United States

US tax law imposes a 30% branch profits tax on a foreign corporation's US branch earnings and profits for the year that are effectively connected with a US business, to the extent that they are not reinvested in branch assets. Thus, the taxable base for the branch profits tax is increased by any decrease in the US net equity of the branch, or, conversely, such base is decreased by any increase in the US net equity. The branch profits tax on profits may be reduced or eliminated entirely if a relevant treaty so provides (subject to strict 'treaty shopping' rules).

The purpose of the branch profits tax is to treat US operations of foreign corporations in much the same manner as US corporations owned by foreign persons. Because a dividend paid by a US corporation to its foreign owner would be subject to a 30% withholding tax, the branch profits tax imposes a 30% tax on the foreign corporation’s ‘dividend equivalent amount.’

US law also imposes consequences on interest paid by a foreign corporation that is allocable to such foreign corporation’s effectively connected income (ECI) for purposes of calculating US taxable income. To the extent income allocable to ECI is paid with respect to a liability entered on the branch’s US books, the interest income to the lender will be from US sources and thus subject to 30% gross basis tax. If the allocable interest is incurred with respect to a liability not entered on US branch books, the interest income to the recipient is respected as foreign source. However, in such a case, the foreign corporation that paid the interest is deemed to receive additional US-source interest income subject to 30% gross basis tax (known as the tax on excess interest).