What Is Branch Profits Tax?
Branch Profits Tax is a corporate tax on profits deemed repatriated by a foreign company's local branch, with base and rate set by national law.
Also known as: BPT, Branch Remittance Tax.
How Branch Profits Tax works
Branch Profits Tax mirrors the dividend withholding tax which would apply if the foreign company had operated through a local subsidiary, so that profits of a branch or permanent establishment bear a second layer of tax when treated as withdrawn from the host country rather than reinvested there. In the United States, section 884 of the Internal Revenue Code and the Treasury regulations impose a tax equal to 30% of a foreign corporation's dividend equivalent amount, which starts from effectively connected earnings and profits and is adjusted for changes in US net equity. An income tax treaty can reduce or eliminate the tax only for a foreign corporation which is a qualified resident of the treaty country and meets any limitation-on-benefits requirements, applying the treaty branch profits rate or, failing one, the treaty dividend rate. Other countries apply different bases and rates or no equivalent charge, subject to domestic law and treaties.
Branch Profits Tax vs Dividend Withholding Tax
Unlike dividend withholding tax, which is withheld when a subsidiary actually pays a dividend to a foreign shareholder, Branch Profits Tax applies to a branch whose profits are treated as remitted without any formal distribution.
Example
Illustrative example: A company incorporated in Country A runs a US sales branch earning effectively connected income. After US corporate income tax, the company reinvests part of the earnings in the US operations and sends the rest to headquarters. The reinvested part generally reduces the dividend equivalent amount, while the remitted part bears branch profits tax at the statutory 30% rate unless a treaty rate applies to a qualified resident.
Common misconception
Myth: Operating abroad through a branch rather than a subsidiary removes any second layer of tax on repatriated profits.
Reality: Countries with a branch profits tax, such as the United States under section 884, impose a charge designed to parallel dividend withholding tax on subsidiary distributions, subject to treaty relief.
Frequently asked questions
What is the branch profits tax rate in the US?
The US Branch Profits Tax under section 884 of the Internal Revenue Code equals 30% of a foreign corporation's dividend equivalent amount, although an income tax treaty may reduce or eliminate the tax for a qualified resident of the treaty country.
Who pays branch profits tax?
Branch Profits Tax is generally paid by a foreign corporation operating through a branch or permanent establishment, rather than a local subsidiary, on profits treated as withdrawn from the host country.
Related terms
- Dividend Withholding Tax — Subsidiary-side charge which branch profits tax mirrors
- Foreign Branch — Structure on which the tax falls
- Permanent Establishment (PE) — Taxable presence generating branch profits
- Effective Connected Income (ECI) — US income base feeding the dividend equivalent amount
- Limitation on Benefits (LOB) — Treaty test conditioning reduced branch profits tax
Related guides
- Incorporation options for location-independent entrepreneurs — Branch versus subsidiary structuring choices
- Tax treaties and international taxation — Treaty relief framework for branch profits
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
