Tax issues for swedish companies

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Tax issues for swedish companies

  1. 1. Yelena Epova, CPA Partner Habif, Arogeti & Wynne, LLP Tax Issues for Swedish Companies Doing Business in the United States
  2. 2. Permanent Establishment Issues
  3. 3. Permanent Establishment <ul><li>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. </li></ul>
  4. 4. Permanent Establishment <ul><li>Example – 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. </li></ul><ul><li>In general, a permanent establishment takes the form of: a facility, a construction site, or an agency relationship. </li></ul>
  5. 5. Facility <ul><li>The facility permanent establishment includes: </li></ul><ul><ul><li>A place of management </li></ul></ul><ul><ul><li>A branch </li></ul></ul><ul><ul><li>An office </li></ul></ul><ul><ul><li>A factory </li></ul></ul><ul><ul><li>A workshop </li></ul></ul><ul><ul><li>A place of extraction of natural resources </li></ul></ul>
  6. 6. Permanent Establishment <ul><li>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. </li></ul>
  7. 7. Subsidiary <ul><li>The subsidiary will be taxed the same way as a regular U.S. corporation. </li></ul><ul><li>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. </li></ul>
  8. 8. Corporate Income Tax Rates <ul><li>Federal income tax: </li></ul><ul><li>Marginal rates 15-35% </li></ul><ul><li>Georgia state income tax </li></ul><ul><li>Flat rate – 6% (deductible to arrive at taxable income) </li></ul><ul><li>Georgia has various state tax credits available that reduce GA income tax rate </li></ul><ul><li>Other states – rates vary from 0% to 11% </li></ul><ul><li>City rates may apply as well </li></ul><ul><li>Atlanta does not have city local income tax </li></ul>
  9. 9. Net Operating Losses <ul><li>Net operating losses can be carried forward 20 years and back 2 years. </li></ul><ul><li>Net capital losses can be carried back 3 years and forward 5 years. </li></ul>
  10. 10. Multi-State Taxation <ul><li>Income may be apportioned to various states if the company has nexus in other states. </li></ul><ul><li>Nexus is normally determined by employees, inventory, fixed assets and/or rents in other states. </li></ul><ul><li>Sales alone in other states don’t normally create nexus and don’t require income to be apportioned to other states. </li></ul>
  11. 11. Branch <ul><li>A branch will be subject to the same corporate income tax rates as a subsidiary. </li></ul><ul><li>A branch will be subject to 5% branch profit tax (based on the Swedish – U.S. income tax treaty). </li></ul><ul><li>Branch profit tax is an equivalent of dividend withholding tax. </li></ul>
  12. 12. Minimal Capitalization Requirement <ul><li>No minimum cash investment to start a company in the U.S. </li></ul><ul><li>Debt/equity ratio has to be reviewed each year to insure deductibility of interest expense (safe harbor debt/equity ratio is 1.5/1) </li></ul>
  13. 13. Not Effectively Connected Income <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>The withholding rate for Section 1441 is 30% unless a lower treaty rate applies. </li></ul>
  14. 14. Swedish-U.S. Income Tax Treaty Withholding Rates <ul><li>Dividends – 5-15% </li></ul><ul><li>Interest – 0% </li></ul><ul><li>Royalties – 0% </li></ul>
  15. 15. Property Taxes <ul><li>Applies to value of tangible property owned on the first day of the calendar year. </li></ul><ul><li>Rates vary by county (approximately 1-2%). </li></ul><ul><li>Freeport exemption may be available for inventory. </li></ul>
  16. 16. Sales and use tax <ul><li>Most goods and some services are subject to sales and use tax. </li></ul><ul><li>Companies need to collect from customers and remit to the appropriate tax authorities (serve as agents). </li></ul><ul><li>Rates vary by county. </li></ul><ul><li>Georgia rates – 5-7% </li></ul>
  17. 17. Sales Exempt From Sales and Use Tax <ul><li>Sales to distributors </li></ul><ul><li>Sales of products to be used in manufacturing process </li></ul><ul><li>Sales to states where the company does not have nexus </li></ul><ul><li>Most sales of services </li></ul><ul><li>Sales to tax-exempt non-profit organizations </li></ul>
  18. 18. Payroll Taxes <ul><li>Social Security taxes – 6.2% of (employer pays the same tax as employee) </li></ul><ul><li>Medicare taxes – 1.45% of gross salary (employer pays the same tax as employee) </li></ul><ul><li>Federal and State unemployment taxes – approximately $300 per employee per year in Georgia (employer only) </li></ul>
  19. 19. Transfer Pricing <ul><li>All transactions between related parties have to be conducted at arm’s length and documented. </li></ul><ul><li>Upon IRS audit 30 days are given to provide documents to support transfer pricing. </li></ul><ul><li>Penalties can be very substantial. </li></ul>
  20. 20. Repatriation of Profits Back to Sweden <ul><li>Dividends </li></ul><ul><li>Interest </li></ul><ul><li>Royalties </li></ul><ul><li>Management fees </li></ul>
  21. 21. Accounting Requirements <ul><li>No statutory audit requirements </li></ul><ul><li>Audited financial statements are prepared when needed by creditors, investors or parent company </li></ul><ul><li>Fiscal year end can be selected and be different than calendar year end </li></ul><ul><li>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. </li></ul>
  22. 22. Resident Aliens and Nonresident Aliens
  23. 23. Different Tax Treatments of RA and NRA <ul><li>An RA is taxed in the same manner as U.S. citizen - taxed on worldwide income, subject to gift and estate taxes, etc. </li></ul><ul><li>A NRA is taxed on U.S. source income and subject to various limitations concerning deductions. </li></ul>
  24. 24. Determining RA and NRA <ul><li>Two tests </li></ul><ul><ul><li>Substantial-Presence Test </li></ul></ul><ul><ul><ul><li>31 days during the current year, and </li></ul></ul></ul><ul><ul><ul><li>183 days during the 3-year period that includes the current year and the 2 year immediately before that, counting: </li></ul></ul></ul><ul><ul><ul><ul><li>(i) all the days present in the current year, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(ii) 1/3 of the days present in the first year before the current year, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(iii) 1/6 of the days present in the second year before current year. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(iv) not including the days while being an exempt-individual </li></ul></ul></ul></ul><ul><ul><li>Green Card Test </li></ul></ul><ul><ul><ul><li>The person is a RA if he/she becomes green-card holder at any time during the year. </li></ul></ul></ul>
  25. 25. Questions/Comments? <ul><li>Yelena Epova, CPA </li></ul><ul><li>Partner </li></ul><ul><li>Habif, Arogeti and Wynne </li></ul><ul><li>[email_address] </li></ul><ul><li>404-898-7431 </li></ul>

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