How can you optimize your U.S. expansion strategy?

An article by Gerry de Luca and Olivier Djoufo.

Thinking of expanding your business in the United States? Now’s the time to think about it!

Faced with the 25% tariffs imposed by the U.S., as well as retaliatory measures applied by Canada, more and more Canadian entrepreneurs are turning to this winning solution: establishing a direct presence on U.S. soil.

This expansion strategy not only bypasses customs barriers – it also opens the door to promising new markets and attractive tax advantages. Of course, setting up in the United States requires a great deal of preparation, particularly in terms of navigating the tax and legal aspects.

That’s why we’ve put together a practical guide detailing the essential points for successful expansion in the United States. Find out how to turn this challenge into a real opportunity for your company.

1. Choosing the right business structure

Canadian entrepreneurs wishing to establish a business in the United States have several options in terms of legal structures, each with specific tax implications:

• C Corporation: Provides legal protection for shareholders and is subject to a federal tax of 21%, excluding state taxes.
• LLC (Limited Liability Company): Provides tax flexibility, with profits taxed directly to the members. However, this structure is generally not recommended for Canadian entrepreneurs due to complex tax rules that can result in double taxation.
• Partnerships: Offer flexible management and avoid double taxation, but do not protect against liability.
• Branch office: A Canadian company can also operate through a branch office in the U.S., but this may entail additional tax and regulatory obligations.

Each structure has its advantages and disadvantages, depending on your business and tax objectives. It is therefore essential to consult experts to choose the best expansion strategy.

2. Comparative tax rates: Canada vs. United States

The US corporate tax rate is currently 21% at federal level, with a planned reduction to 20%. State taxes range from 2.25% to 11.5%.

In Canada, companies with revenues in excess of CAD 500,000 are subject to a federal rate of 15%, and a provincial rate of 11.5% in Quebec.

3. Profit repatriation and withholding tax

Profits earned in the U.S. and repatriated to Canada in the form of dividends are subject to a 30% withholding tax under U.S. domestic law. However, thanks to the Canada-U.S. tax treaty, this rate can be reduced to 5%.

4. Manufacturing or distribution activities in the United States

Companies setting up a distribution subsidiary in the United States are subject to the US federal tax rate of 21% (with a planned reduction to 20%).

For manufacturing activities, an additional tax incentive is provided, with a reduced tax rate of 15% provided production takes place in the USA.

5. Financing U.S. operations

Financing can be provided by :

• Intercompany loans: Interest may be tax deductible, subject to U.S. deductibility rules.
• Investment in share capital: Avoids certain restrictions on interest deductibility.

In the United States, rules limit the deductibility of interest on loans, which must be taken into account in financial strategy.

6. Transfer pricing and intercompany transactions

When expanding into the U.S., inter-company transactions will take place between the Canadian company and its U.S. subsidiary. These transactions often include :

• Sale of tangible goods
• Provision of intra-group services (management, administration, etc.)
• Granting of intellectual property rights
• Intra-group financing

It is imperative that these transactions are carried out at market prices to avoid tax adjustments by the US and Canadian tax authorities. Proper documentation is required to comply with transfer pricing rules.

7. U.S. sales tax

Sales of goods in the United States are subject to sales taxes, the rates of which vary from state to state, and sometimes even between localities within the same state.

Companies must register with the tax authorities in each state where they reach a defined sales threshold. Failure to comply with sales tax collection and remittance obligations can result in fines and penalties.

It is advisable to establish a clear process to ensure tax compliance and avoid any financial penalties.

8. Hiring US employees and international mobility

Recruiting American employees can be advantageous thanks to competitive wage costs and local tax incentives. However, it is crucial to comply with tax and social security obligations:

• Employees must be registered on a U.S. payroll.
• A salary top-up between the Canadian company and the U.S. subsidiary may be necessary.
• Canadian employees sent temporarily to the U.S. may be subject to U.S. withholding taxes.

What’s more, companies need to anticipate work visa requirements to avoid any problems entering the US.

Settling in the U.S.: a complex choice, but one that pays off!

Establishing a distribution or manufacturing subsidiary in the U.S. can offer significant commercial advantages to Canadian companies. However, this expansion requires careful planning to maximize profits while minimizing tax and regulatory risks.

Key elements to consider include

• Company structure
• Tax rate comparison
• Profit repatriation
• Financing operations
• Transfer pricing
• U.S. sales tax
• Hiring and employee mobility

Given the complexity of these issues, it’s essential to surround yourself with tax experts. The professionals at Demers Beaulne are available to support you as you expand into the United States, and to answer any questions you may have. Need support? Please contact us.

More questions? We have the answer.