Whether or not a FC is required to file Form 1120-F “U.S. Income Tax Return of a Foreign Corporation” depends on the source and character of income earned by the FC
FDAP (Fixed and Determinable, Annual or Periodical) income includes interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensation, and other FDAP gains, profits, and income
Tax on FDAP income is withheld at a flat rate of 30% or at a reduced rate provided in a tax treaty with the United States
If a FC is engaged in a US trade & business, it is taxed on the income that is effectively connected to its US trade & business income (“ECI”). This ECI is taxed at graduated corporate tax rate
A FC that is engaged in a USTB at any time during the taxable year, is required to file Form 1120-F (whether or not it has taxable income) to report the income effectively connected to its US trade & business income.
Form 1120-F must be filed on a timely basis in order for a FC to take deductions and credits against its effectively connected income
If a FC is a qualified resident of a treaty jurisdiction it may only be taxed on its business profits attributable to a permanent establishment (“PE”) in the U.S. The FC must file Form 1120-F to report the income earned from the PE
Permanent Establishment (“PE”) is defined as a fixed place of business through which the business of the enterprise is wholly or partially carried out.
Protective Form 1120-F
A FC may conduct limited activities in the U.S. which it determines either FC do not give rise to gross income which is effectively connected with the conduct of a US trade or business (ECI), or
has no U.S. tax liability under the provisions of an applicable income tax treaty, for example -it claims that its presence in the US does not rise to the level of a PE and, therefore, there are no business profits subject to US tax.
Please FC file protective Form 1120-F reporting no income and no expenses to ensure that it will be entitled to claim deductions and credits if it is later determined that the foreign corporation is engaged in a US trade & business.