|Corporate Income Tax Rate (%)||15 to 39 (a)|
|Corporate Capital Gains Tax Rate (%)||15 to 39|
|Branch Tax Rate (%)||15 to 39 (a)|
|Withholding Tax (%) (b)|
|Royalties from Patents, Know-how, etc.||30 (c)|
|Branch Remittance Tax||30 (e)|
|Net Operating Losses (Years)|
a) In addition, many states levy income or capital-based taxes. An alternative minimum tax is also imposed on corporations. See Section B.
b) Rates may be reduced by treaty.
c) Applicable to payments to non-US corporations and nonresidents.
d) Interest on certain “portfolio debt” obligations issued after 18 July 1984 and non-effectively connected bank deposit interest are exempt from withholding tax.
e) This is the branch profits tax applicable to non-US corporations (see Section D).
f) Special rules apply to certain types of losses and entities. For details, see Section C.
Taxes on corporate income and gains
Corporate income tax. US corporations are subject to federal taxes on their worldwide income, including income of foreign branches (whether or not the profits are repatriated). In general, a US corporation is not taxed by the United States on the earnings of a foreign subsidiary until the subsidiary distributes dividends or is sold or liquidated. Numerous exceptions to this deferral concept may apply, resulting in current US taxation of some or all of a foreign subsidiary’s earnings.
Foreign corporations generally are taxable in the United States on income that is effectively connected with a US trade or business and on certain US-source income. However, if the foreign corporation is resident in a country having an income tax treaty with the United States, business profits are taxable by the United States only to the extent the income is attributable to a permanent establishment in the United States and rates of tax on certain US-source income may be reduced or eliminated.
Rates of corporate tax. A corporation’s taxable income not exceeding USD335,000 is taxed at marginal rates ranging from 15% to 39%. Corporations with taxable income between USD335,000 and USD10 million are effectively taxed at 34% on all taxable income. Corporations with taxable income exceeding USD10 million are taxed at 35%, with amounts exceeding USD15 million but not exceeding USD18,333,333 subject to an additional tax of 3%. As a result, corporations with taxable income in excess of USD18,333,333 are effectively subject to tax at a rate of 35% on all taxable income. These rates apply both to US corporations and to the income of foreign corporations that is effectively connected with a US trade or business.
Alternative minimum tax. The alternative minimum tax (AMT) is designed to prevent corporations with substantial economic income from using preferential deductions, exclusions and credits to substantially reduce or eliminate their tax liability. To achieve this goal, the AMT is structured as a separate tax system with its own allowable deductions and credit limitations. The tax is imposed on alternative minimum taxable income (AMTI), less a phased-out exemption amount, at a flat rate of 20%. It is an “alternative” tax because corporations are required to pay the higher of the regular tax or the AMT. To the extent the AMT ex ceeds regular tax, a minimum tax credit is generated and carried forward to offset the taxpayer’s regular tax to the extent it exceeds the AMT in future years.
In general, AMTI is computed by making adjustments to regular taxable income and then adding back certain nondeductible tax preference items. The required adjustments are intended to convert preferential deductions allowed for regular tax (for example, accelerated depreciation) into less favorable alternative deductions that are allowable under the parallel AMT system. In addition, an adjustment based on “adjusted current earnings” can increase or decrease AMTI. Net operating losses may reduce AMT by up to 90% (subject to modifications; see Section C), compared to a potential reduction of 100% for regular tax purposes. Foreign tax credits may reduce AMT by up to 100%.
An AMT exemption applies to small business corporations that meet certain income requirements.
Capital gains and losses. A corporation’s gains are taxed at the same rates as ordinary income. In general, capital losses may offset only cap ital gains, not ordinary income. Subject to certain restrictions, a corporation’s excess capital loss may be carried back three years and forward five years to offset capital gains in such other years.
Administration. The annual tax return for domestic corporations is due by the 15th day of the third month after the close of the company’s fiscal year. A cor poration is entitled, upon request, to an automatic six-month extension to file its return. In general, 100% of a corporation’s tax liability must be paid through quarterly estimated tax installments during the year in which the income is earned. The estimat ed tax payments are due on the 15th day of the 4th, 6th, 9th and 12th months of the company’s fiscal year.
Foreign tax relief. A tax credit is allowed for foreign income taxes paid, or deemed paid, by US corporations, but the credit is generally limited to the amount of US tax incurred on the foreign-source portion of a company’s worldwide taxable income. Sep arate limitations must be calculated for passive income and for “general” category income (most types of active business income).
Determination of taxable income
General. Income for tax purposes is generally computed according to generally accepted accounting principles, as adjusted for certain statutory tax provisions. Consequently, taxable income typically does not equal income for financial reporting purposes.
In general, a deduction is permitted for ordinary and necessary trade or business expenses. However, expenditures that create an asset having a useful life longer than one year may need to be capitalized and recovered ratably.
Depreciation. A depreciation deduction is available for most property (except land) used in a trade or business or held for the production of income, such as rental property. Tangible depreciable property that is used in the United States (whether new or used) and placed in service after 1980 and before 1987 is generally depreciated on an accelerated basis (ACRS). Tangible depreciable property that is used in the United States and placed in service after 1986 is generally depreciated under a modified ACRS basis. In general, under the modified ACRS system, assets are grouped into six classes of personal property and into two classes of real property. Each class is assigned a recovery period and a depreciation method. The following are the depreciation methods and recovery periods for certain assets.
|Asset||Depreciation method||Recovery period (years)|
|Commercial and industrial buildings||Straight-line||39 (a)|
|Office equipment||Double-declining balance or straight-line||7 or 12|
|Motor vehicles and computer equipment||Double-declining balance or straight-line||5 or 12|
|Plant and machinery||Double-declining balance or straight-line||7 or 12 (b)|
a) 5 years if placed in service before 13 May 1993.
b) These are generally the recovery periods.
With respect to certain qualified property (for example, long-production-period property and certain aircraft placed in service before 1 January 2016), a first-year depreciation deduction equal to 50% of the property’s adjusted basis may be taken. Instead of the above methods, a taxpayer may elect to use the straight-line method of depreciation over specified longer recovery periods or the methods prescribed for AMT purposes, which would avoid a depreciation adjustment for AMT.
The cost of intangible assets developed by a taxpayer may be amortized over the determinable useful life of an asset. Certain intangible assets, including goodwill, going concern value, patents and copyrights, may generally be amortized over 15 years if they are acquired as part of a business.
Tax depreciation is generally subject to recapture on the sale of a depreciated asset to the extent that the sales proceeds exceed the tax value after depreciation. The amounts recaptured are subject to tax as ordinary income.
Net operating losses. If allowable deductions of a US corporation or branch of a foreign corporation exceed its gross income, the excess is called a net operating loss (NOL). In general, NOLs may be carried back 2 years and forward 20 years to offset taxable income in those years. A specified liability loss (including a product liability loss) may be carried back 10 years. A real estate investment trust (REIT) may not carry back an NOL arising in a tax year in which the entity did not operate as a REIT. Farming business losses may be carried back five years. Limitations apply in utilizing NOLs of acquired operations.
Inventories. Inventory is generally valued for tax purposes at either cost or the lower of cost or market value. In determining the cost of goods sold, the two most common inventory flow assumptions used are last-in, first-out (LIFO) and first-in, first-out (FIFO). The method chosen must be applied consistently. Uniform capitalization rules require the inclusion in inventory costs of many expenses previously deductible as period costs.
Dividends. In general, dividends received by a US corporation from other US corpor ations qualify for a 70% dividends-received deduction, subject to certain limitations. The dividends-received deduction is generally increased to 80% of the dividend if the recipient corporation owns at least 20% of the distributing corporation. Dividend payments between members of an affiliated group of US corporations qualify for a 100% dividends-received deduction. In general, an affiliated group consists of a US parent corporation and all other US corporations in which the parent owns, directly or indirectly through one or more chains, at least 80% of the total voting power and value of all classes of shares (excluding non-voting preferred shares).
Consolidated returns. An affiliated group of US corporations (as described in Dividends) may elect to determine its taxable income and tax liability on a consolidated basis. The consolidated return provisions generally allow electing corporations to report aggregate group income and deductions in accordance with the requirements for financial consolidations. Consequently, the net operating losses of some members of the group can be used to offset the taxable income of other members of the group, and transactions between group members, such as intercompany sales and dividends, are generally deferred or eliminated until there is a transaction outside the group. Under certain circumstances, losses incurred on the sale of consolidated subsidiaries are disallowed.
Foreign subsidiaries. Under certain circumstances, undistributed income of a foreign subsidiary controlled by US shareholders is taxed to the US shareholders on a current basis, as if the foreign subsidiary distributed a dividend on the last day of its taxable year. This may result if the foreign subsidiary invests its earnings in “United States property” (including loans to US shareholders) or earns certain types of income (referred to as “subpart F” income), including certain passive income and “tainted” business income.
Other significant taxes
The following table summarizes other significant taxes.
|Nature of tax||Rate|
|Branch profits tax, on branch profits (reduced
by reinvested profits and increased by
withdrawals of previously reinvested
earnings); the rate may be reduced by treaty
|Branch interest tax, on interest expense paid
by a branch (unless the interest would be
exempt from withholding tax if paid by a
US corporation); the rate may be reduced
|Personal holding company (PHC) tax, applies
to a corporation that satisfies a passive-income
test; in addition to regular tax or AMT; imposed
on undistributed income
|Accumulated earnings tax; penalty tax levied
on a corporation (excluding a PHC) accumulating
profits to avoid shareholder-level personal
income tax; assessed on accumulated taxable
income exceeding a calculated amount (at
least USD250,000 or USD150,000 for
certain personal services corporations)
|State and local income taxes, imposed by
most states and some local governments
|State and local sales taxes, imposed by many
states and some local governments
|Federal unemployment insurance (FUTA);
imposed on first USD7,000 of wages
|6.0% and 0.6% (assuming full credit of 5.4%)|
|Workmen’s compensation insurance;
provisions vary according to state laws;
rates vary depending on nature of
|Social security contributions (including
1.45% Medicare tax); imposed on
|Wages up to USD118,500 (for 2016); paid by|
|Wages in excess of USD118,500 (for 2016;
Medicare tax); paid by
(Effective from 1 January 2013, an additional Medicare tax of 0.9% applies to wages, tips, other compensation and self-employment income in excess of USD200,000 for taxpayers who file as single or head of household. For married taxpayers filing jointly and surviving spouses, the additional 0.9% Medicare tax applies to the couple’s combined wages in excess of USD250,000. The additional tax applies only to the amount owed by the employee; the employer does not pay the additional tax.)
Foreign-exchange controls. The United States currently has no foreign-exchange control restrictions.
Debt-to-equity rules. The United States has thin-capitalization principles under which the Internal Revenue Service (IRS) may attempt to limit the deduction for interest expense if a US corporation is thinly capitalized. In such case, funds loaned to it by a related party may be recharacterized by the IRS as equity. As a result, the corporation’s deduction for interest expense may be dis allowed, and principal and interest payments may be considered distributions to the related party and be subject to withholding tax as distributions.
Although the United States has no fixed rules for determining whether a thin-capitalization situation exists, a facts and circumstances test may be applied based on US case law.
A deduction is disallowed for certain “disqualified” interest paid on loans made or guaranteed by related foreign parties that are not subject to US tax on the interest received. This dis allowed interest may be carried forward to future years and allow ed as a deduction. No interest deduction is disallowed under this provision if the payer corporation’s debt-to-equity ratio does not exceed 1.5:1. If the debt-to-equity ratio exceeds this amount, the deduction of disqualified interest is deferred to the extent of any “excess interest expense.” “Excess interest expense” is defined as the excess of interest expense over interest income, minus 50% of the adjusted taxable income of the corporation plus any “excess limitation car-ryforward.” Special rules apply to corporate partners in partnerships for purposes of determining disallowances.
In addition, interest expense ac crued on a loan from a related foreign lender must be actually paid before the US borrower can deduct the interest expense.
Transfer pricing. In general, the IRS may redetermine the tax liability of related parties if, in its discretion, this is necessary to prevent the evasion of taxes or to clearly reflect income. Specific regulations require that related taxpayers (including US persons and their foreign affiliates) deal among themselves on an arm’s-length basis. Under the best-method rule included in the transfer-pricing regulations, the best transfer-pricing method is determin ed based on the facts and circumstances. Transfer-pricing methods that may be acceptable, depending on the circumstances, include uncon trolled price, resale price and profit-split. It is possible to reach transfer-pricing agreements in advance with the IRS.
If the IRS adjusts a taxpayer’s tax liability, tax treaties between the United States and other countries usually provide procedures for allo cation of adjustments between related parties in the two countries to avoid double tax.
Treaty withholding tax rates
The following are US withholding tax rates for dividends, interest and royalties paid from the United States to residents of various treaty countries.
|Patent and know-how royalties %|
|Australia||0/5/15 (a)||0/10 (b)||5|
|Bangladesh||10/15 (c)||5/10 (d)||10|
|Canada||5/15 (c)||0||0/10 (e)|
|Czech Republic||5/15 (c)||0||0/10 (f)|
|Estonia||5/15 (c)||10||5/10 (g)|
|France||0/5/15 (a)||0||0 (h)|
|Hungary (j)||5/15 (c)||0||0|
|Iceland||5/15 (c)||0||0/5 (k)|
|India||15/25 (c)||10/15 (l)||10/15 (m)|
|Israel||12.5/25 (c)||10/17.5 (n)||10/15 (o)|
|Italy||5/15 (c)||0/10 (p)||0/5/8 (q)|
|Korea (South)||10/15 (c)||12||10/15 (r)|
|Latvia||5/15 (c)||10||5/10 (g)|
|Lithuania||5/15 (c)||10||5/10 (g)|
|Luxembourg (oo)||0/5/15 (c)(s)||0||0|
|Mexico||0/5/10 (u)||4.9/10/15 (v)||10|
|New Zealand||0/5/15 (a)(c)||10||5|
|Philippines||20/25 (c)||10/15 (z)||15/25 (aa)|
|Poland (bb)||5/15 (c)||0||10|
|Russian Federation||5/10 (c)||0||0|
|Slovak Republic||5/15 (c)||0||0/10 (ee)|
|South Africa||5/15 (c)||0||0|
|Spain (ii)||10/15 (c)||10||5/8/10 (ff)|
|Sri Lanka||15||10||5/10 (gg)|
|Switzerland (pp)||5/15 (c)||0||0|
|Thailand||10/15 (c)||10/15 (hh)||5/8/15|
|Tunisia||14/20 (c)||15||10/15 (jj)|
|Turkey||15/20 (c)||10/15 (hh)||5/10 (kk)|
|United Kingdom||0/5/15 (mm)||0 (nn)||0|
|Venezuela||5/15 (c)||4.95/10 (t)||5/10 (kk)|
Various exceptions (for example, for governmental entities and REITs) or conditions may apply (for example, a limitation-on-benefits provision), depending upon the terms of the particular treaty.
a) The 0% rate applies if dividends are paid by an 80%-owned US corporation to its parent company (80% ownership must be for at least a 12-month period ending on the date the dividend is declared or the entitlement is determined) and if certain other conditions are met. The 5% rate applies to dividends paid to a company that directly owns at least 10% of the voting power (or share capital, if applicable) of the payer. The 15% rate applies to other dividends.
b) The 10% rate applies to all interest payments with the following exceptions:
- Interest derived by the government of a contracting state
- Interest derived by certain financial institutions
c) The withholding rate is reduced to 5% (10% in the case of Bangladesh, Indonesia, Jamaica, Korea (South), Morocco, Spain, Thailand and Trinidad and Tobago; 12.5% in the case of Israel; 14% in the case of Tunisia; 15% in the case of India, Pakistan and Turkey; and 20% in the case of the Philippines) if, among other conditions, the recipient is a corporation owning a specified percentage of the voting power of the distributing corporation.
d) The 5% rate applies to interest paid to banks or financial institutions and interest related to the sale on credit of industrial, commercial or scientific equipment or of merchandise.
e) The 0% rate applies to royalties for cultural works as well as to payments for the use of, or the right to use, computer software, patents and information concerning industrial, commercial and scientific experience.
f) The 0% rate applies to royalties paid for copyrights. The 10% rate applies to royalties paid for patents, trademarks, and industrial, commercial or scientific equipment or information.
g) The 5% rate applies to royalties paid for the use of commercial, industrial or scientific equipment.
h) The 0% rate applies to royalties paid for copyrights of literary, artistic or scientific works, cinematographic films, sound or picture recordings, or software.
i) The exemption does not apply if the recipient controls directly or indirectly more than 50% of the voting power in the paying corporation.
j) On 4 February 2010, the United States and Hungary signed a new income tax treaty that would replace the existing treaty between the two countries. As of 31 December 2015, the proposed treaty had not yet received US Senate advice and consent to ratification.
k) The treaty provides for a general exemption from withholding tax on royalties. A 5% withholding tax rate applies to royalties for trademarks and motion pictures.
l) The 10% rate applies to interest paid on loans granted by banks carrying on bona fide banking business and similar financial institutions.
m) The 10% rate generally applies to royalties for the use of industrial, commercial or scientific equipment.
n) The 10% rate applies to interest on bank loans. The 17.5% rate applies to other interest.
o) The 10% rate applies to copyright and film royalties.
p) The exemption applies to the following:
- Interest paid to qualified governmental entities, provided the entity owns, directly or indirectly, less than 25% of the payer of the interest
- Interest paid with respect to debt guaranteed or insured by a qualified governmental entity
- Interest paid or accrued with respect to the sale of goods, merchandise or services
- Interest paid or accrued on a sale of industrial, commercial, or scientific equipment
q) The 0% rate applies to royalties paid for the use of certain copyright materials. The 5% rate applies to royalties paid for the use of computer software and industrial, commercial or scientific equipment. The 8% rate applies in all other cases.
r) The 10% rate applies to royalties paid for copyrights or rights to produce or reproduce literary, dramatic, musical, or artistic works and to royalties paid for motion picture films.
s) The rate is 0% for dividends paid by a company resident in Luxembourg if the beneficial owner of the dividends is a company that is a resident of the United States and if, during an uninterrupted period of two years preceding the date of payment of the dividends, the beneficial owner of the dividends has held directly at least 25% of the voting shares of the payer.
t) The 4.95% rate applies to interest paid on loans made by financial institutions and insurance companies. The 10% rate applies to other interest.
u) The 0% rate applies to the following dividends:
- Dividends paid to certain recipients that own at least 80% of the voting shares of the payer of the dividends
- Dividends paid to certain pension plans
The 5% rate applies if the conditions for the 0% rate are not met and if the recipient owns at least 10% of the payer of the dividends. The 10% rate applies if the 10% ownership threshold is not met. A protocol to the treaty provides an exemption from the 5% “dividend equivalent amount” tax if certain conditions are met (the conditions are similar to those that apply with respect to the 0% withholding tax rate on dividends).
v) The 4.9% rate applies to interest paid on loans (except back-to-back loans) made by banks and insurance companies and to interest paid on publicly traded securities. The 10% rate applies to interest paid by banks and to interest paid by sellers to finance purchases of machinery and equipment. The 15% rate applies to other interest.
w) Interest on certain “portfolio debt” obligations issued after 18 July 1984 and non-effectively connected bank deposit interest are exempt from withholding tax.
x) Interest paid to state-owned enterprises in China is exempt from withholding tax.
y) The general withholding tax rate for interest may be increased to 10% if both Norway and the United States tax interest paid to nonresidents under their domestic tax laws. Norway does not impose tax on interest paid to nonresidents and, consequently, a 0% rate applies to US-source interest under the treaty. The treaty also provides that a 0% rate applies to certain types of interest, such as interest paid on bank loans.
z) The 10% rate applies to interest derived by a resident of one of the contracting states from sources in the other contracting state with respect to public issuances of bonded indebtedness.
(aa) The tax imposed by the source state may not exceed, in the case of the Philippines, the lowest of the following:
- 15% if the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities
- The lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state (bb) On 13 February 2013, the United States and Poland signed a new income tax treaty that would replace the existing treaty between the two countries. As of 31 December 2015, the proposed treaty had not yet received US Sen ate advice and consent to ratification.
(cc) A reduced rate may apply if the beneficial owner of the dividend is a Portuguese company that owns at least 25% of the capital of the dividend-paying company.
(dd) On 24 January 2013, the United States and Japan signed a protocol that would amend the existing income tax treaty between the countries. As of 31 December 2015, the proposed protocol had not yet received US Senate advice and consent to ratification.
(ee) The lower rate applies to cultural royalties, which are defined as payments for the right to use copyrights of literary, artistic or scientific works, including cinematographic films.
(ff) The 5% rate applies to royalties paid for copyrights of musical compositions or literary, dramatic or artistic works. The 8% rate applies to royalties paid for the following:
- Motion picture films, and films, tapes and other means of transmission or reproduction of sounds
- Industrial, commercial or scientific equipment
- Copyrights of scientific works
(gg) The 5% rate applies to rent paid for the use of tangible movable property. (hh) The 10% rate applies to interest on loans granted by financial institutions. The 15% rate applies to other interest.
(ii) On 14 January 2013, the United States and Spain signed a new protocol that would amend the existing income tax treaty and protocol between the two countries. As of 31 December 2015, the proposed protocol had not yet received US Senate advice and consent to ratification.
(jj) The 10% rate applies to the following:
- Royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment
- Remuneration for the performance of accessory technical assistance with respect to the use of the property or rights described above, to the extent that such technical assistance is performed in the contracting state where the payment for the property or right has its source
The 15% rate applies to royalties or other amounts paid for the following:
- The use of, or right to use, copyrights of literary, artistic and scientific works, including cinematographic and television films and videotapes used in television broadcasts
- Patents, trademarks, designs and models, plans, and secret formulas and processes
- Information relating to industrial, commercial or scientific experience (kk) The 5% rate applies to payments for the right to use industrial, commercial or scientific equipment. The 10% rate generally applies to other royalties.
(ll) The US Department of Treasury has announced that the income tax treaty between the United States and the USSR, which was signed on 20 June 1973, continues to apply to the former republics of the USSR, including Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan, until the United States enters into tax treaties with these countries. The United States has entered into tax treaties with Estonia, Kazakhstan, Latvia, Lithuania, the Russian Federation and Ukraine. The withholding tax rates under these treaties are listed in the above table.
(mm) The 0% rate applies if the dividends are paid by US companies to UK companies that owned 80% or more of the voting shares of the payer of the dividends for a 12-month period preceding the declaration of the dividends and if either of the following additional conditions is met:
- The 80% test was met before 1 October 1998.
- The recipient is a qualified resident under certain prongs of the limitation-on-benefits provision in the treaty.
The 0% rate also applies to US-source dividend payments made to UK pension schemes. The 5% rate applies if the beneficial owner of the dividends is a company owning 10% or more of the payer. For other dividends, the 15% rate applies.
(nn) Withholding tax may be imposed at the full domestic rate on interest paid in certain circumstances.
(oo) On 20 May 2009, the United States and Luxembourg signed a protocol that would amend the existing income tax treaty between the two countries. As of 31 December 2015, the proposed protocol had not yet received US Senate advice and consent to ratification.
(pp) On 23 September 2009, the United States and Switzerland signed a protocol that would amend the existing income tax treaty between the two countries. As of 31 December 2015, the proposed protocol had not yet received US Senate advice and consent to ratification.
The United States and Chile signed their first-ever income tax treaty and protocol on 4 February 2010. It includes a general limitation-on-benefits provision and reductions in withholding tax rates. As of 31 December 2015, the proposed treaty and protocol had not yet received US Senate advice and consent to ratification. The United States and Vietnam signed their first-ever income tax treaty and protocol on 7 July 2015. It includes a general limitation-on-benefits provision and reductions in withholding tax rates. As of 31 December 2015, the proposed treaty and protocol had not yet received US Senate advice and consent to ratification.