Figures relate to tax year 2025-26 (UK) · 2025 (US)
British companies expect one American tax return. They budget for one, and they plan around one.
There is one federal return. Underneath it sits a state layer that nobody mentions until the first year end.
A US subsidiary can owe tax in states it has never set foot in, because selling into a state is often enough on its own.
Key takeaways
- A US subsidiary is taxed as its own company, not as part of the group.
- State taxes sit on top of the federal charge.
- Selling into a state can create a filing there.
- Transfer pricing between parent and subsidiary must be at arm's length.
- Form 5472 reports dealings with the British parent.
- Dividends back to Britain attract treaty withholding.
- Delaware is popular but not automatically right.
- The admin cost usually exceeds the tax in the early years.
Which entity should the US subsidiary be?
A corporation, in nearly every case where a British company owns it. A limited liability company looks simpler, but the rules usually treat it as transparent, which can push American income straight onto the British parent and create a filing obligation for it. According to IRS guidance on company classification, the default treatment follows the structure you pick.
The corporation keeps the two companies cleanly separate for tax as well as for law.
Most of the problems we see start with an LLC chosen for the wrong reason.
Why do people put a US subsidiary in Delaware?
Because its company law is well settled and investors expect it. That is a legal preference rather than a tax one, and it brings its own annual franchise tax. If you have no actual presence there, Delaware adds a filing without removing any other.
Incorporating in one state and operating in another means registering in both.
Pick the state for the law, then accept that tax follows where you operate.
What is state nexus?
The link that gives a state the right to tax you. It once needed a physical presence. Now sales alone can be enough. A company selling over a limit into a state can owe tax there with no office, no staff and no visits at all.
Our guide to US sales tax for UK sellers covers the sales tax side.
Thresholds differ by state, so the answer is never one answer.
A worked example
Take an illustrative example. A British software company sets up a US subsidiary in Delaware with two salespeople working from home in Texas and New York.
It files a federal return, a Delaware franchise return, and income tax returns in Texas and New York.
It then crosses the sales limit in four more states during its second year.
By year three it is filing in seven states on revenue of under $3 million, and the compliance bill is larger than the tax.
Two layers, one company
| Layer | Trigger | Typical cost |
|---|---|---|
| Federal income tax | Being a US company | One return |
| State income tax | Nexus in that state | One per state |
| Franchise tax | State of set-up | Annual, often small |
| Sales tax | Separate nexus rules | Monthly or quarterly |
| Payroll | Any employee in a state | Registration and filings |
| Form 5472 | Dealings with the parent | With the federal return |
What is transfer pricing?
The rule that connected companies must deal as if they were strangers. Where the British parent gives staff, software or management to the American company, it has to charge for them, and defend the figure. Setting it at nothing is not a neutral choice.
Our guide to permanent establishment risk covers the related exposure.
A simple cost plus method documented once is usually enough for a small group.
Why does transfer pricing matter so much?
Because it decides which country taxes the profit. Charge too little and the profit sits in America. Charge too much and it sits in Britain. Both tax authorities have an interest, and the one that loses out is the one that asks questions.
Write the policy down before the first invoice rather than after the first enquiry.
An intercompany agreement signed at the time is worth a great deal later.
What is Form 5472?
An information return covering dealings between the American company and its foreign owner. It lists what moved between the two of you that year, including loans, charges and sales. Missing it costs $25,000 to start with, and that applies per form.
Our guide to Form 5472 for UK owners covers it in detail.
It is the single most commonly missed filing for British owned American companies.
How do you get profit back to Britain?
By dividend, usually, and the treaty reduces the withholding that would otherwise apply. Rates follow the size of the holding and whether you meet the treaty conditions. Without the treaty the deduction would run far higher.
Our guide to US withholding tax for UK investors covers the mechanics.
Most British parents leave profit in the subsidiary for several years before taking any.
Does Britain tax the dividend again?
Usually not, because the British exemption for dividends from subsidiaries is broad. A UK company taking a dividend from its American subsidiary usually pays no further corporation tax on it. That makes the structure cleaner than people expect.
Our guide to running a UK limited company as an American covers the parent.
The withholding is therefore usually the only cost of bringing money home.
What about losses in the early years?
They stay in the American company and carry forward against its own later profits. You cannot set them against British profits, because the two companies file separately. That surprises groups used to British group relief.
Early losses are not wasted, they are simply stranded until the subsidiary makes money.
Funding the subsidiary by loan rather than equity changes the picture slightly.
Loan or equity?
Both work, and the mix matters. Interest on a loan is deductible in America and taxable in Britain, which can move profit usefully. Limits apply to how much interest a thinly funded company can deduct, so keep the ratio sensible.
Document any loan properly, with a rate and terms a bank would recognise.
Informal funding with no paperwork counts as equity the moment anybody looks.
What about employing people?
Each employee brings payroll signing up in their state, plus jobless insurance and withholding. A single remote hire in a new state brings a small bundle of filings with it. Most groups use a payroll provider rather than handle this themselves.
Our guide to shadow payroll between the US and UK covers cross-border staff.
Hiring in a new state is a tax decision as well as a recruitment one.
Does the parent need a presence beside the US subsidiary?
No, and it is better if it does not have one. The point of a subsidiary is that the British company itself stays outside the American system. Directors visiting now and then is fine. The parent trading directly is not.
Keep the two companies behaving like separate businesses in practice as well as on paper.
Contracts should be with the American company where the work is American.
What does a US subsidiary cost to run?
More than British groups expect, mainly because of the state layer. A federal return, a state return or two, a franchise return and payroll filings add up before any tax is paid. Budgeting a few thousand pounds a year for compliance alone is realistic.
Our business tax service covers both sides of the group.
The cost does not scale down for a small subsidiary, which is why early years feel expensive.
When is a US subsidiary not worth it?
Where the American activity is small and occasional. Selling remotely into America from Britain may create no filing at all, where no nexus and no establishment exist. Setting up a US subsidiary before you need one adds cost without removing risk.
Our guide to UK contractors with US clients covers selling without a company.
Many British businesses sell into America for years without needing one.
What triggers the decision?
Hiring somebody, signing a customer who insists on an American party, or taking investment. Those three account for most of the US subsidiary formations we see. Each of them makes the informal arrangement unworkable.
Customers in regulated sectors often require an American entity to contract with.
Investors almost always do, which is where the Delaware preference comes from.
Does it affect the British accounts?
Yes, because the parent now has a subsidiary to consolidate. Group accounts may follow depending on size, and the audit position can change. That is a company law question rather than a tax one, but it arrives at the same time.
Speak to your British accountant before setting up rather than afterwards.
Small group exemptions may still apply, depending on the combined figures.
What if the owner is American?
Then the position gets more complicated, because the individual sits inside both systems. An American who owns a British company that owns an American one reports at every level. The structure that suits a British founder may not suit an American one.
Our guide to the check-the-box election covers the classification choice.
Get advice on the whole chain rather than on each company separately.
What records should you keep?
The intercompany agreement, the transfer pricing basis, board minutes and a record of which states you have nexus in. Those four answer most questions from either authority. Nobody owns the nexus record until it suddenly matters.
Review the nexus position annually as sales grow into new states.
Companies cross limits quietly, usually without noticing at the time.
What is the federal rate on a US subsidiary?
Twenty one per cent on taxable profit, which is lower than the main British rate of 25% for 2025-26. State tax then sits on top, ranging from nothing in a few states to around 10% in others. The combined figure is usually broadly similar to Britain rather than dramatically cheaper.
Nobody should set up in America purely for the headline rate.
The state layer usually closes most of the gap.
When does the first return fall due?
For a calendar year company, the federal return is due in the spring following the year end, with an extension available to the autumn. State deadlines mostly follow the federal one but not always. The first year catches people out because the company often forms mid-year and nobody has set the dates up anywhere.
Put every deadline into a shared calendar the week the company is formed.
A missed first filing sets an unhelpful tone with several authorities at once.
Can you close a US subsidiary easily?
Less easily than you opened it, which is worth knowing at the start. You have to file a final return, settle state obligations, sign off in each state and formally dissolve in the state of set-up. Skipping the last step leaves franchise tax accruing on a company nobody uses any more.
Our guide to company strike off and US tax covers closing the British side.
Dormant American companies quietly build up penalties for years.
Does a US subsidiary affect your British tax?
Only lightly, because the subsidiary is a separate taxpayer. The parent may have controlled foreign company issues to think about, though an American subsidiary paying full American tax rarely causes a problem there. Consolidation for accounting purposes is usually the bigger practical change.
Our guide to GILTI for UK company owners covers the mirror problem.
A genuinely trading subsidiary paying real tax is rarely caught by anti-avoidance rules.
Who should own the US subsidiary?
The British trading company, in most cases, because that keeps the chain short and the dividend exemption straightforward. Some groups put a holding company in between, usually for reasons that have nothing to do with tax. Adding layers without a reason simply adds filings on both sides.
Keep the structure as flat as the commercial position allows.
Every extra entity brings its own accounts, its own return and its own fees.
What do investors expect to see?
American investors frequently want to invest in an American company rather than a British one, which sometimes means flipping the structure so the US entity sits on top. That is a major change with real tax consequences on both sides, and it is far easier to do early than once the British company holds valuable assets.
Raise the question with advisers before a term sheet rather than during one.
A flip after a few profitable years can be genuinely expensive to execute.
How to set one up
- Decide whether you actually need a US subsidiary yet.
- Choose a corporation rather than a transparent entity.
- Pick the state of set-up for legal reasons, not tax ones.
- Register in every state where you have people or sales.
- Write a transfer pricing policy before the first intercompany invoice.
- Decide the mix of loan and equity funding, and document the loan.
- Diarise Form 5472 alongside the federal return.
- Review the nexus position every year as sales grow.
Mistakes and penalties we see with a US subsidiary
The first is forming a transparent entity, which drags the British parent into the American system.
The second is charging nothing between the companies, which leaves the profit split inone you can defend.
The third is missing Form 5472, where the penalty starts at $25,000 per form.
The fourth is ignoring state nexus until a state writes, by which point several years are open.
How US UK Tax Accountants helps
We start with whether you need the company at all, because a surprising number of British businesses set one up a year or two before anything required it.
Our guide to US property for UK residents covers another route into the American system.
If you are about to hire or contract in America, get in touch before the entity is formed.
Last reviewed 25 October 2026. This article is general information and not personal tax advice, and state rules vary considerably.
For the neighbouring question, Nobody closes a company by stopping work walks through it in detail.
For the neighbouring question, The UK finally answers the US LLC double tax problem walks through it in detail.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
