Tax residency – A corporation organized or established under the Delaware General Corporation Law is tax resident in Delaware and the United States.
Basis – Federal income tax is levied on US effectively connected income (ECI), while Delaware state income tax is levied on income arising in Delaware.
Taxation – Delaware corporations may elect to be taxed as an S-Corp or a C-Corp.
C-corporations are subject to federal income tax and state income tax.
S-corporations are closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
S-corporations do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders, who must then report the income or loss on their own individual income tax returns.
To be treated as an S-corp, shareholders must be natural persons and citizens/residents of the United States.
Tax rate – Resident corporations are subject to tax at a 21% rate.
Income derived from Delaware is subject to State Income Tax at 8.7%.
Capital gains – Gains or losses derived from assets held for more than 12 months are treated as long-term capital gains or losses, gains and losses derived from assets held for 12 months or less are treated as short-term capital gains or losses.
Net gains are the excess of net long-term capital gain over the net short-term capital loss. Capital losses may be used to offset capital gains. Excess of losses may be carried back three years and carried forward five years to offset capital gains.
Net gains are subject to tax at applicable federal income tax rates.
Dividends – Dividends received by a US corporation from another US corporation may be 70% deductible income. Dividend deduction may be increased up to 80% if the recipient holds between 20%-80% shares of the distributor.
Dividends payments between US corporations that are members of the same Group may be exempted. Certain Corporations may be subject to Accumulated earning tax on undistributed profits if it is not justified that the accumulation is based on business needs. Certain Holding Companies that receive substantial passive income may be subject to Personal Holding Company Tax on undistributed profits at a 15% rate.
Dividends received from foreign entities may be considered deductible income.
Interests – Interests are generally included in the taxable base.
Royalties – Royalties are generally included in the taxable base.
Foreign-source income – Corporations are taxed on their worldwide income, including foreign-branch income when earned and foreign-source dividends received. Relief from double taxation may be available by tax treaties, tax credit or claiming a deduction for foreign tax paid.
A Foreign subsidiary owned by more than 50% by United States tax residents, is considered a controlled foreign company (CFC). Certain undistributed income (Subpart F income) retained in a CFC will be subject to taxation.
Passive income retained in a foreign investment company (75% or more of the income is passive or at least 50% of the assets held produce passive income) may be also subject to taxation.
Foreign-source income may be exempt from Delaware state income tax.
Withholding taxes – Dividends, interests, and royalties paid to non-residents are usually subject to withholding tax at a 30% tax rate. Withholding tax may be reduced or exempted under a tax treaty.
Losses – Losses arising from taxable income may be carried forward for 20 years and carryback for 2 years.
Inventory - Inventory may be valued at the lower of acquisition/production costs or market value. To determine costs are allowed First in first out (FIFO) and Last in first out (LIFO) methods.
Anti-avoidance rules – Transactions between related parties must be carried out on arm’s length terms. If a company is not in compliance, the IRS may raise taxable income and tax payable.
Thin capitalization rules apply to disallow interest payments related to excess debt and make these payments as dividends.
A Foreign subsidiary owned by more than 50% by United States tax residents, is considered a controlled foreign company (CFC). Certain undistributed income (Subpart F income) retained in a CFC will be subject to taxation.
Passive income retained in a foreign investment company (75% or more of the income is passive or at least 50% of the assets held produce passive income) may be also subject to taxation.
Labor taxes – Employers may be subject to social security contributions tax of 6.20% on the first USD 127,200 of wages paid to employees and 1.45% of Medicare tax on any wages, regardless of amount.
In addition, employers must pay, under certain conditions, federal unemployment insurance tax (FUTA) of 6.2% on the first USD 7,000 of wages paid to employees meeting certain criteria.
Tax credits and incentives – A tax credit or deduction is usually available for foreign tax paid.
Business and employment credits are also available business to provide special incentives for the achievement of certain economic objectives.
Credits may be also available for qualified research expenditures (QREs) to develop new or improved products, manufacturing processes, or software in the United States.
Qualifying private activity bonds interests may be exempt from federal income tax.
Compliance – On average, a company in the United States may require 11 payments and 175 hours per year to prepare, file and pay corporate income tax, value-added tax, and labor taxes, including payroll taxes and social contributions.
Personal income tax – An individual is deemed to be tax resident in the United States if he or she is a citizen or permanent resident or he or she is physically present in the US during 31 days in a year and a total of 183 equivalent days during the current year and prior two years.
US citizens and permanent residents are tax residents, no matter the days spent in the country during a year.
Tax residents are subject to tax on their worldwide income.
The federal tax rate is progressive at rates ranging from 0% to 39.6%. Delaware personal income tax rates are progressive up to 6.6%.
Self-employed individuals may be subject to self-employment tax at 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Capital gains derived from assets held more than 12 months are subject to a maximum tax rate of 20%. Gains derived from assets held 12 months or less are subject to tax at standard rates.
Dividends, interests, royalties and rental income are subject to individual income tax at applicable rates.
In addition, individuals may be subject to net investment income tax (also known as Medicare contribution tax) on investment income received by individuals with modified adjusted gross income above certain amounts.
Other taxes – There are no value-added tax or sales tax in Delaware.
Real property ownership and transfer of assets are subject to local taxes in Delaware.
Estate inheritances are taxed in the U.S.
There are no wealth taxes in the United States.
