Taxes in the US are collected by federal, state and municipal governments. Federal and state taxes include income-tax, excise duties and succession duties. In addition, many states and/or municipalities levy a franchise tax, property tax, sales tax and use tax.
The federal tax authority is the Internal Revenue Service (IRS), a division of the US Department of Treasury. The rules and regulations of the IRS are recorded in the Internal Revenue Code. The tax code is based on the principle of residence. For more information regarding income earned in more than one state we recommend you contact a tax attorney or accountant.
Income and Corporate Tax
Corporations
A corporation is a separate legal entity from its shareholders. The shareholders are not personally liable for corporate obligations. A corporation's net income is subject to federal income taxation. However, under some circumstances, a corporation can elect to be taxed as an "S" corporation for federal income tax purposes. The income of an "S" corporation is generally taxed to the shareholders as ordinary income and not to the corporation itself.
The federal corporate income tax varies between 15% (for earnings up to US $50,000) and 35% (for earnings above US $ 10,000,000). US taxes are calculated using tax brackets. The income tax levied by the state varies from state to state, but is normally between 0 and 10%, with most states collecting between 4% and 7%.
Partnerships
This is a type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts. The partnership is itself not subject to federal income tax. All of the income, deductions, and other tax attributes are allocated to the partners in accordance with the partnership agreement.
In a general partnership, each partner has unlimited personal liability for the debts of the partnership. In a limited partnership, those partners designated as limited partners only have exposure for liabilities to the extent of their contributions to the partnership. An increasingly important alternative to partnerships is the limited liability company ("LLC"). The owners of an LLC are not responsible for its debts, but it is treated as a partnership for federal income tax purposes.
Taxation of Non-Resident Companies
Foreign corporations are generally subject to US income tax in two categories of income:
- Income that is effectively connected with the conduct of a US trade or business, whether from US or foreign sources.
- Fixed or determinable annual or periodical (FDAP) income from US sources that is not effectively connected with a US trade or business, such as interest, dividends, rents and royalties.
Income effectively connected with a US trade or business is subject to tax on a net basis, after deducting expenses incurred to produce such income. Normal corporate graduated income tax rates apply. FDAP income not effectively connected with a US trade or business is generally subject to US income tax on a gross basis - without allowance for deductions - at a 30% or lower treaty rate.
Branch Profit Tax
Profits of foreign companies without a permanent presence in the US are also subject to branch profit tax. The object of the branch profit tax is to burden a foreign corporation's US business profits with the same taxes, whether the business is done through a domestic subsidiary or an unincorporated branch. If a foreign corporation is operated as a branch, income effectively connected with the US branch is taxed at the normal rates. However, profits of a US branch are not subject to a withholding tax when they are repatriated to the corporation's foreign head office because this payment represents a transfer within the corporation, as opposed to a dividend. The branch profit tax is generally a withholding tax on withdrawals from a US branch.
The branch profits tax is an annual tax of 30 percent of after-tax earnings (also known as the dividend equivalent). The amount deemed to be distributed from a branch's current earnings is measured indirectly as branch earnings less the portions of these earnings that are reinvested in branch operations.
A foreign corporation is usually exempt from the branch profits tax for the year in which it completely terminates its business. In addition, the branch profit tax may be reduced or waived by treaty if the foreign corporation is a “qualified treaty resident” of that country.
Branch Interest Tax
Interest paid by the US branch of a corporation is treated as if it’s paid by a US corporation. Thus, these interest payments are subject to a 30% withholding tax, unless a lower income tax treaty rate applies. Certain cases are exempt from US withholding tax under regular domestic rules, e.g. as portfolio interest.
Furthermore, a foreign corporation is subject to a 30% “excess branch interest tax,” (unless again a lower income tax treaty rate applies) on the excess of the US branch interest expense deduction over the interest paid by the branch.
For Dutch companies the 30% rate is reduced to 5% and is in some cases waived completely. Please check with an international tax attorney or accountant for accurate tax rates.
Capital Gains Tax
Based on the US-Dutch Tax Treaty, capital gains tax for Dutch corporations is 5% if the Dutch corporation own at least 10% of the voting rights of the US company. This will eventually be lowered to 0%; however, the exact date for this adjustment is still unknown.
All other dividends are taxed at a 15% rate. Payments of royalties and interest are exempt from taxation, in accordance with the US-Dutch Tax Convention.
State and Local Taxes
Most state and a majority of municipalities impose an income tax on corporations that are incorporated within the state or doing business with the state.
A corporation may be subject to the taxing jurisdiction of multiple states. A corporation may be incorporated in one state, but may be “doing business” in several other states. Each state may tax the corporation for that part of the income derived from the particular state.
Most states determine the portion of a corporation's income subject to tax by multiplying the corporation's federal taxable income, as adjusted for state modifications, by a three-factor formula based on that portion of the corporation's property, payroll and sales within the state.
Some states do not permit the filing of state consolidated returns. In many states, regardless of inter-company ownership and transactions, each corporation having taxable contacts with the state may be required to file a separate state tax return. Other states either require or allow multi-state controlled groups to report income on a combined basis if business operations are of a “unitary” nature.
State Sales Tax
The US does not impose a “BTW” tax as levied in the Netherlands. However, the US does have a State Sales Tax. This state level tax is levied on goods sold to end-users. The rates differ from state to state. In some states, cities are allowed to add a City Sales Tax to the State Sales Tax. Some states have no sales tax, e.g. Alaska, Delaware, New Hampshire and Montana.
US-Dutch Tax Convention
The current treaty was signed January 1, 1994, and partly revised in March 2004. The revised Protocol contains several elements considered to be beneficial to the economic relations between the two countries. The most important elements are:
- A reduction in the taxation on several dividends from 5% to 0%, including the corresponding reduction of the “Branch profit Tax” form 5% to 0%.
- A relaxation and simplification of the “limitation on benefits” article (Article 26). Article 26 refers to when and based on what criteria, residents of the Netherlands and the US are entitled to the benefits of the US-Netherlands Tax Convention.
- Inclusion of additional measures intended to avoid misuse of the Convention. Article 26 (4) (b), for instance, is intended to prevent a narrow case of treaty-shopping abuses in which a company attempts to qualify for treaty benefits by engaging in de minimis connected business activities that have little economic cost or effect with respect to the company’s business as a whole.
Inclusion of measures to protect the right of the resident to continue participation in pension plans of the country of residency.
More information
For more information please consult the following links:
General US Tax information
US-Dutch Tax Convention
State Level Tax
State Sales Tax
Disclaimer: Data and information is provided for informational purposes only, and are not intended to provide, and do not constitute, legal advice. Persons who need legal services should contact a duly licensed professional.