United States

The basic federal corporate tax rate is 21%. US states may also impose taxes on corporate income, which may vary according to the corporation’s level of income, and these tax rates currently range from 0% to 11.5%. To the extent that states allow it, localities (such as New York City) within them may also tax corporate income.

The federal corporate tax rate is imposed on a US corporation’s income, whether sourced in the US or sourced abroad, as well as on the corporate income of foreign corporations engaged in a US trade or business. It should be noted that the US has a classical corporate tax system, which means that the corporate tax exists independently from any tax that is imposed on shareholders when corporate income is distributed to them. In the US, “qualified dividends” (most dividends) are taxed at capital gains rates when received by individuals (see Question 1.3, below) and no credit is allowed against the 21% tax that was imposed on the corporation.

It should be also noted that the Internal Revenue Code (IRC) allows for certain corporations to be taxed on a fiscally transparent (or “pass-through”) basis. Such corporations, known as “S” Corporations (based on the subchapter of the IRC that regulates them), are not taxed directly on their income and instead, their shareholders pay taxes on their share of the corporation’s income at the tax rates applicable to individuals. The IRC imposes a myriad of requirements for corporations to be eligible to be taxed on a pass-through basis (e.g., having less than 100 shareholders, having only US citizen/resident owners, and so on).

While the US does not officially have a global minimum tax, to some extent its taxation of designated Controlled Foreign Corporations (CFCs) amounts to the imposition of a minimum rate of tax on the worldwide income of US persons (as defined in IRC, section 7701(a)(30)). Section 957(a) of the IRC defines CFCs as foreign corporations in which more than 50% of the value of the stock of the corporation or 50% of the combined voting power of all classes of stock entitled to vote is held by US Shareholders. In turn, section 951(b) of the IRC defines US Shareholders, with respect to a particular foreign corporation, as US persons owning more than 10% of the value or the total combined voting power of all classes of stock entitled to vote.

Thus far, the US has resisted joining the Organization for Economic Co-operation and Development’s (OECD) Pillar Two framework imposing a 15% Global Minimum Tax. Instead, it has negotiated with the OECD for a side-by-side system in which countries participating in the Pillar Two framework would treat the CFC regime as an acceptable alternative and abstain from applying the Income Inclusion Rule and the Undertaxed Profits Rule (UTPR) on US-parented multinationals.

The US alternative to the Global Minimum Tax imposes tax on US shareholders’ pro rata share of the CFC’s income. A CFC’s income is taxed under two different regimes, each applicable to a different type of income: Subpart F and Global Intangible Low-Taxed Income (GILTI). For US shareholders that are US individuals, Subpart F income and GILTI income are taxed according to the ordinary tax rates applicable to individuals (see Question 1.1, above). For US Shareholder corporations, Subpart F income is taxed at a rate of 21% (just as with other US corporate income) while GILTI income is taxed at 12.6%.

Subpart F income is defined in the IRC to include certain income earned by CFCs in transactions with related parties as well as certain types of passive income. Meanwhile, for the most part, GILTI will capture the remaining income earned by the CFC. Corporate US Shareholders and individuals making an election to be taxed on their Subpart F income as if they were corporations may obtain a credit for foreign taxes deemed paid on Subpart F income and 90% of foreign taxes deemed paid on GILTI income. Amounts taxed as Subpart F income or GILTI income are not taxed again upon distribution.

Individuals are taxed on their income based on brackets provided in section 1(j) of the IRC, as adjusted by inflation each year. The seven brackets currently in effect are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, and each establishes the applicable rate of tax for a given range of income. Different income thresholds apply for each bracket depending on whether one is filing as a single filer, a married couple filing jointly, married but filing separately, or filing as a head of household. In determining their taxable income, taxpayers may apply various deductions provided for in the IRC or alternatively, a standard deduction which is adjusted for inflation each year.

Long-term capital gain income is taxed at preferential rates. A capital asset is generally considered to be long-term if it is held for more than a year. Depending on an individual taxpayer’s total income, long-term capital gain income will be taxed at preferential rates of 0%, 15%, and 20%. A corporation’s capital gain income is taxed at the same 21% rate to which the rest of its income is subject.

In the United States, US persons are taxed on both their US-source income and their foreign-source income. It should be noted that “US person” denotes not just US residents and entities organized in the US, but also US citizens residing elsewhere. Meanwhile, non-US persons are generally taxed only on their US-source income (with certain limited exceptions for foreign-source income effectively connected with a US trade or business).

Foreign-source income earned directly by US persons is generally taxed in the same manner as the income would have been taxed if it had been US-source income. Yet, the IRC will sometimes impute income earned by foreign entities to US persons, and in such cases US persons may sometimes be eligible for preferential rates on such imputed income (as discussed in Question 1.2, above).

Sales and use taxes

Most US states impose a sales tax on retail sale transactions and some localities within each state impose an additional tax on such transactions. The sales tax functions as an indirect tax because it is imposed on the seller of retail goods instead of the consumer, though the consumer bears the cost of the tax.

The sales tax amounts to a percentage of the price of the good sold in the transaction, which can vary between 0% and more than 13%. For sales within states, in most states the applicable sales tax rate (combined state + locality) will be based on the location of the consumer, though some US states may impose the tax based on the location of the seller. For sellers delivering a product from one state to a consumer located in a different state, the state in which the consumer is located is almost always the one imposing the sales tax, provided that the seller has the requisite level of economic nexus with the consumer’s state (each state establishes its own threshold).

Use taxes, even though usually paid by the consumer of the retail good, are often also categorized as indirect taxes. These taxes are imposed upon the use of a retail good within a state, though states usually allow for a credit against the sales tax paid when the good was purchased.

Import duties

The federal government also imposes import duties on certain goods imported into the US. The importer is the responsible party for this tax, and the import duty functions as an indirect tax to the extent that the consumer bears the cost of importing the good into the US.

The duty may be imposed as a percentage of the value of the imported product (ad valorem), or it can be a specific amount based on the quantity of the good imported (e.g., five cents/kilogram). US Customs and Border Protection will assess the amount of the duty based on a published Harmonized Tariff Schedule, though imports from certain countries may be subject to an elevated import duty.

FDAP withholding

US-sourced fixed, determinable, annual, or periodical income (FDAP) earned by non-US persons (individuals and corporations) is subject to a 30% withholding tax, unless a treaty rate applies that reduces or eliminates withholding. Below is a list of types of income that are categorized as FDAP income, as well as when the income earned is treated as US source:

• Interest income. US source when the obligation is owed by corporate and non-corporate US residents.
  • Exception: Deposits with a foreign branch of a domestic corporation or partnership if such branch is engaged in the business of commercial banking.
• Dividends. US source if received from a domestic corporation and certain foreign corporations when more than 25% of the foreign corporation’s gross income during the prior three years was effectively connected with a US trade or business.
• Labor. US source if performed in the United States.
• Rents and royalites. US source if obtained from property located in the US or derived from the privilege of using patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar property in the United States.
• Sale of personal property. Sales of property are US source if sold by US residents and non-US source if sold by non-US residents.
  • Exception: Inventory property — US source if inventory property is purchased outside the United States and sold in the United States.
  • Exception: Intangibles are only sourced based on the seller’s residence if the payments are not contingent on the productivity, use, or disposition of such intangibles.

Despite being US source, there is no withholding obligation on portfolio interest. Portfolio interest is understood as interest paid on a debt obligation that is in registered form. An obligation is in registered form when the issuer of the debt keeps a record of the owner of the debt instrument (as opposed to, for instance, a bearer bond). Certain exclusions from the exemption from withholding apply if the owner of the debt instrument has a 10% or greater interest in the issuer of the debt or if the interest payment is contingent on the profits, sales, or the fair market value of the debtor.

FIRPTA withholding

Under the Foreign Investment in Real Property Tax Act (FIRPTA), when a foreign person disposes of a US real property interest, the transferee (buyer) is required to deduct and withhold 15% of the amount realized by the foreign seller.

US real property interests consist of any interest in real property as well as interests in domestic corporations if the taxpayer fails to certify that the corporation was not a US real property holding corporation at any point during the prior five years. A corporation is a US real property holding corporation if more than 50% of the fair market value of its assets consist of real property and certain assets used in a trade or business.

The amount realized is the consideration paid in exchange for the real property interest (cash, the fair market value of other property transferred, and liabilities to which the property is subject immediately before and immediately after the transfer).

A reduced withholding rate of 10% applies if the property is acquired by the transferee for use as a personal residence and if the amount realized is less than USD 1,000,000.

In other circumstances, no withholding is required. In cases where no withholding is required, or if reduced withholding is sought, the taxpayer must request a withholding certificate from the Internal Revenue Service (IRS). The funds potentially subject to withholding are usually placed in an escrow account pending the IRS’s decision on the withholding certificate. Below is a list of circumstances in which withholding is generally not required:

• The amount realized is less than USD 300,000.
• Stock of a domestic corporation that has at least one class of stock that is regularly traded in a public securities market.
• When an interest in a domestic corporation is disposed of and the transferee furnishes a certification that the domestic corporation is not a US real property holding corporation.
• The seller gives the transferee a certification, under penalty of perjury, asserting that it is not a foreign person.
• The transferee receives notice from the IRS that a withholding certificate was already issued.
• The transferor gives the transferee notice that withholding does not apply because of a nonrecognition provision in the IRC.
• The selling price is equal to or less than the adjusted basis of the US real property interest.

Finally, foreign corporations that distribute US real property interests must withhold 21% of the gain recognized on the distribution to their shareholders that are foreign persons.

FATCA withholding

Under the Foreign Account Tax Compliance Act (FATCA), there is a 30% withholding tax on withholdable payments made to foreign financial institutions that do not sign an information reporting agreement with the IRS. Such an agreement with the IRS generally entails a commitment to identify US account holders and to report certain information annually to the IRS regarding such accounts. The responsibility for withholding falls on the applicable withholding agent.

Payments to non-financial foreign entities may also be subject to a 30% withholding tax under FATCA. This withholding applies if such entities fail to provide the withholding agent with a certification that they do not have any substantial US owners or if they do, fail to provide the name, address, and TIN of such US owners. Payments to corporations whose stock is publicly traded are not subject to this withholding requirement.

Withholding on foreign partners’ effectively connected income

The income of a foreign partner that is effectively connected with a US trade or business is withheld at the highest applicable tax rate (currently 21% for C corporations and 37% for all other entities and individuals). Upon the disposition by a foreign person of an interest in a partnership engaged in a US trade or business, the buyer must withhold 10% of the purchase price.

Federal income tax withholding on wages

Employers in the United States are required to withhold federal income tax on the wages paid to their employees in accordance with tax withholding tables that are provided by the IRS. The withheld amounts constitute a prepayment of the employee’s estimated tax liability. In January following the year of the withholding, the employee will receive a W-2 Form from his or her employer indicating the amount withheld throughout the preceding year. This way, the employee can determine if there is any outstanding tax liability or entitlement to a refund when filing Form 1040 (the annual income tax return). Also, employers must withhold additional amounts on the wages paid to their employees under the Federal Insurance Contributions Act (FICA) to pay the Social Security tax and the Medicare tax.

The closest mechanism to a General Anti-Avoidance Rule in the US is the Economic Substance Doctrine. Under this doctrine, codified in section 7701(o) of the IRC, a transaction will lack economic substance if:

• the transaction does not meaningfully change the taxpayer’s position; or
• the taxpayer had no substantial motive for the transaction other than expected federal tax benefits.

According to section 7701(o)(5)(B) of the IRC, the codified Economic Substance Doctrine will only apply to individuals for transactions undertaken in connection with a trade or business. In considering whether a transaction has economic substance, the profit potential of a transaction is a relevant factor.

While the Economic Substance Doctrine was codified in 2010, it already existed before that in court decisions. Thus, court decisions discussing the business purpose doctrine and the economic substance doctrine prior to 2010 are still considered relevant in interpreting the scope of the Economic Substance Doctrine.

While a recent court case has brought this into question, it has been generally recognized that the codification of the Economic Substance Doctrine was not intended to have any impact on choices made by taxpayers that have traditionally been respected by courts and administrative authorities even when lacking any business purpose or undertaken primarily to maximize tax benefits. Per a Technical Explanation of the Staff of the Congressional Joint Committee on Taxation, these choices include:

• the decision on whether to capitalize a business with debt or equity;
• choosing between a foreign and domestic corporation when making foreign investments;
• the decision to perform a corporate reorganization under the applicable provisions in the IRC; and
• the decision to utilize a related-party entity in a transaction, as long as it is done on an arm’s-length basis.

When a tax benefit is claimed and the underlying transaction is found to lack economic substance, section 6662(b)(6) of the IRC imposes a 20% accuracy-related penalty, in addition to the disallowance of the tax benefit. Moreover, if it turns out that the transaction lacking economic substance was not adequately disclosed on the taxpayer’s return, section 6662(i) of the IRC increases the accuracy-related penalty to 40%.

It is also worth mentioning that while not codified, the Step Transaction Doctrine could also qualify as a General Anti-Avoidance Rule. This doctrine, sometimes invoked by the IRS and judicially recognized, collapses the steps performed in a transaction to the extent that the decision to pursue the transaction in such steps was done primarily for the purpose of obtaining a tax benefit. Thus, the taxpayer’s tax liability for the transaction is assessed as if the transaction had been completed in one step. For instance, a transitory tax-free merger of two corporations would be ignored if its sole purpose was to minimize taxes on a subsequent sale or liquidation of the target.

The Taxpayer Advocate Service, as part of its annual report to Congress, provides a list of the most frequently litigated tax issues. The list is divided by type of court (Tax Court, US District Court, and US Courts of Appeal) and in turn, among taxpayers that file Form 1040 (mostly individuals) and non-Form 1040 taxpayers (corporations, among other entities). The data below comes from the Taxpayer Advocate Service’s FY 2025 Report:

Most frequently contested issues in Tax Court petitions for individual taxpayers:

• Determinations that income was unreported or underreported — 11,865 petitions.
• IRS automatic adjustments to tax liability or credit eligibility due to application of tax law — 3,641 petitions.
• Schedule C Income and Expenses (applicable for sole proprietorships) — 2,085 petitions.
• “Payments and Other Credits” — 1,622 petitions.
  • The Payments and Other Credits is a broad designation for taxes on qualified retirement plans, individual retirement accounts, Social Security and Medicare tax on tip income, as well as other credits in the IRC.
• Filing Status and Dependents — 1,066 petitions.
  • Covers eligibility to file as Single, Head of Household, Married Filing Jointly/Separately and whether individuals listed on returns as dependents qualify as such.

Most frequently contested issues in Tax Court Petitions for entities:

• Corporate or Partnership Trade or Business Expenses — 321 Petitions.
• Corporate or Partnership Gross Income — 246 Petitions.
• Challenges to the accuracy-related penalty (IRC, section 6662) — 136 Petitions.
• Schedule K-1 (form issued to members of a partnership) flow through items initially reported on partnership or S-Corporation tax return — 82 Petitions.

Most frequently addressed issues in Tax Court opinions for individuals:

• Collection Due Process Issues — 27 Opinions.
• Determinations that income was unreported or underreported — 25 Opinions.
• Challenges to the accuracy-related penalty (IRC, section 6662) — 24 Opinions.

Most frequently addressed issues in Tax Court opinions for entities:

• Challenges to the accuracy-related penalty — 18 Opinions.
• Partnership Income and Expenses (except for Cost of Goods Sold issues) — 13 Opinions.
• Charitable Contributions Including Conservation Easements (IRC, section 170) — 12 Opinions.

Most frequently addressed issues in US District Court Opinions for individuals:

• Civil actions to enforce federal tax liens or to subject property to payment of tax (IRC, section 6321 and 7403) — 29 Opinions.
• Summons Enforcement (IRC, section 7602(a), 7604(a), and 7609(a)) — 14 Opinions.
  • Motions to compel the taxpayer or third parties to provide testimony or requested information.
• Civil actions to claim refund of tax (IRC, section 7422) — 13 Opinions.

Most frequently addressed issues in US District Court Opinions for entities:

• Summons Enforcement (IRC, section 7602(a), 7604(a), and 7609(a)) — five Opinions.
• Trust Fund Recovery Penalty (IRC, section 6672) — five Opinions.
• Taxes not paid by individuals responsible for taxes owed by trust fund.
• Civil actions to enforce federal tax liens or to subject property to payment of tax (IRC, section 6321 and 7403) — four Opinions.

Most tax controversies begin with an examination. Common cases in which tax controversies do not arise from audits include when a taxpayer files for a refund and the IRS denies the claim or when the government files a lawsuit against a taxpayer to recover unpaid taxes or penalty fees.

An examination will usually begin when the IRS selects a taxpayer’s return for examination. Examinations may be conducted by mail through requests for information or in-person. If the IRS finds that tax is owed or otherwise finds a failure to comply with tax obligations, the taxpayer may indicate agreement or disagreement with the IRS’s conclusions at the end of the audit. In the case of disagreement, the taxpayer will generally receive a “30-day letter” from the IRS, which indicates how the taxpayer should modify tax returns or other documents to come into compliance. The taxpayer must, within 30 days, acquiesce or indicate continued disagreement with the examination’s conclusions.

If the taxpayer objects to the proposed modifications in the 30-day letter, the taxpayer must contest the examiner’s determination with the IRS’s Independent Office of Appeals. If the Independent Office of Appeals agrees with the IRS’s determinations, the IRS will send a 90-day letter to the taxpayer, also known as a Notice of Deficiency.

A taxpayer can challenge a Notice of Deficiency before the United States Tax Court. A key advantage of filing a case with the United States Tax Court, and the reason the vast majority of tax cases are litigated before it in the first instance, is that it is the only venue in which the taxpayer is not required to pay the tax before litigating.  After paying the tax, the taxpayer can also seek a refund with the Court of Federal Claims or the US District Court with jurisdiction over the matter. Some taxpayers may prefer litigating a case in a US District Court, as this is the only venue in which one can request a jury trial.

If the taxpayer is unsatisfied with the decision in any of the three venues previously mentioned, the taxpayer can appeal to the US Court of Appeals with jurisdiction over the matter. On rare occasions, the Supreme Court of the United States may review appeals from decisions of the US Court of Appeals.

The IRS provides certain alternative methods for resolving tax controversies, which the taxpayer can request. During an examination, a taxpayer can elect to participate in a voluntary mediation program called Fast Track Settlement (FTS). Under FTS, an independent mediator working with the IRS’s Independent Office of Appeals will facilitate settlement discussions. The mediator may propose non-binding settlement offers. The objective is to resolve any outstanding issues within 60 days for cases involving small businesses or self-employed taxpayers and 120 days for cases examined by the Large Business and International Division of the IRS.

Once an examination has concluded, there are further options to engage in mediation. One of these is known as Fast Track Mediation — Collection (FMTC), in which a mediator from the IRS’s Independent Office of Appeals seeks to resolve disputes over outstanding issues once the IRS’s collection process has begun. Both the IRS and the taxpayer must agree to participate in FMTC.  A final mediation option, titled Post-Appeals Mediation (PAM), is available following the issuance of a 30-day letter after settlement discussions in the IRS’s Independent Office of Appeals have been unsuccessful.