What is the branch profits tax?

The branch profits tax (IRC §884) is a second layer of US tax on a foreign corporation that operates in the US through a branch rather than a subsidiary. On top of the 21% corporate tax on the branch's effectively connected income, a 30% tax applies to the branch's 'dividend equivalent amount' — the after-tax earnings deemed repatriated out of the US. It mimics the withholding tax that would apply if a US subsidiary paid a dividend to its foreign parent.

Why does the branch profits tax exist?

Without it, a foreign corporation could avoid the second layer of US tax that a US subsidiary faces. A US subsidiary pays 21% corporate tax, then 30% withholding when it sends a dividend to its foreign parent. A branch pays only the 21% — so Congress added the branch profits tax in 1986 to put branches and subsidiaries on roughly equal footing.

Can a tax treaty reduce or eliminate the branch profits tax?

Yes. Many US income tax treaties reduce the 30% branch profits tax rate — often to 5% or 0% — mirroring the treaty's reduced rate on direct dividends. To claim the reduced rate, the foreign corporation must be a qualified resident of the treaty country and satisfy the treaty's limitation-on-benefits provisions. The claim is made on the corporation's Form 1120-F.

How do I avoid or reduce the branch profits tax?

The branch profits tax falls on the 'dividend equivalent amount' — after-tax ECI that is NOT reinvested in the US branch. Reinvesting earnings back into US branch assets increases the corporation's US net equity and reduces the dividend equivalent amount, deferring the tax. Choosing a subsidiary structure, or operating from a favorable treaty jurisdiction, are the other primary levers. The right choice depends on the treaty rate and the business's cash-flow needs.

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US Inbound Tax

The Branch Profits Tax: The Second Layer on a Foreign Corporation's US Branch

A foreign corporation running a US branch faces two layers of tax: 21% on the branch's profits, then a 30% branch profits tax on what's repatriated. Understanding IRC §884 — and the treaty that cuts it — is the difference between a 44% and a sub-25% effective rate.

SMAART Tax Team

March 9, 2026

7 min read