What Is a Foreign Corporation?
A Foreign Corporation is a company classification in tax law for a corporation organised outside the taxing country, with criteria set by national law.
Also known as: Non-Domestic Corporation, Foreign Company.
How Foreign Corporation works
A Foreign Corporation is generally any corporation which the taxing country does not treat as domestic, and under United States law the test is formal: a corporation created or organised under federal or state law is domestic, while every other corporation is foreign under 26 U.S.C. 7701. Foreign status usually limits taxation to locally sourced income or profits attributable to a permanent establishment, and a foreign corporation with United States effectively connected income reports on Form 1120-F. Other countries may also treat a company as resident where central management or effective management sits locally, so classification varies by jurisdiction.
Foreign Corporation vs Controlled Foreign Corporation
Unlike a Controlled Foreign Corporation, which is a foreign corporation owned above set thresholds by resident shareholders, a Foreign Corporation describes only the place of incorporation, regardless of who owns the shares.
Example
Illustrative example: A founder resident in Country A incorporates a company under the law of Country B and invoices clients worldwide. Country B treats the company as domestic, while Country A generally treats the company as a foreign corporation; Country A may nonetheless claim taxing rights if management decisions are taken in Country A or if controlled foreign company rules attribute profits to the founder.
Common misconception
Myth: A company incorporated abroad is taxed only where the company was registered.
Reality: A Foreign Corporation can still be taxed in another country through a permanent establishment, a management-based residence test or shareholder-level rules such as controlled foreign company regimes.
Frequently asked questions
What is considered a foreign corporation?
A Foreign Corporation, in United States tax law, is any corporation not created or organised in the United States or under federal or state law; other countries apply their own incorporation or management-based tests.
Does a foreign corporation pay US tax?
A Foreign Corporation generally pays United States tax on income effectively connected with a United States trade or business, reported on Form 1120-F, and may face withholding on certain United States-source passive income, subject to treaties.
Related terms
- Controlled Foreign Corporation — Ownership-based status often confused with foreign incorporation
- Corporate Residence — Determines where a company is taxed on worldwide profits
- Place of Effective Management (POEM) — Management test which can override incorporation
- Entity Classification — Decides whether a foreign entity is a corporation
- Permanent Establishment (PE) — Creates local taxing rights over foreign companies
Related guides
- Incorporation options for location-independent entrepreneurs — Choosing a jurisdiction of incorporation
- Estonian e-Residency for location-independent entrepreneurs — Foreign company formed remotely in Estonia
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
