Should a foreign company use a US subsidiary or a branch?

Most foreign companies choose a US subsidiary — a C-corporation — because it caps US tax exposure at the corporate level and shields the parent from direct US filing and liability. A branch keeps the US operation inside the foreign parent, which can trigger the branch profits tax and expose the parent's worldwide records to US scrutiny. The branch mainly makes sense for early, loss-generating operations where the parent wants to use those losses at home.

What is the branch profits tax?

The branch profits tax is a second-level tax — 30% under the statute, often reduced or eliminated by treaty — imposed on a foreign corporation's US branch earnings that are treated as effectively repatriated to the home office. It exists to match the two-layer tax a subsidiary pays (corporate tax plus dividend withholding), so a branch doesn't get a one-layer advantage over a subsidiary.

Does a tax treaty reduce US tax on my US operations?

It can. A treaty typically raises the threshold for US taxation to a 'permanent establishment' rather than any US activity, and reduces withholding rates on dividends, interest, and royalties — dividend withholding can drop from 30% to as low as 5% or 0% for qualifying parents. But treaty benefits require passing a limitation-on-benefits test and filing to claim them; they are not automatic.

Can a foreign owner just use a US LLC?

Yes, but the tax result depends on how the LLC is classified. A single-member LLC is disregarded by default, so its US-source business income flows to the foreign owner and can create a direct US filing obligation for that owner. Many foreign owners instead elect to treat the LLC as a C-corporation, or form a corporation outright, to keep US tax and filing contained at the entity level rather than reaching the individual.

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Foreign Business Expansion

US Market-Entry Tax Structuring for Foreign Companies: Subsidiary, Branch, or LLC

A foreign company entering the US market has three basic structures — subsidiary, branch, or LLC — and each one changes how you're taxed, what you file, and whether a treaty can lower your rate. Choosing wrong is expensive to unwind.

SMAART Tax Team

February 10, 2026

7 min read