1.5 WASHINGTON CORPORATION
Unlike a branch, a subsidiary is a legal entity separate from its foreign parent. Although the U.S. subsidiary will be subject to U.S. income taxes and annual corporate license fees, the foreign parent ordinarily will not be deemed to be doing business in Washington State, will not be liable for any of the obligations of the U.S. subsidiary, and will not be subject to the jurisdiction of the U.S. courts solely by reason of its ownership of the U.S. subsidiary.
1.5.1 Steps That Should be Taken to Limit Liability of Foreign Parent
The advantages of operating through a U.S. subsidiary can be lost if the separate corporate form of the parent and subsidiary is disregarded. In such case, the courts will “pierce the corporate veil” of the parent-subsidiary relationship and will treat the subsidiary as if it were a branch or division of the foreign corporation. Although it is not easy to “pierce the corporate veil” under Washington law, the following guidelines should be observed to help avoid any such claim against the foreign parent corporation:
1. The subsidiary should be capitalized at a level appropriate for the types of business in which it is to engage.
2. The parent company should refrain as much as possible from exercising control over day-to-day operations of the subsidiary.
3. The parent and subsidiary should maintain separate bank accounts and financial books and records, and the subsidiary should be treated as a separate legal entity from the parent for all purposes.
4. The parent and subsidiary should not commingle their money or other property, and the parent should not use the subsidiary to do business in a manner that is misleading or intentionally causes losses or damages to third parties.
5. The parent company should not indicate in its company literature that it has a branch office or that it is doing business in the United States by virtue of the location of its subsidiary there.
6. The parent and subsidiary should have different officers and directors if feasible, and separate meetings should be held for the Board of Directors of each corporation.
7. The name of the parent company should not appear on the office door, on the letterhead of the subsidiary, or on the business cards of the employees of the subsidiary.
1.5.2 Procedures to Establish a Washington Corporation
The procedures to establish a Washington corporation are discussed in greater detail in Chapter 2.
1.5.3 Tax Considerations Relating to U.S. Subsidiary
From a tax standpoint, a U.S. subsidiary of a foreign corporation is subject to U.S. taxes in the same manner as any other U.S. corporation (see Chapters 9 and 10 of this Guide). One disadvantage of using the corporate form (as opposed to a partnership or limited liability company described below) is that its income may be subject to double taxation, once at the corporate level and again at the shareholder level when the profits are distributed in the form of dividends. Dividends and interest payments made by the U.S. subsidiary to its foreign parent are generally subject to withholding tax, which may be reduced or eliminated under tax treaties. Depending on the nature of the U.S. subsidiary’s business activities, other tax issues may arise. For example, “transfer pricing” rules may affect the pricing of transactions between a U.S. subsidiary and its foreign parent. Also, if a foreign corporation owns more than one U.S. subsidiary, the losses of one may not be offset against the profits of another unless both subsidiaries are owned by a common U.S. holding company (two U.S. subsidiaries which are owned by a common foreign holding company cannot file a consolidated return).
1.5.1 Steps That Should be Taken to Limit Liability of Foreign Parent
The advantages of operating through a U.S. subsidiary can be lost if the separate corporate form of the parent and subsidiary is disregarded. In such case, the courts will “pierce the corporate veil” of the parent-subsidiary relationship and will treat the subsidiary as if it were a branch or division of the foreign corporation. Although it is not easy to “pierce the corporate veil” under Washington law, the following guidelines should be observed to help avoid any such claim against the foreign parent corporation:
1. The subsidiary should be capitalized at a level appropriate for the types of business in which it is to engage.
2. The parent company should refrain as much as possible from exercising control over day-to-day operations of the subsidiary.
3. The parent and subsidiary should maintain separate bank accounts and financial books and records, and the subsidiary should be treated as a separate legal entity from the parent for all purposes.
4. The parent and subsidiary should not commingle their money or other property, and the parent should not use the subsidiary to do business in a manner that is misleading or intentionally causes losses or damages to third parties.
5. The parent company should not indicate in its company literature that it has a branch office or that it is doing business in the United States by virtue of the location of its subsidiary there.
6. The parent and subsidiary should have different officers and directors if feasible, and separate meetings should be held for the Board of Directors of each corporation.
7. The name of the parent company should not appear on the office door, on the letterhead of the subsidiary, or on the business cards of the employees of the subsidiary.
1.5.2 Procedures to Establish a Washington Corporation
The procedures to establish a Washington corporation are discussed in greater detail in Chapter 2.
1.5.3 Tax Considerations Relating to U.S. Subsidiary
From a tax standpoint, a U.S. subsidiary of a foreign corporation is subject to U.S. taxes in the same manner as any other U.S. corporation (see Chapters 9 and 10 of this Guide). One disadvantage of using the corporate form (as opposed to a partnership or limited liability company described below) is that its income may be subject to double taxation, once at the corporate level and again at the shareholder level when the profits are distributed in the form of dividends. Dividends and interest payments made by the U.S. subsidiary to its foreign parent are generally subject to withholding tax, which may be reduced or eliminated under tax treaties. Depending on the nature of the U.S. subsidiary’s business activities, other tax issues may arise. For example, “transfer pricing” rules may affect the pricing of transactions between a U.S. subsidiary and its foreign parent. Also, if a foreign corporation owns more than one U.S. subsidiary, the losses of one may not be offset against the profits of another unless both subsidiaries are owned by a common U.S. holding company (two U.S. subsidiaries which are owned by a common foreign holding company cannot file a consolidated return).