As a manufacturer, selling your product(s) through an independent distributor is one way to enter the U.S. market without paying U.S. tax. The U.S. will seek to tax you if you have a business presence in the U.S.

Agency Relationship

Under general U.S. tax rules, the creation of an agency relationship (independent or otherwise) is considered as establishment of a U.S. business presence, potentially subjecting you to U.S. tax and requiring you to file U.S. tax returns. However, a buy-sell arrangement between a distributor and manufacturer does not involve an agency relationship, and should not itself constitute having a U.S. business presence. You can also look to the U.S. Model Tax Treaty for exemption from U.S. tax.

U.S. Model Tax Treaty

Under the U.S. Model Tax Treaty, a treaty resident (ex. manufacturer) is not subject to U.S. tax on business profits unless it has a fixed location or “permanent establishment” such as an office in the U.S., through which it conducts a business. The use of a “dependent” agent with the authority to legally bind it on an ongoing basis constitutes a “permanent establishment”. Whether an agent is “dependent” or “independent” of a treaty resident involves issues such as economic dependency and degree of control. You should remain exempt from U.S. tax even if it you use an agent to market your products, provided the agent’s authority is limited to soliciting sales. The U.S. is now taking a closer look at agency relationships and asserting dependent status in arrangements previously thought to involve independent agencies.

Filing a U.S. Tax Return

If your basis for paying no U.S. tax is a treaty exemption, you must file an annual corporate tax return stating the basis for the exemption. The return need not show the results of your U.S. operations. Filing a return also protects your right to offsetting deductions if it is later determined that the exemption claim was incorrect.

U.S. tax treaties do not cover state and local activities. It is therefore possible to be subject to state and local tax, even if the in-state activity does not subject the business to federal tax. Accordingly, you must not only determine the federal tax treatment, but also the treatment under state and local tax legislation.

Employee Taxes

During the early stage of your business, your employees may enter the U.S. periodically to assist in marketing efforts. This must be carefully monitored so that the employees’ authority, presence and activities do not cause you to be deemed as having a fixed place of business in the U.S. Employees will receive a salary for services rendered in the U.S., and could be subject to U.S. personal income tax. The U.S. Model Tax Treaty provides that if an individual does not spend more than 183 days in the U.S. during the calendar year, he or she will not be subject to taxation if their salary is paid by the manufacturer.