By: Leib Orlanski, Esq., Eric Simonson, Esq., and James Guadiana, Esq.
Foreign companies considering acquiring a U.S. company should carefully evaluate several tax and structural considerations that may significantly impact the overall economics of the transaction. These include:
- Corporate Income Tax: Effectively connected income (ECI) is taxed at a federal rate of 21%, with state and local income taxes that must be considered since they may increase this rate substantially in some locales.
- Withholding Taxes: A standard 30% withholding tax applies to U.S.-sourced dividends, interest, and royalties, though many tax treaties may significantly reduce this rate.
- Branch Profits Tax: Repatriated profits may be subject to an additional 30% tax, often reduced by treaty provisions, if the foreign company operates as a branch in the U.S.
Direct Ownership Structure
Under a direct ownership structure, a European parent company acquires the shares of a U.S. target without using an intermediate U.S. holding company. This straightforward structure is commonly used in cross-border transactions where operational simplicity and exit flexibility are prioritized.
How It Works
- Ownership: The share of the European parent (e.g., a German GmbH or French SAS) owns 100% of the U.S. subsidiary.
- Operations: The subsidiary operates as a U.S. C corporation, subject to the 21% federal tax rate.
- Repatriation: Profits are distributed as dividends to the parent company.
- Tax Treaties: Withholding taxes on dividends may be reduced from 30% to 5% or even 0%, depending on applicable treaties.
Why European Buyers Use This Structure
- Simplified Exit: The sale of shares in a U.S. subsidiary is generally not subject to U.S. capital gains tax for foreign sellers, making exit transactions more efficient.
Greenspoon Marder’s Corporate Practice advises domestic and international clients on a wide range of transactions, including setting up U.S. subsidiaries, mergers and acquisitions, private equity investments, and strategic growth initiatives. Our team delivers practical, business-focused guidance to help clients navigate complex deals and achieve their objectives.
International M&A Group
Leib Orlanski
Partner, Corporate
Greenspoon Marder LLP
Los Angeles, CA 90067
Office: 323-880-4539
Email: [email protected]
Eric Simonson
Partner, Corporate & Business
Greenspoon Marder LLP
New York, NY 10105
Office: (212) 524-5030
Email: [email protected]
James Guadiana
Partner, Tax
Greenspoon Marder LLP
New York, NY 10105
Office: (212) 524-5099
Email: [email protected]
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