PRC enterprises encounter a myriad of domestic and foreign tax issues when expanding overseas. This article is an overview of certain significant US tax issues that a PRC enterprise should be aware of in making outbound investments into the US.
Acquiring US business assets
If a PRC enterprise directly acquires US operating assets, generally the enterprise would be treated as conducting business in the US. As a result, the PRC enterprise would be subject to 35% US corporate income tax (plus state and local taxes), and would be required to file US tax returns and be exposed to US tax audits.
In addition, if an offshore special purpose vehicle (e.g., a Hong Kong or Cayman Islands entity) is used to acquire the US assets, the vehicle could be subject to an additional 30% “branch profits tax”, resulting in an effective tax rate of more than 50%.
On the other hand, an acquisition of the stock of a US corporation generally would not subject the acquirer to US taxation or tax return filing obligations. For these reasons, investments into the US are often structured as stock purchases rather than asset purchases. Alternatively, a PRC enterprise could use a newly formed or existing US corporate subsidiary to acquire the applicable US business assets.
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Matthew Lau is a partner of Morrison & Foerster in Hong Kong. He can be contacted on +852 2585 0850 or by email at email@example.com