Taxation

Texas continues to attract foreign investment due to its pro-business climate, skilled workforce, and absence of personal income tax. However, foreign companies entering the Texas market must address a range of federal and state tax issues to operate efficiently and avoid costly missteps. Vanguard Legal, with offices in Houston and Dallas, offers strategic guidance to help international businesses establish compliant and tax-efficient operations.

Under US tax law and applicable income-tax treaties, a permanent establishment (PE) refers to a fixed place of business—such as an office, factory, or branch—that triggers US income tax liability for foreign entities. Activities like signing contracts, storing inventory, or providing services in the US may create a PE, subjecting the foreign company to federal taxation on effectively connected income.

Foreign corporations operating through a US branch may be subject to the branch profits tax, a 30% levy on repatriated earnings. This tax is designed to mirror the dividend withholding tax that applies when profits are distributed by a US subsidiary to its foreign parent. Proper structuring can mitigate exposure to this tax.

Foreign investors typically choose between forming a US corporation or a limited partnership (LP). A corporation offers liability protection and may simplify compliance with US tax and regulatory requirements. An LP, while offering flow-through tax treatment, can raise complexity for foreign partners due to withholding obligations and potential US tax filings.  LLCs are often ill adivised for foreign investors due to inconsistent treatment under international tax treaties.

The United States maintains income-tax treaties with many countries, including Canada, the UK, Germany, and Japan. These treaties can reduce withholding rates, clarify PE thresholds, and provide relief from double taxation. To claim treaty benefits, foreign companies must file IRS Form W-8BEN-E and maintain proper documentation.

Foreign businesses must comply with transfer pricing rules, which require that transactions between related entities be conducted at arm’s length. This includes pricing for goods, services, royalties, and loans. Failure to document and justify transfer pricing policies can result in IRS audits and penalties.

• Engage Local Tax Advisors: Texas tax laws—including franchise tax and sales tax—require specialized knowledge. Local counsel ensures compliance and identifies planning opportunities.
• Conduct a Tax Residency Analysis: Determine whether your entity or operations create US tax residency or PE status.
• Review Treaty Eligibility: Confirm your home country’s treaty provisions and file the necessary documentation.
• Implement Robust Transfer Pricing Policies: Maintain contemporaneous documentation and benchmark intercompany pricing.
• Consider Entity Structure Carefully: Choose a structure that aligns with your business goals, liability preferences, and tax planning needs.

DII allows qualifying U.S. corporations to claim a reduced effective tax rate on profits derived from serving non-U.S. markets. For Texas companies in technology, energy, or manufacturing, the FDII deduction can substantially improve global competitiveness when properly structured.

For tailored legal and tax guidance, contact Vanguard Legal’s international business team in Houston or Dallas. We help foreign companies expand confidently and compliantly into the Texas market.