How to structure your expansion into the US?
Expansion Into The US
When your clients plan an expansion into the US, they will most likely ask you how to structure this. Should they just trade through their Australian entity? Or set up an entity in the US?
Peter Harper of Asena Advisers in New York, Florida and California will discuss the options with you.
Here is what we learned but please listen in as Peter explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Expansion Into The US
Start with the objective. What do you intend to achieve in the US? Is it just a distribution channel to push your products into the US market or are you looking at building a footprint in the US?
Types of Expansions
There are three types of business expansions into the US that commonly come up.
1 – E-commerce business – headquartered in Australia, manufactures in Asia, and then dropships into the US through a 3PL provider.
2 – Software business – everything is Australian-grown, subscription-based platform where US customers sign up, possibly some staff on the ground in the US for support and advertising.
3 – People heavy and requires physical boots on the ground.
For a footprint, you very quickly have a PE / US Trade or Business and hence effectively connected income (ECI). For e-commerce and software businesses, you usually don’t have ECI and hence no taxable income in the US as long as you don’t have people on the ground.
PE v US TB
The US Trade or Business (US TB) is a concept of primary US tax law. Permanent Establishment (PE) is defined in Article 5 of the US – Australia treaty. You trigger a US TB much easier than a PE.
However, the treaty will override the US TB to the extent it is relevant. So for Australian businesses don’t worry about the definition of US TB and focus on the definition of a PE in Article 5.
The definition of a PE in the treaty is very industrial – very much built for an industrial age. So when you have an ecommerce business dropshipping from a 3PL warehouse, you are unlikely to create a PE.
Footprint – C-corporations
The only time Peter Harper sees an LLC for an operational business is e-commerce. The main reasons an Australian business would change from trading as a Pty Ltd to trading as an LLC are banking and insurance.
With a software business, it is slightly different. Even though they have a subscription platform, most of them need substantial teams physically present in the US. In the software business, there is far more segregation of roles. So the software business would employ staff through a C-Corp.
Branch Profit Tax
Branch profit tax doesn’t play a big role for larger cross-border structures.
Most Australian businesses – once they hit a certain size – operate through an Australian company.
Branch profit tax only applies in two scenarios.
1 – You have a foreign (non-US) corporation that is the sole owner of an LLC. Technically a single member LLC is a branch of its single member.
2 – You have an Australian company operating directly within the US, hence establishing a branch.
In those two scenarios, you have branch profit tax. Branch profit tax mirrors the tax on dividends of a C-Corp to Australian shareholders. Per Aricle 10 of the US – AU treaty withholding tax on dividends is 15% reduced to 5% when you hold at least 10% of the voting power.
Accordingly, branch profit tax is also 15% reduced to 5% when you hold at least 10%.
Withholding Tax
Withholding tax only reduces to 0% when you hold 80% or more and are publicly listed. So for most small to medium Australian business expanding into the US the withholding tax is 15% or 5% if you hold 10%.
Multi Member LLC
Branch profit tax only applies when an Australian Pty Ltld is the single member of an LLC. If you have a multi member LLC, then no branch profit tax.
LLC v C-Corp
So the question begs: Why would you ever set up an Australian company as the single member of an LLC and not hold a C-Corp?
The tax outcome is the same – both C-Corp and Australian Pty Ltd pay 15% or 5% tax, either as withholding tax on dividends or as branch profits tax. But by having an Australian company hold a single member LLC, the Australian company now gets pulled into the US tax net.
Options
So here are some common choices that Australian businesses have:
- Australian Pty Ltd / trust holds a C-Corp
- Australian Pty Ltd / trust holds a multi-member LLC
- Individual holds a single or multi-member LLC
- Australian trust makes an 8832 election in the US.
This is what we learned but please listen in since Peter explains this much better than we ever could.
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