State Taxation of Foreign Business
Without a Permanent Establishment
By
Peter Leonardis, Corporate Business Taxation Monthly
Corporations that are formed outside the United States and have no permanent
establishment in the United States are often surprised to learn that
international tax treaties do not protect such corporations from state and
local taxes. While federal treaties may exempt foreign corporations from
federal U.S. tax altogether, or the federal income tax statues may permit
separate accounting for the U.S. activities of non-U.S. corporations, state
taxation frequently does not follow these rules. Sending employees or
representatives into the United States may, as a result, have the unwelcome
effect of subjecting a foreign corporation’s worldwide income to state or
local tax, on an apportioned basis. A recent New York State Tax Appeals
Tribunal decision, Matter of Infosys Technologies Limited,
highlights some common concerns of multinational businesses relating to the
state taxation of services. Infoys Technologies Limited was incorporated and
headquartered in Bangalore, India
This problem can be avoided by separately incorporating the entity’s New
York or U.S. activities. Where New York activities are properly insulated
from activities overseas, New York would not have a basis for reaching the
alien entity’s worldwide income. In this regard, it is also worth noting
that New York’s combined reporting regime prohibits the combination of alien
corporations. Thus, by placing the U.S. activities in a separate
corporation, the worldwide, non-U.S. income of any affiliated alien
corporation becomes unreachable by New York.
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