Chinese Businesses See Opportunity in U.S. Operations

Attracted by one of the largest markets in the world, Chinese companies have been increasing investments in the U.S. significantly since 2009, in many cases establishing subsidiaries or starting new businesses on American soil. But bringing investment, technology and jobs to the U.S. is a complicated undertaking, fraught with state and federal laws and regulations that require careful compliance and coordination.

Working with trusted advisors who understand international business and tax issues is essential to ensure that your China-based business maximizes its opportunities in the U.S.

For a business that is already established in China and is considering establishing a subsidiary for U.S. operations, the following essential steps can help get the enterprise off to a strong start:

Determine your business entity structure. Some Chinese businesses opt to start their U.S. operations by buying shares in an existing U.S. company and establishing it as a subsidiary of the Chinese parent company. Others simply create a U.S. subsidiary of their existing company. Operation in the U.S. as a subsidiary of a Chinese parent company can make it easier to decouple from the parent at some point in the future, if that is part of a long-range plan.

One of the most important decisions is whether to establish the U.S. business as a C Corporation or a pass-through entity. The C Corporation structure is sometimes more appropriate for foreign-based companies because foreign owners cannot legally be members of an S Corporation, which is the most prevalent form of pass-through entity. They can, however, be members of Limited Liability Companies and Limited Liability Partnerships, which also are pass-through entities.

The difference between C Corporations and pass-through entities lies primarily in the way they are taxed. C Corporations are taxed as business entities, separate from their owners. The maximum corporate tax rate for a C Corporation currently is 21%, and the taxation process is more straightforward. With pass-through entities, there is no corporate-level tax. Rather, the owners pay business income tax based on the proportion of their individual ownership.

An important consideration when deciding on entity structure will be whether the U.S. tax treaty with China – which has existed since 1987 – will benefit the type of entity you choose. Selecting an entity structure should be done with the guidance of an accountant and a lawyer who are both knowledgeable about international business and tax laws.

Determine where your physical office or store will be located. This may be different than the state where you registered. Where are your markets and your major customers concentrated? Where is your workforce? Will company officials be traveling to and from China and want to be near an international airport? Proximity to key resources such as advisors, investors, engineers, technology know-how and materials may help determine where you should establish your U.S. operation.

Obtain an Employer Identification Number (EIN) from the IRS. You must have one to do business in the U.S., and your U.S.-based bank will want to know your EIN number, so this is a logical first step.  The EIN is required not only for banking but also for federal tax filings, payroll reporting (e.g., Form 941), and claiming tax treaty benefits.

Register your business. Registration is done at the state level and the question of whether you need to register in a state depends on whether you have a physical office there and whether you have employees working from that location. However, tax nexus rules vary: even without a physical presence, economic activities (e.g., exceeding $500,000 in sales in California) may require registration and sales tax collection.

Open a bank account. You will need a commercial business bank account to run your business in the U.S., so it’s a good idea to open one as soon as you have an EIN.  Note that large transactions (over $10,000) may trigger IRS scrutiny under anti-money laundering rules, and foreign ownership of the account must be reported annually under FBAR (see below)

Understand U.S. regulations that apply to foreign business owners.

Various regulations apply specifically to foreign owners doing business in the U.S., and understanding their requirements is essential to avoid penalties for non-compliance. Some of these regulations include:

• FBAR – Foreign Bank and Financial Records report. This is an annual report required of a U.S. citizen, resident, corporation, partnership, limited liability company, trust or estate, that has a financial interest in or signature or other authority over at least one financial account located outside the U.S. if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
• Form 1042 – Form 1042 is an annual withholding tax return for U.S. source income of foreign persons. It is used to report tax withheld on certain income paid to foreign individuals, corporations and other entities. The purpose of Form 1042 is to report withheld taxes on income subject to withholding under U.S. tax laws.
• Form 5472 – Form 5472 is an IRS tax form used to report certain transactions of foreign corporations. Businesses are required to file Form 5472 if they are a U.S. corporation or U.S. disregarded entity with at least 25% foreign ownership, or a foreign corporation doing business in the U.S. There are exemptions to filing Form 5472 under certain circumstances.

These are just a few considerations for Chinese business owners looking to enter the U.S. market. The most important factor is to work with a knowledgeable, experienced team of advisors who understand how Chinese businesses are run and how to keep China-based businesses compliant with U.S. laws related to taxes, payroll and financial regulation.

We’re here to help

China-based business owners in the U.S. can rely on the team of international business experts at JLK Rosenberger. You can view the services we provide here.

If you have questions about the information above, please contact your JLK Rosenberger team member, or click here to contact us. We look forward to speaking with you soon.