tax issues for swedish companies
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Yelena Epova, CPAPartnerHabif, Arogeti & Wynne, LLP
Tax Issues for Swedish Companies
Doing Business in the United States
Permanent Establishment Issues
Permanent Establishment
Based on income tax treaty between Sweden and the U.S.a resident of Sweden is not taxed on business income derived in the U.S. unless the business income is “attributable to” a “permanent establishment” located in the U.S.
Permanent EstablishmentExample – A Swedish corporation selling
inventory in the U.S from its foreign business office would not be taxable in the U.S. under the treaty with the absence of the permanent establishment.
In general, a permanent establishment takes the form of: a facility, a construction site, or an agency relationship.
Facility
The facility permanent establishment includes:A place of managementA branchAn officeA factoryA workshopA place of extraction of natural resources
Permanent Establishment
When a Swedish company has a permanent establishment in the U.S., it either has to set up a subsidiary in the U.S. or open a branch.
SubsidiaryThe subsidiary will be taxed the same way as
a regular U.S. corporation.We normally advise our clients to establish
the subsidiaries for legal reasons. If a subsidiary is not set up, there is no separation of legal obligations and the creditors of the branch may come after foreign company’s assets.
Corporate Income Tax RatesFederal income tax:Marginal rates 15-35%Georgia state income taxFlat rate – 6% (deductible to arrive at taxable income)Georgia has various state tax credits available that
reduce GA income tax rate
Other states – rates vary from 0% to 11%City rates may apply as well Atlanta does not have city local income tax
Net Operating Losses
Net operating losses can be carried forward 20 years and back 2 years.
Net capital losses can be carried back 3 years and forward 5 years.
Multi-State TaxationIncome may be apportioned to various states
if the company has nexus in other states.Nexus is normally determined by employees,
inventory, fixed assets and/or rents in other states.
Sales alone in other states don’t normally create nexus and don’t require income to be apportioned to other states.
BranchA branch will be subject to the same
corporate income tax rates as a subsidiary. A branch will be subject to 5% branch profit
tax (based on the Swedish – U.S. income tax treaty).
Branch profit tax is an equivalent of dividend withholding tax.
Minimal Capitalization Requirement
No minimum cash investment to start a company in the U.S.
Debt/equity ratio has to be reviewed each year to insure deductibility of interest expense (safe harbor debt/equity ratio is 1.5/1)
Not Effectively Connected Income Any person or entity that pays section 1441(a) fixed
or determinable income, as defined in Section 1441(b), from U.S. sources to a nonresident alien, must withhold tax from the payment.
Withholding is not required on payments to foreign taxpayers on income that is effectively connected with a U.S. trade or business, which is included in gross income.
The withholding rate for Section 1441 is 30% unless a lower treaty rate applies.
Swedish-U.S. Income Tax Treaty Withholding RatesDividends – 5-15%Interest – 0%Royalties – 0%
Property TaxesApplies to value of tangible property owned
on the first day of the calendar year.Rates vary by county (approximately 1-2%).Freeport exemption may be available for
inventory.
Sales and use taxMost goods and some services are subject to
sales and use tax.Companies need to collect from customers
and remit to the appropriate tax authorities (serve as agents).
Rates vary by county.Georgia rates – 5-7%
Sales Exempt From Sales and Use TaxSales to distributorsSales of products to be used in
manufacturing processSales to states where the company does not
have nexusMost sales of servicesSales to tax-exempt non-profit organizations
Payroll TaxesSocial Security taxes – 6.2% of (employer
pays the same tax as employee)Medicare taxes – 1.45% of gross salary
(employer pays the same tax as employee)Federal and State unemployment taxes –
approximately $300 per employee per year in Georgia (employer only)
Transfer PricingAll transactions between related parties have
to be conducted at arm’s length and documented.
Upon IRS audit 30 days are given to provide documents to support transfer pricing.
Penalties can be very substantial.
Repatriation of Profits Back to Sweden
DividendsInterestRoyaltiesManagement fees
Accounting RequirementsNo statutory audit requirementsAudited financial statements are prepared when
needed by creditors, investors or parent company
Fiscal year end can be selected and be different than calendar year end
Income tax returns are due within 2 ½ months after year end. Extension to file can be obtained for 6 months. Tax payments have to be made quarterly to avoid penalties.
Resident Aliens and Nonresident Aliens
Different Tax Treatments of RA and NRA
An RA is taxed in the same manner as U.S. citizen - taxed on worldwide income, subject to gift and estate taxes, etc.
A NRA is taxed on U.S. source income and subject to various limitations concerning deductions.
Determining RA and NRA Two tests
Substantial-Presence Test 31 days during the current year, and 183 days during the 3-year period that includes the current year
and the 2 year immediately before that, counting: (i) all the days present in the current year, and (ii) 1/3 of the days present in the first year before the current
year, and (iii) 1/6 of the days present in the second year before current
year. (iv) not including the days while being an exempt-individual
Green Card Test The person is a RA if he/she becomes green-card holder at any time
during the year.
