What are Foreign Branches
Generally, a foreign branch is a division which operates a trade or business in a foreign country and maintains a separate set of books and records (Treas. Reg. §1.367(a)-6T(g)). It is common that this operation is subject to the tax laws of the foreign country in which it operates or may be a permanent establishment under Treaty. Generally, a Foreign Branch is treated as a part of the corporate consolidated group for US tax purposes.
Tax Practitioner Planning. Beginning in 2018, taxpayers are required to file Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs) to report activity of all foreign branches. Prior to 2018, this form was only required for foreign disregarded entities.
Covid-19 Guidance Regarding Foreign Branches (Rev. Proc. 2020-30, 2020-22 I.R.B. 873)
Conducting activities in a county temporarily due to travel restrictions will not give rise to a foreign branch separate unit for purposes of the DCL rules and Form 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)).
Important Flashback: The TCJA added Two Drawbacks to Foreign Branches
The TCJA did not change the basic taxation of a foreign branch. The income of a foreign branch is taxed at the current corporate tax rate of 21% since it is consolidated into the return of its US parent. There are two drawbacks of being classified as an FB.
- Income earned through a foreign branch does not qualify for the §250 FDII deduction.
- Because of the new §904 foreign branch income foreign tax credit basket, excess foreign taxes paid by the branch can no longer be shared with the consolidated group to which it belongs.
There are many factors to consider, but it may be an option to consider moving the foreign operations into the US or through a CFC depending on the situation.