Best Practices for Foreign Companies Establishing a U.S. Presence and Hiring U.S. Employees

Foreign companies entering the U.S. have a lot to consider from a tax, accounting, and legal perspective prior to commencing operations in the U.S. Because establishing a legal entity can take time to complete, with multiple steps and potential bottlenecks to accommodate, AAFCPAs advises that clients understand the timeline and plan accordingly.

The first step in the process is entity formation and obtaining an Employer Identification Number (EIN). Next, the newly established entity must create a bank account and engage a third-party payroll provider. Tax withholding requirements and the related implications will also need to be considered. Each step comes with potential nuances and complications and must be completed in a certain sequence.

Employers entering the U.S. face new tax and accounting requirements including payroll, benefits, tax withholdings, retirement plans, and State and Local Tax (SALT) concerns. Consider that the U.S. has approximately 52 state tax jurisdictions in addition to local and city obligations. Plan to register with the Secretary of State for income tax, payroll tax, and sales and use tax purposes based on where the entity is incorporated and where it conducts business operations. For instance, a business might be incorporated in Delaware with offices in New York or Boston and would need to register both in the state(s) in which it conducts business and where it is incorporated. The taxpayer will also need to be aware of all monthly, quarterly, and annual filing requirements in those states.

The Importance of Forming a Separate Entity

When launching a U.S. subsidiary, AAFCPAs advises that clients establish its parent and subsidiary as two separate legal entities with distinct bank accounts and separate books and records. This is because the company will want to keep taxation in the U.S. subsidiary and ensure the parent is not subject to U.S. taxation. This will allow the foreign parent to avoid the complicated branch profits tax.  

The two entities will need to consider the tax implications of all intercompany trade transactions and other related-party transactions. For example, how is the subsidiary funded? Will this funding be considered capital or debt? If the latter, are proper loan agreements in place and will such characterization be properly recognized by the taxing authorities?

The company, under IRS regulations, will need to have some form of transfer pricing agreement in place that speaks to how intercompany trade transactions between the parent and subsidiary interact.

Related to intercompany transactions are intercompany loans, e.g., when a foreign parent creates and lends money to its U.S. subsidiary. Not only should that loan accrue interest but there should be controls in place to monitor how transactions are conducted, who is paid, and who in the company is authorized to approve those payments. AAFCPAs advises that clients implement a dual approval process to oversee intercompany loans. For instance, a company could designate one individual at the U.S. subsidiary or another at the parent company able to check periodically to ensure transactions are conducted correctly. In addition, the entity needs to consider withholding obligations, tax treaty benefits, and related reporting with regard to interest payments made.

How We Help

Establishing a U.S. presence and hiring U.S. employees from outside of the country is a complex process that will likely require professional guidance along the way. Doing so properly will require following a set of best practices and regulations while avoiding the pitfalls that can cause delay. When it’s time to expand internationally, seek professional advice before acting. If you already hired employees, please reach out to one of our professionals so we can discuss the next steps and how best to proceed.

If you have questions, please contact Destiny J. Flood, CPA, Commercial Partner, Outsourced Accounting & Finance at 774.512.4151 or dflood@nullaafcpa.com, Terri Delaney, Consulting CFO at 774.512.9035 or tdelaney@nullaafcpa.com, Scott Goffstein, CPA, International Tax Partner at 781.398.1770 or sgoffstein@nullaafcpa.com—or your AAFCPAs Partner.