Do I file Form 1120 even if no tax is owed?
Annual return obligations of this kind are generally required on the facts rather than on the tax result, so a nil position does not remove one. US corporations, including US subsidiaries of foreign groups and US companies with foreign operations.
What happens if I have missed Form 1120 for several years?
Missed years are dealt with as a package rather than one at a time, because the route chosen for the first year affects the relief available for the rest. We map the years and the obligations before anything is filed.
Is Form 1120 the same as the other reports I already file?
No. The US corporation income tax return, and what changes on it when the shareholders, customers or affiliates are foreign. Satisfying a different obligation, even one covering the same accounts or entity, does nothing for this one.
Can our US company use a tax treaty to lower its own tax?
Generally not in the way people expect. A US corporation is a US resident, and a treaty does not reduce the tax a country charges its own residents on their own income. Treaty questions on this return are about payments crossing the border: what is withheld on dividends, interest and royalties going out, what relief a foreign shareholder can claim, and how foreign tax on income coming in is relieved. The company itself is taxed as a US company. That is why the structure conversation belongs before incorporation rather than at filing time.
Our parent company is abroad, so what changes on our US return?
The return is still a US corporation return, but the scrutiny moves to the related party dealings. Charges from the parent for services, management, licences and interest have to be on terms unrelated parties would have agreed, and they have to be documented before they are deducted rather than justified afterwards. Payments leaving the company may carry withholding, and the parent's own relief depends on claims being made properly. Reporting the transactions is a separate obligation from the deduction question. The practical work is usually in the intercompany agreements, not in the return itself.
Do we withhold on dividends paid to our foreign shareholder?
Dividends paid by a US corporation to a foreign shareholder carry withholding as a starting point, and a treaty may reduce the rate where the shareholder qualifies and has documented its entitlement. The relief belongs to the shareholder rather than to the company, but the company is the one that must hold the documentation and apply the correct rate when it pays. Collect and check the shareholder's certification before the payment goes out. Correcting a payment made at the wrong rate costs far more work than getting the paperwork in first.
Should we set up a US subsidiary or run it as a branch?
The choice changes what is taxed, where, and what is withheld on the way home, and it is difficult to unwind once trading has started. A subsidiary is a US resident taxed on its own profits, with distributions to the parent a separate question. A branch leaves the foreign company itself inside the US system for that activity. The right answer depends on where profits are expected to arise, what the group intends to do with them, and how the home country relieves the US tax. Decide before incorporation, not at the first filing.
Our US company has operations abroad, so how is that income taxed?
A US corporation is taxed on its income wherever it arises, so foreign operating income comes into the US return. Relief for tax paid abroad comes through the foreign tax credit rather than by leaving the income out, and that credit is computed separately from the return itself. Whether the foreign operation is a branch or a subsidiary changes the timing and the mechanics rather than the principle. Keep the foreign accounts and the foreign tax assessments in a form the credit computation can run from, because that is usually where the work stalls.
Is interest we pay to our foreign parent deductible on Form 1120?
It is not automatically deductible. Three things have to hold. The loan has to be a loan in substance rather than capital dressed as debt, the rate and terms have to be what unrelated parties would have agreed, and the deduction has to survive the limits that apply to interest paid to related parties abroad. The payment may also carry withholding on the way out, which a treaty may reduce for the recipient. Put the loan agreement, the pricing evidence and the board approvals in place at the time, not when the return is being prepared.
What is the treaty saving clause, and why does it matter to Americans abroad?
It is the provision that lets each country keep taxing its own residents and citizens as though the treaty did not exist. Because the United States taxes on citizenship, the saving clause is what stops an American in Canada or India using the treaty to remove US tax on ordinary income. A short list of articles is carved out of it — certain pensions, social security, government service, students — and those exceptions are where a treaty position for a US citizen usually lives. See our treaty work.
How is my RRSP taxed if I move to the United States?
The treaty lets a US resident defer US tax on the income accruing inside an RRSP or RRIF until it is distributed, which is what stops annual growth being taxed with no cash to pay it — but the position has to be taken and, historically, disclosed. On withdrawal Canada takes withholding as the source country and the United States taxes the distribution with a credit, complicated by the fact that the two systems can measure the taxable portion differently. Contributions and basis need tracking from the start. See treaty relief for RRSPs, 401(k)s and IRAs.
