For Australian entrepreneurs, the excitement and the promise of establishing a business in the United States can often be too much to resist! Indeed in this day and age it can be all too easy to establish a US entity. However, in the rush to do so one needs to be very clear about the tax consequences.
We are often approached by Australians entrepreneurs who have established US entities without a proper understanding of the tax consequences & filing obligations. As a result they have faced fines and penalties that they would never have expected.
In a later blog we will address the question of whether to establish an LLC or a C-Corporation, which is the typical starting point for an Australian business wanting to set up in the USA.
However before addressing this question, we wanted to make some basic observations which we will feel will help people and will encourage them to seek advice on their situation. The American tax systems is not a DIY system !
Basic starting points to note about establishing an entity in the USA;
- There are plenty of states to choose from, other than the usual suspects, such as Delaware and Nevada;
- Despite being a very complex business tax system, the US system is also a very flexible one. For example, in Australia it is not possible to establish an entity and choose the basis on which the entity is taxed so that it better suits your situation. But this is exactly what is achievable in the US. A business is essentially able to choose whether it wishes to have flow through taxation, where the members are taxed on the income of the entity, or whether the business will be taxed at the entity level.
- In the US you can set up a business entity without needing to have a U.S based director. This provides opportunities for quick expansion of your business presence, but you also need to understand that from an Australian perspective, it is likely that the US entity will be treated as an Australian tax resident, paying Australian company tax on profits but also paying US tax without the ability to claim tax credits. Not exactly the result most people would want or expect.
- Don’t assume that you can set up a US entity, leave it dormant and not have to file taxes – false assumption and a very costly one to make. Australian’s are often caught out by filing deadlines in the US – perhaps it is cultural but in the United States – a deadline is a hard deadline. The Australian ‘she’ll be right mate attitude’ to deadlines will not fly. So even dormant entities are expect to file, and penalties for late filing will arise.
- The US tax year end is the calendar year, so don’t get caught out with the 30 June mentality. In addition if you are a member of an US LLC, take note that if flow through taxation applies then you will be expected to lodge a tax return with the IRS in the U.S in respect of your membership interest in the LLC.
- It is important to plan how the Australian shareholders will be able to access US business profits. Clients need to be aware of the US branch profits tax, how foreign income tax offsets can be claimed in Australia and what the effective global tax rate is on their US sourced business income, after taking into account US and Australian tax;
- Always consider the tax residency issues of the entity you are setting up the US and speak to your tax accountant about ensuring that your not unwittingly taxed twice on the same income by the IRS and the ATO. Never assume that the U.S. – Australia Double Tax Agreement would necessary work to ensure you are not taxed twice. Unfortunately it can happen.
If you are planning to set up your business in the USA or if you have already set up a US entity – our US tax team would be delighted to assist you. We are very passionate about helping clients navigate the complexities that they will face on tax so that they can go about focusing on the growth of their US business.