An Overview Of Foreign

Corporations
An Overview Of Foreign Corporations

Learning Objectives
● To get a basic understanding of foreign corporations under the US Corporate laws
● To learn about the authorities that have the jurisdiction over the Foriegn
Corporations
● To learn about statutory requirements of Foreign Corporations
● To learn about the penalties in case of failure of complying with the relevant statutes

Introduction
Foreign corporation is a term used in the United States to describe an
existing corporation (or other type of corporate entity, such as a limited liability company or
LLC) that conducts business in a state or jurisdiction other than where it was originally
incorporated. The term applies both to domestic corporations that are incorporated in
another state and to corporations that are incorporated in a nation other than the United
States which is also known as “Alien Corporations”. All states require that foreign
corporations register with the state before conducting business in the state.

For U.S. federal tax purposes, “foreign corporation” means a corporation that is not created
or organized in the United States. For tax purposes, the Internal Revenue Service (IRS)
treats all domestic companies in the same manner, without regard to where they were
originally formed or organized within the United States, but applies different rules to
companies that are formed or organized outside of the US.

Statutory Requirements For Foreign Corporations

Foreign corporations must get a “Certificate of Authority” to conduct business from the
Secretary of State. A registered office with a registered agent must be maintained by the
foreign corporation. All legal processes, demands, or notices required by law to be served
on the corporation may be served on the registered agent.

When the corporation conducts business in the state, certain conditions must be met.
Some operations do not fall under the concept of doing business and may be carried out
even if a certificate of authority has not been received. These include filing or defending a
lawsuit, holding meetings of directors or shareholders, maintaining bank accounts,
maintaining offices for the transfer of the company’s own securities, selling through
independent contractors, soliciting orders through agents or employees, creating or
acquiring security interests in real or personal property, securing or collecting debts,
transacting any business in interstate commerce, and “conducting an isolated transaction
that is completed within 30 days and that is not one in the course of repeated transactions
of a like nature”.

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An Overview Of Foreign Corporations

JURISDICTION OVER FOREIGN CORPORATIONS

The extent to which corporations operate within the state determines whether they are
subject to state court jurisdiction or not. State courts have jurisdiction over corporations
that are qualified to do business in the state and have a certificate of authorization or
licence, and the process may be served on the corporation's registered agent. Even if the
corporation does not conduct enough business in the state to be needed to get a certificate
or licence, long-arm statutes may allow it to be sued in state courts. These statutes allow
state courts to have personal jurisdiction over a corporation with enough ties to the state
.
The major constitutional limitation on long-arm statutes is the Due Process Clause. The
Supreme Court upheld the validity of long-arm statutes applied to corporations
in International Shoe Co. v. Washington.International Shoe Co. v. Washington, 326 U.S.
310 (1945). But the long-arm statute will only be constitutionally valid where there are
minimum contacts—that is, for a state to exercise personal jurisdiction over a foreign
corporation, the foreign corporation must have at least “minimum contacts” the state.

How Does A Corporation Operate In Multiple Jurisdictions

The ways through which a corporation can operate in multiple jurisdictions can be
illustrated as below -

Change Of Jurisdiction
Tax treaties, which permitted a firm to alter its domestic jurisdiction from a U.S. state to the
country of Bermuda, allowing it to avoid substantial amounts of tax payments, were a
problem for some larger companies in the 1990s. Some companies took advantage of this
option, while others did not because stockholders were concerned about its legality.

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An Overview Of Foreign Corporations

Taxing Authority
The method of taxation of foreign corporations under the corporate laws in the US is
different from domestic corporations. Foreign corporations generally are taxed only on the
business income, when the income is effectively connected with the conduct of a U.S. trade
or business.

In addition, foreign corporations are subject to withholding tax at 30% on dividends,

interest, royalties, and certain other income. Tax treaties may reduce or eliminate this tax.
This tax applies to a "dividend equivalent amount," which is the corporation's effectively
connected earnings and profits for the year, less investments the corporation makes in its
U.S. assets (money and adjusted basis of property connected with the conduct of a U.S.
trade or business).

The first federal income tax in was enacted in 1861, and expired in 1872

Penalties For Failure To Comply With A Statute

A corporation cannot sue in state court to assert its rights until it receives a certificate of
authority. It may, however, defend any litigation filed against it. The state attorney general
is in charge of collecting civil penalties, which vary by state. Other penalties in various states
include fines and penalties for unpaid taxes; fines and imprisonment for corporate agents,
directors, and officers; and fines and imprisonment for corporate agents, directors, and
officers.

Conclusion
A foreign corporation is an entity that is formed outside of the state in which it operates.
Subject to constitutional constraints, states can impose reasonable restrictions on foreign
firms. To fall under the jurisdiction of a state, a foreign corporation must do something that
is adequate to bring it to the level of transacting business within that state. In order for
long-arm statutes to apply, these transactions must meet the minimum contacts criterion.
A state can tax a foreign corporation if it does not obstruct interstate commerce.

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