A U.S. Subsidiary is a fully incorporated legal entity that is owned and controlled by the parent corporation. A subsidiary is considered “wholly owned” when the parent company owns all its common stock.
For tax purposes, a subsidiary and its parent remain separate legal entities. Accordingly, the parent corporation is not exposed to the risks incurred by the subsidiary.
A Foreign individual or entity, as a parent company, can choose to incorporate a subsidiary in the U.S., whether they are physically present or not. There are a number of different types of subsidiaries a foreigner can establish in the US, such as LLC (Limited Liability Company), C Corporations, Non-profit (also known as 501(c)(3)), or LLP (Limited Liability Partnerships).
However, the subsidiary of a foreign parent company may be subject to U.S. corporate income tax on all profits generated within the United States, currently at a standard rate of 21% (2025). Dividends paid by the wholly owned subsidiary are subject to a withholding tax of 30% (2025), unless otherwise reduced under the applicable treaty. The subsidiary withholds this withholding tax on foreign shareholders and remits it to the Internal Revenue Service (IRS). Because a 30 percent withholding tax already applies to dividends payable by a U.S. subsidiary to its foreign parent company. Thus, there is no requirement for any branch profits tax on subsidiaries.
Unlike a foreign branch, a U.S. subsidiary is treated as a separate legal entity for tax purposes, which means it must file its own corporate tax return and pay taxes on its earnings.