Taxing Branches and Subsidiaries

To illustrate the complexities of taxing foreign-source income, it is useful to examine how U.S.-based companies tax earnings from a foreign branch and a foreign subsidiary.

1. The Foreign Branch. Since a foreign branch is an extension of the parent company, any foreign branch income (or loss) is directly included in the parent’s taxable income.

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2. The Foreign Subsidiary. A foreign corporation is an independent legal entity set up in a country according to the laws of incorporation of that country. When an MNE purchases or establishes such an entity, it is called a subsidiary. Subsidiary income is either taxable to the parent or tax deferred (not taxed until it is submitted as a dividend to the parent).

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