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A U.S. branch is the foreign corporation doing business in the United States without creating a separate U.S. entity; a U.S. subsidiary is a separate domestic corporation. The branch generally reports U.S. business income under foreign-corporation rules, commonly on Form 1120-F, while the subsidiary generally files Form 1120. A branch may also owe branch profits tax on a statutory dividend-equivalent amount, whereas a subsidiary’s dividends to a foreign owner may face U.S. withholding. Those different filing and tax paths do not, by themselves, show which structure will cost less.
How the two structures differ
| Issue | U.S. branch | U.S. subsidiary |
|---|---|---|
| Legal identity | The foreign corporation operates in the United States without setting up a new legal entity. | A domestic corporation is formed under U.S. law and is distinct from its foreign shareholder. |
| Federal income tax return | Form 1120-F when a filing condition applies; the return reports the foreign corporation’s U.S. income and related items. | Form 1120 for the domestic corporation. |
| Tax on business income | Effectively connected income (ECI) is taxed under foreign-corporation rules after allowable deductions. | The corporation reports its income under the domestic-corporation rules. |
| Potential tax when earnings reach the foreign owner | Branch profits tax may apply to a statutory dividend-equivalent amount, subject to treaty rules. | U.S.-source dividends paid to a foreign beneficial owner generally face withholding, subject to treaty relief. |
| Foreign-owner information reporting | Form 1120-F and applicable schedules; requirements depend on the facts. | Form 5472 may be required for a 25%-foreign-owned corporation with a reportable related-party transaction. |
The federal descriptions above reflect IRS guidance and the 2025 tax-year Form 1120-F instructions accessed in 2026. State and local rules are separate.
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How U.S. federal tax applies to a branch
U.S. trade or business and Form 1120-F
The IRS generally treats a foreign corporation as engaged in a U.S. trade or business when it conducts considerable, continuous, and regular profit-seeking activities in the country. The determination is fact-dependent; U.S.-based employees acting for the foreign corporation can create a U.S. trade or business. A foreign corporation operating through a U.S. branch is considered to have one.
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When a filing condition applies, Form 1120-F reports income, gains, losses, deductions, and credits and computes the foreign corporation’s U.S. income tax. Under the 2025 Form 1120-F instructions, ECI is taxed at the 21% corporate rate after allowable deductions. That rate is not a tax on gross receipts: the amount due depends on which income is ECI and which deductions may be claimed and allocated.
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The instructions also describe a protective Form 1120-F filing for certain limited U.S. activities when the corporation concludes it has no ECI. In an eligible case, filing can preserve access to deductions and credits if the no-ECI conclusion is later challenged. Whether a return is required, including whether a protective return is appropriate, depends on the corporation’s activities and filing facts.
Branch profits tax
The 2025 Form 1120-F instructions state a statutory 30% branch profits tax rate. The tax applies to after-tax earnings and profits of the foreign corporation’s U.S. trade or business that are not reinvested in that business by year-end, or are disinvested later. Its statutory computation uses a dividend-equivalent amount and U.S. net equity mechanics; it is not simply a 30% tax on every cash transfer to the parent.
An income tax treaty may reduce the rate if the foreign corporation qualifies under the treaty in force. The instructions also describe tax on excess interest in some circumstances, a specialized issue relevant to certain financing arrangements rather than a universal charge on every branch.
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Corporate return and dividends to the foreign owner
A domestic subsidiary generally files Form 1120 to report its corporate income and tax. If it pays U.S.-source dividends to a foreign beneficial owner, the general U.S. withholding rate is 30%. An applicable treaty may provide a lower rate or exemption, but eligibility and required documentation must be satisfied.
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Dividend withholding is distinct from the branch profits tax: the former concerns a dividend paid by a separate U.S. corporation, while the latter is calculated under rules for a foreign corporation’s U.S. business. A payment’s label alone does not establish the tax result.
Form 5472 and related-party transactions
A corporation that is at least 25% foreign-owned generally must file Form 5472 if it has a reportable transaction with a related party during the tax year. Foreign ownership alone does not make the form automatic under this general rule; the reportable-transaction condition matters. The current form instructions should be checked for definitions, exceptions, recordkeeping, deadlines, and penalties applicable to the company’s facts.
Where treaty analysis changes the comparison
There is no single treaty outcome for every foreign parent. The relevant treaty depends on the parent’s country and the treaty currently in force. For a branch, the analysis can include business-profits and branch-profits provisions. For a subsidiary, it can include the dividend article. In either structure, residence, beneficial ownership, limitation-on-benefits provisions, income type, and required documentation can affect whether relief is available.
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1Clear out junk files and repair common Windows errors2Fix the driver behind crashes, sound loss and screen glitches3Repair Windows errors before they cause bigger problemsThe IRS advises checking the actual treaty and its requirements rather than assuming that treaty residence alone guarantees a reduced rate. Treaty relief should therefore be modeled separately for the specific parent and payment or business income involved.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.State and local compliance is a separate decision
This federal comparison cannot determine state obligations. Depending on where and how the business operates, either structure may need state registration or tax compliance, and other duties may arise for payroll, sales tax, or annual reports. Forming a subsidiary in one state does not by itself settle whether it must register or meet tax obligations in other states where it operates. Identify each relevant state and review its current rules independently.
How to choose what to model
Neither structure is universally more tax-efficient. Before choosing, compare the complete fact pattern rather than only the federal corporate rate or the potential tax on distributions:
- Where the foreign parent is resident and whether it can qualify for relevant treaty benefits.
- What U.S. activities, employees, property, and income the business expects to have, and whether those activities create a U.S. trade or business or ECI.
- How the U.S. operation will be financed, including whether branch-level interest rules may be relevant.
- Whether and how earnings will be retained, reinvested, or distributed to the foreign owner.
- Which related-party transactions could trigger Form 5472 if a subsidiary is used.
- Which states the business will operate in and what registration, tax, and reporting obligations apply there.
A qualified U.S. international-tax adviser can model the federal and treaty treatment against those operating facts. The result should also be checked against the current-year forms and instructions, since the cited Form 1120-F rate and rules are from the 2025 tax-year instructions.
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