International Taxation

Chapter 2Foreign Branches

Learning objectives

• Recognize what the definition of a foreign branch is following the Tax Cuts and Jobs Act (TCJA), for U.S. income tax purposes.
• Identify foreign branch income rules following the TCJA.
• Identify the choice of entity classification rules — the “check-the-box” rules.
• Recognize the concept of functional currency.
• Recognize fundamental corresponding foreign currency tax issues.

Operating through a foreign branch — summary

After exporting goods from the United States, the next step for a U.S. business is conducting direct business operations overseas, either through foreign branch operations or through foreign subsidiary corporation(s). A foreign business operation may manufacture goods, provide services, or perform special functions (for example, advertising, financing, and sales). Frequently, a foreign business operation requires a significant number of full-time personnel, including people who are transferred from the United States to the foreign country.

U.S. taxpayers typically use the following approaches to establish a foreign branch.

1. Send personnel or employees or have an office in a foreign jurisdiction sufficient to be considered a branch but with no legal entity within the foreign jurisdiction (a true branch).
2. Establish a legal entity that is legally considered a branch within the foreign jurisdiction or country.
3. Form a legal entity/corporation within the foreign jurisdiction and make an entity classification election or ...