A business income tax is imposed by both federal and state governments on the profits generated by businesses.
At the federal level, the United States imposes a corporate income tax rate of 21% on domestic corporations as of July 2025. Foreign corporations may also be subject to this same 21% tax. The corporate income tax for foreign corporations typically applies based on whether they earn Effectively Connected Income (ECI) from their business activities in the United States. If a foreign corporation is deemed to be engaged in a business or trade in the U.S., it may generate ECI and, as a result, could be liable for this tax.
To determine if a foreign corporation is engaged in trade or business within the United States, it is essential to examine the specific facts and circumstances related to the income generated from its U.S. activities. Generally, income is considered effectively connected to a U.S. trade or business if the corporation maintains a fixed base or permanent establishment in the U.S., such as an office or factory.
For instance, if a foreign corporation operates a permanent office, factory, or base of operations in the U.S. that generates income, this income would be deemed effectively connected to its U.S. trade or business.
All foreign corporations doing business in the United States should file a U.S. corporate income tax return Form 1120-F.
Example: A French corporation, ABC Corp., opens a retail store in New York City through its US branch, selling smartphones and laptops. The branch earns $2 million annually from product sales to U.S. customers. This income constitutes effectively connected income (ECI) because it’s generated through the corporation’s active U.S. trade or business operations. Hence, this net income will be subject to the 21% corporate income tax rate, resulting in $420,000 ($2,000,000.00 x 21%) in corporate taxes owed to the IRS.