Expanding into the US? Here are the hidden tax pitfalls foreign companies should avoid.
Expanding into the US can be a major growth opportunity for European companies, but the American tax system is often more complex than expected. Misunderstandings about corporate income tax, sales tax, and filing obligations are common. Below are five tax “traps” international businesses frequently fall into when entering the US market. Avoiding these pitfalls early can save time, money, and unnecessary IRS or state-level scrutiny.
1. “Corporate income tax is only filed with the federal tax agency IRS.”
It’s true that the Internal Revenue Service (IRS) handles federal corporate income tax, but the story doesn’t end there. Most US states have their own corporate income tax systems, each with separate filing requirements and rules. Depending on your activities, you may need to register and file in multiple states, even if your federal return is compliant. Many European companies expanding to the US underestimate these state-level obligations, which can quickly become expensive if ignored.
2. “We don’t have a permanent establishment; therefore no US filing obligations.”
In Europe, the concept of “permanent establishment” often determines whether tax filings are required, but the US works differently. Even without a permanent establishment under treaty definitions, certain activities can create federal or state filing obligations. The IRS and state tax authorities may still expect disclosures, even if no tax is ultimately due. For example, the IRS require taxpayers to annually claim and disclose treaty benefits on Form 1120-F and Form 8833. Failing to file can trigger penalties and unnecessary tax exposures. Some states don’t even recognize treaty benefits at all.
3. “We are merely exporting, therefore sales tax is not applicable.”
The US has no federal sales tax, but nearly every state imposes its own version with different rates, exemptions, and thresholds. Since recent legal changes (such as Wayfair), even selling into the US remotely can create a “sales tax nexus,” requiring registration and tax collection. This trap is especially common for companies selling online via e-com or through distributors, and who are in a “moms/VAT”-mindset. VAT-principles are not global.
4. “My exporting agent handles all US indirect taxes for us.”
Export agents are invaluable for logistics and customs compliance, but their role rarely extends to sales tax or state-level indirect taxes. They typically do not register your company with US tax authorities or file returns on your behalf. Assuming they do can leave big gaps in compliance.
5. “We have a tax advisor handling our US company’s tax filings — we’re all set.”
Having a US-based tax advisor for your US company is essential, but it doesn’t cover every obligation for your wider group. Foreign parent or sister companies may still need to file disclosures or deal with issues related to intercompany loans, dividends, or US-sourced income. Treating subsidiary filings as the “whole picture” can create blind spots. Double-check the scope of assignment with your US tax-advisor – I find that European companies often mistakenly assume the foreign companies’ US tax compliance is looked after.
Final Thoughts
The US tax landscape is fragmented, with federal, state, and sometimes even local rules. For foreign companies, this means that what seems straightforward in Europe can hide multiple layers of compliance. If your company is exporting to the US, hiring employees, consultants or agents, or setting up a subsidiary, it pays off to understand your tax position before problems arise.
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