Crossing Borders: What Foreign Investors Need to Know About U.S. Tax

*Originally published in the January/February 2026 edition of The Ohio Society of CPAs’ CPA Voice publication. View here.

Entering the U.S. market can be a daunting task for foreign companies. One of the main challenges is navigating the complex U.S. tax system. U.S. tax law is a constantly changing mix of federal, state and local rules that often differ greatly from those in other countries.

However, with informed planning and a focused strategy, foreign investors can turn these challenges into a manageable part of their overall business plan. This article provides a high-level overview of key U.S. and Ohio tax considerations to help Ohio CPAs advise inbound foreign investors with C Corporation subsidiaries.

Choosing How to Capitalize Your U.S. Business: Debt vs. Equity

When a foreign investor decides to incorporate a U.S. business, one of the first decisions is whether to fund that entity through debt, equity, or a combination of both. While debt financing may appear attractive due to the interest deduction, the U.S. tax regime includes several layers of restrictions and considerations:

• IRC §163(j) Limitation: The Tax Cuts and Jobs Act (TCJA) made significant changes to how businesses can deduct interest expense. Now, all taxpayers are generally limited to deducting business interest up to the amount of business interest income plus 30% of adjusted taxable income or ATI.Under the TCJA, ATI is equal to Earnings Before Interest and Taxes computed under tax law. Under the One Big Beautiful Bill (OBBBA), effective for tax years after December 31, 2024, ATI is equal to tax basis Earnings Before Interest, Tax, Depreciation and Amortization. This change will increase ATI because of the favorable treatment of depreciation and amortization and allow taxpayers to deduct more interest. This change is very generally beneficial to taxpayers in capital intensive industries.However, the OBBBA also excludes certain types of foreign income (Subpart F and GILTI) from the calculation of ATI, thus negating one of the benefits of the 163(j) Group Election, which could offset the benefit of adding back depreciation, amortization and depletion. As a result, multinational companies must carefully consider how they fund their U.S. operations when choosing between debt vs. equity.

• Related-party interest restrictions (IRC §267): Interest owed to a foreign related party may not be deductible until paid in cash.

• Withholding tax: Cross-border interest payments are subject to a 30% U.S. withholding tax, unless reduced by a bilateral tax treaty.

• Debt-equity classification rules (IRC §385): Certain transactions may be recast as equity, eliminating the deduction and changing withholding outcomes (e.g., recharacterizing a repayment as a dividend instead of a loan payment, resulting in a potential loss of interest deduction and the possibility of associated withholding tax on a dividend to the extent of Earnings &Profits).1

Because of these complex rules, the decision between debt and equity is often less straightforward than it may seem. However, there are also opportunities. For example, hybrid financing strategies, such as dividend-payable instruments that create deductible interest-like outcomes, can provide tax advantages when properly structured.

Transfer Pricing

Transfer pricing refers to the rules and methodologies for setting prices in transactions between related companies within a multinational group. These prices must be set as if the companies were unrelated (i.e., at “arm’s-length” terms).

These transactions include, but are not limited to:

• Intercompany loans
• IP licensing
• Management fees
• Cost-sharing arrangements
• Sale of goods and services

The U.S. enforces strict rules about documentation and penalties for transfer pricing. Because of this, transfer pricing is one of the most scrutinized areas for foreign-owned U.S. businesses and is often a focus of Internal Revenue Service (IRS) audits.

Treaty Benefits

Sending profits back to a foreign parent company (repatriating earnings) is a major concern for foreign investors in the U.S., as it can trigger multiple layers of tax. The U.S. has many tax treaties with other countries that can help reduce taxes; however, not all companies qualify for treaty benefits. The U.S. applies rigorous Limitation on Benefits (LOB) tests to prevent abuse. Investors should confirm eligibility early to avoid unexpected withholding taxes.

Baked within the concept of understanding when treaty benefits are available is the concept of permanent establishment (PE). Even with a U.S. legal entity subsidiary, PE risk can still be an important concern. There are steps that foreign investors can take to mitigate this risk, including transfer pricing policies and Global Employee Mobility practices, but understanding the foot faults is paramount.

Withholding Taxes and Reporting Obligations

Foreign investors quickly learn that U.S. withholding tax regimes are extensive. These regimes include:

• A 30% withholding tax on interest, dividends, royalties, and certain service payments made to foreign persons, regardless of profitability
• A 15% withholding tax on U.S. real property interests by foreign persons, imposed by the Foreign Investment in Real Property Tax Act (FIRPTA)
• A 10% withholding tax on gains from the dispositions of certain U.S. partnership interests
• Informational reporting obligations

Compliance is critical because penalties for incorrect or missing filings (such as Form 1042, 1042-S, 8804, etc.) can be severe. Understanding and using Forms W8 (e.g., Form W8-BEN-E) is also vital to ensuring foreign investors are in full compliance.

Ohio Local Tax Complexity

Each of the 50 U.S. states has its own tax system, often including taxes levied on corporate income, sales and gross receipts. Following the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., businesses may be subject to state taxes even without a physical office or employees in the state. Foreign investors often underestimate how complex and impactful state tax exposure can be.

Ohio is a relatively favorable state for taxpayers as there is no corporate income tax in the state, however, it does have a 0.26% Commercial Activity Tax (CAT) on Ohio-sourced gross receipts greater than $6 million. Also, unlike many other states, Ohio municipalities can impose their own municipal income tax on corporations. These are important considerations for foreign investors looking to do business in the Buckeye State.

Intellectual Property Planning and the FDDEI Deduction

For many foreign investors, intellectual property (IP) is one of the most valuable components of their global business. However, bringing IP into the U.S. or using it within a U.S. subsidiary can create several tax issues. For example, cross-border licensing income could be subject to the U.S. withholding tax or transferring IP to the U.S. could generate taxable gain under transfer pricing rules. The Foreign Derived Deduction Eligible Income (FDDEI) deduction can help reduce some of those taxes. FDDEI provides a tax break for income from products, services or IP licenses sold to foreign customers. This deduction, made permanent under the OBBA at 33.34%, lowers the tax rate to 14%. This encourages companies to keep IP and related activities in the U.S. Combining FDDEI with R&D credit planning can further U.S. taxes for inbound investors.

Research and Development Credits

The U.S. Research and Development (R&D) credit can offset a broad range of expenses tied to technological and scientific development such as:

• Wages of U.S.-based engineers, developers, and scientists
• Supplies used in experiments
• Certain contract research
• Applicable cloud computing costs

Doing R&D in the U.S. not only allows companies to claim the R&D credit and reduce the cost of research, but it also increases the value of their intangible assets. This, in turn, increases the amount of income eligible for the FDDEI deduction.

Ohio also has its own set of tax credits and incentives (including the R&D credit) that could be advantageous for an inbound investor as well.

Tariff Considerations

The U.S. trade environment has changed rapidly in recent years, with shifting tariff policies and ongoing geopolitical considerations. Goods imported into the U.S. are subject to customs duties, special tariffs, and user fees. To reduce tariff costs, inbound investors may need to consider restructuring supply chains, relocating assembly locations or adjusting sourcing strategies to decrease tariff exposure. Proactive planning around customs duties, country-of-origin rules, and duty mitigation programs is essential when entering and/or scaling the U.S. market.

Global Employee Mobility

Moving employees across borders – whether sending executives to oversee U.S. operations, transferring technical specialists, or hiring remote workers across multiple jurisdictions – can create major U.S. tax, payroll, immigration, and corporate nexus issues. State and local individual tax for foreign nationals in the U.S. is important to consider as well. For Ohio specifically, if an employee is considered a resident, they are taxed on their worldwide income. Foreign nationals working in Ohio may have to file both state and city income tax returns and navigate complex tax withholdings if they travel in and out of the state. Proper planning is essential to avoid unexpected tax problems for both employers and employees.

Tax Compliance and Provision

The U.S. tax system is more complex than that of most other countries, requiring businesses to navigate federal, state and local tax filings in addition to detailed reporting, withholding requirements, and complex financial statement provisions. Failure to comply can lead to significant penalties, increased audit risk, and reputational damage, especially for multinational groups under the scrutiny of global stakeholders. Inbound entities must accurately file:

• Federal income tax returns (e.g., Forms 1120, 1120-F, 1065, etc.)
• Withholding and informational reporting forms (W-8s, Forms 1042/1042-S, 1099s, etc.)
• Special international tax filings (Form 5471, 5472, 8858, Transfer pricing documentation, etc.)
• State and local tax filing obligations, often across numerous jurisdictions, include:
  • Income and/or franchise tax filings
  • Sales and use tax filings
  • Payroll tax returns
  • Ohio’s compliance obligations include the Commercial Activity Tax (CAT), municipal income taxes, sales/use tax filings, and withholding and informational filings.

Calculating and reporting tax provisions is often one of the most complex aspects of U.S. tax compliance. Integrating U.S. tax provision outputs into global financial reports require close coordination between accounting, tax, and finance teams. For inbound investors, managing tax compliance and provision processes will require complex planning and disciplined processes; however, if done well, these functions provide transparency, reduce risk, and support better decision-making across the organization.

Conclusion

Doing business in the U.S. as a foreign investor is undeniably complex, but it doesn’t have to be prohibitive. With early planning, robust documentation, and sound strategy, investors can navigate the U.S. tax system confidently and capitalize on the world’s largest economy.

1 “Earnings and Profits” is a tax concept that measures a taxpayer’s ability to pay dividends and often mirrors GAAP retained earnings.