Doing business in the USA: Key tax insights for European investors entering the US market

Expanding into the United States is an ambition shared by many European companies, but the tax and legal landscape often bring unexpected challenges. To provide clarity and deliver tax insights for European investors entering the US market, we spoke with Petr Neškrábal, Head of Advisory at Accace and Managing Director & Partner at Accace Czech Republic. Drawing on his extensive experience supporting cross-border investments, Petr outlines six areas that every European investor should understand before stepping into the U.S. market.

Let’s start with the fundamentals. What should European investors know about U.S. tax transparency?

Tax transparency is one of the most important concepts to understand. In the U.S., entities such as LLCs can be treated as transparent, meaning the company itself does not pay federal or state corporate income tax. Instead, all profits (whether distributed or not) are allocated directly to the shareholders and taxed at their level.

For foreign investors, this means that if a Czech or other European shareholder owns a U.S. transparent entity that performs activity in the U.S., the shareholder must register for U.S. taxation and pay tax on their portion of the income.

Fortunately, most EU countries recognise the U.S. transparency concept. Tax paid in the U.S. can typically be credited against tax obligations in the investor’s home country.

It’s also worth remembering that LLCs may choose their tax classification. Unless an election is made, they are considered transparent by default.

You often highlight the importance of the Limitation of Benefits clause. Why is this so critical?

The Limitation of Benefits (LOB) clause is unique to U.S. tax treaties and has a direct impact on whether a foreign investor can enjoy reduced withholding tax rates and other treaty benefits.

To qualify for treaty benefits, an investor or their structure must meet at least one of several tests. The most common are:

Problems arise when a holding company receives mainly passive income (e.g., interest, licensing fees) and has shareholders from multiple jurisdictions. If it fails the LOB tests, U.S. withholding tax on dividends rises from a treaty-reduced 5% to the statutory 30%.

It’s interesting that several EU jurisdictions (Greece, Hungary, Poland and Romania) do not include an LOB clause in their U.S. treaties, which changes the evaluation significantly.

How do dual tax residence and tiebreaker rules affect U.S. investments?

A company may become a dual tax resident if it is incorporated in one country but effectively managed from another. How the tie is resolved depends heavily on the specific U.S. treaty in question.

Across the world, most treaties use the place of effective management to determine residence. U.S. treaties, however, fall into three different categories:

• Older treaties: Residence is determined by place of incorporation. So, a U.S. company remains U.S.-resident even if managed from Europe.
• More recent treaties: Residence is determined by mutual agreement between tax authorities. If they fail to agree, no treaty benefits apply.
• Model treaty developments: In the newest model, if a company is resident in both countries, it simply cannot use treaty benefits. This version is not yet widely implemented but shows the direction of U.S. treaty policy.

For European groups accustomed to managing subsidiaries centrally from their home office, this distinction is crucial. Under older treaties (e.g., Czech Republic, Poland, Romania), the effective management risk is essentially removed.

What should investors expect when receiving dividends from a U.S. entity?

Again, the first step is to check whether the entity is transparent. Transparent entities don’t distribute traditional dividends because profits are already allocated and taxed at shareholder level.

For non-transparent entities, the rules regarding dividend taxation are straightforward. In the absence of treaty benefits, dividends paid to foreign investors are subject to a 30% withholding tax. However, if treaty benefits apply, the withholding tax can be significantly reduced. Specifically, a corporate shareholder that owns at least 10% of the U.S. company may benefit from a reduced tax rate of 5%. In all other circumstances where treaty benefits are available, the applicable rate is 15%. For individuals, the treaty rate consistently provides a 15% withholding tax on dividends received.

 In Europe, dividend income is often either exempt or eligible for a foreign tax credit, reducing or eliminating double taxation.

How does the U.S. tax capital gains when a European investor sells a U.S. company?

If the company is non-transparent and the investor qualifies for treaty benefits, the U.S. generally cannot tax the capital gain from a share sale.

The key exception is the real estate entity rule. If at least 50% of the company’s assets consist of U.S. real estate, then the U.S. has the right to tax the gain.

If the entity is transparent, the investor is treated as selling underlying U.S. assets rather than shares and the U.S. will tax the income accordingly.

Home-country rules must also be checked. Many European jurisdictions exempt capital gains from share sales under their domestic legislation.

Transfer pricing remains a concern for many groups. What should they expect?

The U.S. applies transfer pricing principles consistent with the OECD Guidelines, so the conceptual approach is familiar to European companies. However, U.S. authorities pay close attention to cases where U.S. subsidiaries report relatively low margins compared to other group entities.

For any planned investment, investors should prepare their transfer pricing policy and benchmarking early, document everything thoroughly and be ready for scrutiny, especially in larger transactions.

Accace can support investors with benchmarking and documentation based on both European and U.S. databases to ensure compliance on both sides.

A final message for companies preparing to expand into the U.S.?

The U.S. market offers enormous potential, but it operates with its own tax logic. Understanding transparency, treaty limitations, management rules, dividend treatment, capital gains and transfer pricing from the start can prevent costly surprises. With the right structure and planning, European investors can enter the market efficiently and confidently.

Petr Neškrábal

Head of Advisory | Accace

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