USA Law and Practice Contributed by: G. J. Ligelis Jr., Christopher K. Fargo, Alyssa K. Caples and Margaret T. Segall, Cravath, Swaine & Moore LLP
The Defence Counterintelligence and Security Agency (the “DCSA”), a component of the US War Depart - ment, administers the national industrial security pro - gramme and ensures the security of classified or sen - sitive information shared by the US government with its contractors. If a US business performs government contracts that require access to classified information, the DCSA may require that the parties take specific measures to mitigate or negate concerns relating to foreign ownership, “control” or influence in connection with a foreign investment. US domestic corporations are subject to tax (currently at a 21% federal rate) on income earned worldwide, subject to a complex scheme of foreign tax credits, deductions and other special rules governing income earned from sources outside the USA. Non-US cor - porations are subject to tax at the same rate, but only to the extent of any income attributable to business activities carried on in the USA plus an additional branch profits tax of 30%. Under most treaties, these taxes only apply if the business is conducted through a permanent establishment in the USA. Non-US cor - porations are also subject to tax at a 30% rate on non-business income derived from sources within the USA, including dividends, subject to potential reduc - tion under an applicable treaty. Non-US corporations are generally not subject to US tax on income earned from sources outside the USA. 9. Tax 9.1 Taxation of Business Activities Many non-US investors prefer to earn income or con - duct business in the USA through an entity taxable as a partnership rather than a corporation. Under US tax rules, partnerships are not generally subject to income tax. The activities and income of the partnership are instead subject to tax at the partner level. Notably, most non-US and US domestic entities (other than a US corporation under state law) with more than a single owner, including limited liability companies, may elect to be classified as a partnership for US tax purposes. There are numerous taxes imposed on business activ - ity and income earned in the USA in addition to federal
income tax. In particular, many US states and some local jurisdictions impose income taxes in addition to federal income taxes on income earned in that jurisdic - tion. State and local tax rates vary across jurisdictions (eg, there is no state income tax in Texas and Florida, whereas the top marginal rates in California and New York are well in excess of 10%). State income tax laws generally conform to the US federal income tax laws but there are deviations particular to each state. Additionally, although the USA has no national value- added tax regime, most states and many local juris - dictions impose sales taxes on products and some services sold within the state. There are also federal, state and local withholding taxes imposed on pay - roll payments to employees. Excise taxes are also imposed on certain types of businesses and prod - ucts, including a 1% excise tax on stock repurchases by publicly traded companies. Finally, state and local jurisdictions may impose other taxes such as property taxes, franchise fees or transfer taxes. 9.2 Withholding Taxes on Dividends, Interest, Etc There is a 30% withholding tax imposed on dividends and interest (other than exempt “portfolio interest”) paid by US corporations to non-US investors. US tax treaties generally eliminate withholding tax on inter - est and reduce the dividend rate to 15%. A 5% rate for dividends is often available for significant non-US investors, generally those owning at least 10% of a US corporation. Some treaties also provide for a 0% withholding rate for dividends paid to certain non-US parent corpo - rations holding at least 80% of a US corporation. A 12-month holding period is frequently required to obtain eligibility for the 5% or 0% rates for dividends. Most US tax treaties contain comprehensive limita - tions on benefit provisions to address “treaty shop - ping”. 9.3 Tax Mitigation Strategies Historically, tax mitigation strategies in the USA focused primarily on shifting valuable intellectual prop - erty offshore through transfer pricing arrangements, increasing leverage on the US business through
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