form of organization according to the nature of the business activity, revenue source, and financial scope. The following are the common forms of organizing:

 

C-CORP company

A legal entity composed of people who came together in order to profit. The company is a separate legal entity detached from its owners, and these hold it through shares that reflect their relative part in the company.

The company’s profits are divided between shareholders, depending on their share of the company, through Dividend. Since the company is a separate legal entity, the responsibility of the owners is limited to their obligation to the company.

In contrary to the partnership, in a C-CORP, the tax burden applies to the company and is not transferred to the shareholders.

C-CORP will be liable to tax on its global income. This income will be subject to corporation tax, and unlike a partnership, it will not be able to enjoy preferential rates (reduced rates) of capital gains tax.

In addition, dividend distribution will also be subject to dividend tax, unless it is a dividend received from a foreign company. It should also be mentioned that an additional tax has recently been imposed on multinational American corporations.

 

Partnership

A legal entity, which is not a company, consisting of two or more partners who are organized together to run a business. Each partner contributes money, assets, or services for the right to receive a share of the partnership’s profits and losses, all as determined among the partners.

A partnership, unlike a bound company, does not establish a separate legal personality from the partners, and therefore there is no buffer between them and the partnership. In fact, it is not the partnership that owes the taxes, but that this liability is transferred to each of the partners.

Similarly, the lack of a separation between the partnership and the partners means that their responsibility is not limited to the amount of their investment.

The partnership’s current revenues will be marginally taxed, and capital gains held over a year will be subject to capital gains tax.

 

Foreign company

A legal entity is incorporated as a company under the laws of a foreign country.

Like a C-CORP, it is a separate legal entity from its owners, who hold it through shareholders. Naturally, shareholders will enjoy limited liability. However, a foreign company will be incorporated under the laws of a foreign country.

A foreign company will be taxed on its income generated only within the United States. A foreign company’s local revenues will also be taxed according to corporate tax rates.

 

L.L.C- Limited liability company

A legal entity that combines a partnership with a company ltd. Like the C-CORP, it is an independent legal entity and is completely separate from its owners.

As such, the owner’s liability is limited. However, like the partnership, an L.L.C does not issue shares and its members are not shareholders but members of the partnership.

As in the partnership, the members of the L.L.C are liable for the tax burden.

An L.L.C   with only one partner, will be taxed as if it were a private individual. An L.L.C with more than one partner will be taxed as a partnership. However, it is possible for an L.L.C to choose to be taxed as if it were a C-CORP. In the rest of this discussion, L.L.C’s will be regarded as a partnerships.

 

Common Business Entities and their Taxation Properties

table: [Partnership], [C-CORP], [Foreign company], [Is there a limited liability?], [Not limited], [Not limited], [Limited], [Who holds tax liability?], [The partners], [The company], [The company], [What incomes are taxed], [Only incomes that were generated in the U. S], [Global incomes], [Global incomes], [Which taxes will be deducted], [Current Revenues: Marginal taxation that applies to individuals Capital Gains: Taxation rates of capital gain], [Company taxation rates Dividend tax for distribution], [Company taxation rates Branch taxation rates]

 

The importance of the founding spot

After choosing the compatible business entity that suits your needs, the next equally important matter to decide is where and how to establish the company. This is a matter of great significance and will be explained in-depth in the following segment.

Any form of organizing- whether as a partnership, a C-CORP, or an L.L.C– is subject to state regulation and taxation. This means that beyond regulations governing federal organizing and taxation, there is an additional “layer” of regulations that vary from country to country.

For example, some countries do not charge corporate tax at all, others might charge corporate tax at a low rate, or charge corporate tax only from a certain income, some countries do not charge a company registration fee, and so on and so forth.

The existence of differences requires preliminary planning of the type and its location. Thus, there may be differences in the way the registration takes place in each country, the number of tolls to be paid, and the state tax liabilities imposed on the association.

These differences may, of course, affect not only the feasibility of the transaction but also the risks taken within it.

As mentioned above, the incorporation procedures vary according to each type of organization and by country, but these are the main stages:

 

Choose a name for a corporation

Due to intellectual property law, an existing trade name cannot be used. And so, a “vacant” name must be found for the corporation. When it comes to Company Inc., its name will include an appropriate extension such as Corporate, Corp, Inc, etc.

 

Formulation of the corporation’s basic documents 

The formulation of company regulations that includes the company’s details and the purposes of its establishment.

In some associations and in some countries, it is necessary to draft another separate document that regulates the legal relationship between the members of the corporation and themselves and between them and the corporation.

 

Payment of fees and registration of the corporation as required by state law 

If the company in question is a company Ltd., there will need to be additional stages such as holding a shareholder meeting, selecting directors, and allocating shares. Naturally, additional obligations may apply in accordance with state law and the relevant duties must be carefully examined in order to avoid sanctions.

 

A critical step when establishing a corporation

Another critical step when establishing a corporation is issuing an EIN for tax purposes also known as an Employer Identification Number.

The EIN is used to identify business entities against U.S. tax authorities. Despite what its name implies, the EIN tax is not unique to corporations that employ workers, and most businesses are required to issue it.

The answer to the question of whether there is an obligation to issue an EIN depends on many variables. It is important to examine in advance whether issuing an EIN is necessary since its cancellation will require an official application to the tax authorities.

 

Stages of association (the left column refers to steps relevant to C-CORP)

table: Select a corporation name => Formulation of the corporation's basic documents => Corporate registration and toll payment if necessary => Issuing an EIN => Selection of Directors => General Assembly Meeting => Share Allocation

And so, preliminary tax planning that includes choosing the form and location of the organization, will ensure a profitable investment and prevent exposure to sanctions due to tax violations that stem from an unawareness of the rules and obligations that apply to corporations.

Our team is highly experienced in these subjects and will be happy to assist you with any questions.

 

2:  Reporting duty

As is well known, the reporting obligation is a separate obligation and independent from the tax liability obligation.

This obligation also applies to partnerships and companies, but the report way is different: for each legal entity there is a different reporting form, and reporting times are also different. It is important to comply with the reporting obligation as non-compliance with the rules may expose the investor to unnecessary liabilities.

 

Partnership

In a partnership, the tax report is done through form 1065 – Partnership Return. Any partnership engaged in trade or any business activity must report the activities through the above form. This form contains information regarding the income, expenses, profits, losses, credits, and other activities of the partnership.

As mentioned before, the partnership does not pay the tax fees itself but transfers the liability to its partners.

Therefore, together with form 1065, the partnership will issue for each partner Appendix schedule K. In the above document, the details of each partner will be described, his income, expenses, and profits – all as stipulated in the partnership agreement.

In the case of a foreign partner, the partnership will deduct tax from his income and will issue it a form 8805. The submission of form 1065 must be signed by each of the partners. It will be noted that an LLC held by more than one partner, will also have to report tax through form 1065.

The deadline for submitting the partnership’s tax report is March 15 of the following year. With a special request, you can get an extension to submit the report until September 15.

 

C-CORP

The tax reporting of a C-CORP is done through form 1120 -U. S Corporation income tax return. As part of the form, the Company will report its income, expenses, profits, deductions, credits, and other details required to calculate the tax liability. As stated above, the report will relate to the company’s global revenues.

C-CORP companies will file their tax reports by April 15 of the following year. With a special request, you can get an extension to submit the report until October 15.

 

Foreign company

A foreign company must also file a tax report to authorities. The reporting of a foreign company will be done with form 1120F. In the report, the company will declare its income, profits, expenses, deductions, and credits.

As noted above, this report will only address the company’s business activities within the United States.

The reporting date of a foreign company is June 15 of the following year. It is possible to file a request for an extension until October 15. If necessary, an additional request can be submitted for a special extension. In this case, the report should be submitted by December 15.

table: Partnership 1065 => March 15th => September 15 (after extension); 1120 C-CORP => April 15th => October 15 (after extension); 112OF Foreign company => June 15th => October 15 (after extension) => December 15 (special extension);

3:  Taxation of capital gains and dividends

As mentioned above, the types of tax and rates applicable to it vary depending on the form of incorporation. However, in this discussion, we will review the taxation applicable to capital gains and the taxation of dividends.

 

Individuals

Individuals are taxed on income for a dividend they received. In general, there is a distinction between an ordinary dividend and a qualified dividend. The dividend type classification will be performed by the dividend transferring party through form 1099 that will be issued and transferred to the dividend receiver. The ordinary dividend will be taxed at the relevant marginal tax rate according to the status of the application and the level of income (between 10-37%). The qualified dividend will be taxed at preferable capital gains rates – between 0%-20%.

 

Partnerships

Since the partnership has a tax liability of the partners, the taxation of the income of a partnership will be done according to the marginal tax steps – according to each partner’s income. The tax rate depends on the presenter’s personal status and income level and will range from 10-37%. As for income from capital gains, and when the property from which the capital was generated was held by the partnership for more than a year, the partners will be able to enjoy preferred tax rates to the gain for the depreciation component at 25% tax, while the remaining profit will be taxed at only 15%

 

C-CORP

The total revenues of C-CORP companies will be taxed at a flat rate of corporate tax – 21%. C-CORP companies will not benefit from a preferential rate for capital gains. In addition, companies will be exposed to taxation on dividend distribution. In this context, it is worth mentioning that the Trump tax reform introduced a tax exemption for C-CORP companies from dividends received from a foreign company. The exemption will be given to the C-CORP it held the foreign company at a rate of 10% for at least one year.

 

Foreign company

Foreign companies will be taxed for all income generated in the United States at a company tax rate of 21%. In addition, a foreign company is liable to branch tax liability on company profits transferred by the shareholder outside the United States. The branch tax rate is 30%, but the tax treaty between Israel and the United States limits the rate to 12.5%.

 

4: New tax obligations that must be recognized

The 2018 tax reform added new tax liabilities related to business activity between U.S. and foreign corporations.

The new tax obligations seek to deal with a situation in which profits are not transferred to the United States to avoid paying tax to U.S. tax authorities. The practice of many American corporations is to operate around the world through foreign-controlled corporations (“foreign controlled company”).

Foreign corporations do not have to pay tax on incomes not generated in the United States, and even though they are actually controlled by American entities, they are not taxable incomes.

Therefore, the new tax reform focuses on the profits of corporations incorporated by foreign law and whose actual control is by American shareholders.

The new tax reform turns the tables and requires proper tax planning that will prevent unnecessary liabilities to the tax authorities and exposure to sanctions for missing reporting.

 

One-time tax on excess profits of CFC (Controlled Foreign Corporation)

The 2018 tax reform imposed a one-time liability on some C-CORP companies. As part of the new liability reform, U.S. multinational corporations will be taxed for excess profits held by them in foreign corporations outside the United States.

A U.S. corporation that holds at least 10% holdings in a CFC corporation —that is, a corporation incorporated by foreign law but actually under American control and/or a foreign corporation that has at least one American shareholder—will be taxed for the excess profits of that CFC.

The tax rate imposed on the C-CORP corporation will be 15.5% for cash and cash equivalents and 8% for other foreign company profits. In practice, this tax is imposed on profits held by the American corporation outside the United States when the purpose of the legislature is to prevent a situation where the profits are not transferred to the United States in order to avoid paying tax for them.

 

GILTI – (Global Intangible Low Taxed Income)

Another new tax liability which applies to a U.S. corporation (C-CORP.) that has holdings of at least 10% in CFC (as noted, a company incorporated by foreign law whose more than half of its shareholders are American). The tax will be calculated from the foreign company’s net income and 10% of the value of the company’s fixed assets.

The effective tax rate will stand at 10.5% by 2026 and then stand at 13.125%.

The C-CORP corporation will be entitled to a deduction of 80% of the tax paid by the CFC company in the country of origin. However, an excess credit for GILTI tax will not be transferable to other years (neither to past years nor to future years).

Since GILTI tax liability will not apply to foreign associations that are transparent (like a family-owned company), tax planning is of paramount importance in order to examine the ideal form of association in the light of the circumstances.

 

Summary

Business activity in the United States entails many promises and opportunities. Expanding or copying business operations to the United States requires thorough tax planning that takes into account the specific circumstances of the activity.

Things are becoming more important in light of the 2018 tax reform – a reform that has also reduced the corporate tax rate, but on the other hand, imposed new tax burdens on companies.

Corporate taxation is a very complex issue that requires professional advice. Avoid exposure to unnecessary responsibilities and contact our experts.

The aforesaid should not be regarded as legal advice. It is advisable to consult with the MasAmarika team before any action. The service is provided by a professional team, fluent in English and Hebrew, and includes attorneys and accountants with American licenses.

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