Building a tax-efficient US growth model
As more Irish-founded businesses expand into the United States, the opportunities are substantial, but so are the tax complexities. Early tax planning can play a critical role in supporting growth, protecting value, and avoiding costly pitfalls.
By Cillein Barry, Tax Partner, KPMG
The extent and importance of US foreign direct investment in Ireland are well understood. The other side of this two-way relationship has perhaps attracted less attention, that was until the Taoiseach visited the White House last St Patrick’s Day armed with details of the significant Irish investment in the US. The American Chamber of Commerce Ireland reports that Ireland is the 5th largest source of FDI into the US, having invested $390 billion, with Irish companies directly employing more than 200,000 people across all 50 US States.
For many Irish-founded businesses, the US is a key step on their journey – driven by access to the large US market, talent, and capital. Yet alongside the opportunity comes the necessary evil of navigating the US tax system – to put it mildly, it’s complex, from navigating federal tax to a range of state and local taxes. Establishing an appropriate structure and operating model for your business, with input from a tax advisor, is imperative.
A primary consideration is group structure. In certain circumstances – particularly if seeking US investment – the question of inserting a US parent company above the existing Irish business may arise. Please tread carefully, as this can bring the entire group within the US tax net. The more common route is to establish a US company, which offers separate legal personality and limited liability, as a subsidiary of the Irish group. This is typically a US Corporation – and more specifically, for tax purposes, a “C-corporation” (a “C-corporation” is taxed in its own name). Less frequently, a limited liability company (LLC) is used. Historically, incorporation in Delaware has been the default, although recent high-profile cases (such as Tesla’s decision to leave) have seen states such as Texas become popular too.
Beyond legal structure, defining the US operating model from the beginning is critical, and this initial investment will reap its rewards if the business grows.
Founders must determine where key value-driving activities will sit—such as IP ownership, product development, sales, and location of senior leadership. These decisions drive the transfer pricing position, profit allocation, and overall tax profile. The US operations can take many forms depending on the nature of your business – it may be a sales and distribution entity, provide marketing support on behalf of the Irish business, manufacturing activities, R&D services, etc.
A common approach is for the Irish group to be the key entrepreneur and product/IP owner, with the US entity providing more routine services – be that local marketing support or as a limited-risk distributor in the US. In the early days, for a loss-making business, the most appropriate tax structure can be seen as counterintuitive, as it can result in a US cash tax liability. However, it protects the Irish business as the key profit-generator and can provide long-term benefits, where supportable.
Formalising a legal framework around the operating model in the form of inter-company agreements is also recommended.
Managing cash-flow and minimising withholding taxes are also important considerations, whether through dividends, royalties, interest payments or management fees. Dividends can be less efficient due to the imposition of withholding tax (usually 5% for Irish groups) in the US.
Ultimately, tax should not be viewed merely as a compliance requirement, but as a core enabler of growth. Adopting a well-designed, forward-looking US operating model not only mitigates risk but also allows the business to scale and enhances enterprise value.
