Nonresident Aliens and Foreign Corporations Tx 8300

Learning Objectives 1.Identify __________ aliens, 2.Explain rules for taxing foreign persons, 3.Identify ___________ connected income, 4.Explain _____ of attraction rule, 5.Calculate tax ________ of foreign persons, and 6.Determine foreign person’s ________ tax rate from U.S. business profits. You should be able to:

U.S. Residents and NRAs Section 7701(b) does not apply: –Under ______ and ____ tax law –To U.S. ________ –When sourcing gain from selling ________ ___________ rules in U.S. treaties –Apply to ____ residents –_______ §7701(b)

Estate and Gift Taxes Subtitle ___ Estate and Gift Taxes Income Tax Outbound §_____ Income Tax Inbound §______ U.S. Tax System Foreign Tax System Sourcing Gains §_____ Income Tax Outbound Income Tax Inbound Dual Residency Tie-Breaker Rules (________) Multiple Residency Regimes

Resident Alien Defined ___ U.S. citizen U.S. resident –______ permanent resident –Substantial presence –First ____ election –Nonresident election –___ resident election

Lawful Permanent Resident Requirements –Granted privilege of permanently residing –Privilege not _______ or abandoned Residency starting date –First day in U.S. as ______ permanent resident –Assumes substantial presence test ___ met

Substantial Presence Test Requirements –U.S. presence in current year ≥ ___ days, –U.S. presence in 3 years ≥ ____ weighted days, and –__ exceptions apply Residency starting date –First day of ____ presence –Ignoring up to ___ days of closer connection to home country

Exception: Facts and Circumstances U.S. presence in current year < ___ days Foreign tax ____ Closer __________ to home country Not applying for _____ card

Example: Residency Test Sean O’Brien, an Irish citizen, does not have a green card, nor has he applied for one. He visited the U.S. for ___ days in 2003, ___ days in 2004, and ___ days in Dublin is his regular and principal place of business and where his family resides. Sean rents an apartment in Atlanta and banks with Wacovia. However, his primary bank is First Dublin, and his primary social connections are in Dublin. Is Sean a U.S. resident?

Exception: Exempt Person Foreign _________ personnel Students Teachers and ________ Professional athletes competing in charitable ______ event

Exception: Medical Emergency Became sick while visiting ____ Unable to leave as _________ Inapplicable to those ______ to U.S. for medical treatment

Exception: Transient Regular commuters from ______ and ______ Brief U.S. layovers when traveling between ________ locations

Exception: Transient _______ crew member _______ vessel engaged in international commerce If individual –Temporarily present in ____ and –Not engaged in ____ trade or business

First Year Election Requirements –Not a U.S. resident in _____ year –Meets substantial presence test ____ year –Not a U.S. resident ____ year (without election) –U.S. presence this year ≥ ___ consecutive days –U.S. presence this year ≥ ___% of testing period Residency starting date is 1st day of earliest _______ period meeting ___% requirement

Nonresident Election Requirements –NRA on ____ day –Married to U.S. individual on ____ day –Each spouse ______ Election –Continues indefinitely until revocation, legal separation, or _____ terminates –___ available again Converts ___ to U.S. _______

New Resident Election Requirements –___ on first day, but __ on last day –Married to ____ individual on last day –___ spouse elects Election –Continues indefinitely until revocation, legal separation, or _____ terminates –___ available again Converts ____ ____ alien to U.S. _______

U.S. Taxation of Foreign Persons Effectively connected income (ECI) –_______ tax rates applied to –________ income U.S. source income not EC (____) –____ rate applied to –_____ income

Taxing Ordinary Income Regular Rates U.S. Source Foreign Source ECINot ECI Regular Rates FDAP at 30% Exempt

FDAP Income U.S. source income that is not ___ Includes mostly __________ income Prizes, ______, and gambling income Alimony Gain from selling intangibles when payments are __________ ___% of Social Security benefits

Example: Social Security Benefits The U.S.-France totalization agreement entitles a French national and resident to a $1,000 Social Security benefit. How much should the U.S. Social Security Administration withhold?

Example: Social Security Benefits The U.S.-Germany totalization agreement entitles a German national and resident to a $1,000 Social Security benefit. The U.S.-Germany income tax treaty allows only the country of residence to tax Social Security benefits. How much should the U.S. Social Security Administration withhold?

Withholding on Foreign Persons Dependent personal services Estimated __________ based on likely tax liability Independent personal services Most FDAP income Estimated __________ based on 30% or lower treaty rate _____ tax based on 30% or lower treaty rate

Failure to Withhold Withholding agent is ____ ____ person with custody and control Failure to withhold causes ____ _____ to be liable for tax, interest, and penalties

Taxing U.S. Source Capital Gain Regular Rates NRA < 183 days Foreign Corp ECINot ECI NRA ≥ 183 days Regular Rates Regular Rates 30%

ECI: Salient Issues Is the activity a U.S. trade or business? Is income effectively connected with the U.S. trade or business? –When is ____ source income ECI? –When is _______ source income ECI?

Trade or Business Defined Considerable, _________, and regular activity conducted for ______ If a partnership engages in a U.S. trade or business, _______ partners are engaged also. ____ rendering personal services in the U.S. usually are engaged in a U.S. trade or business.

De Minimis Rule NRA rendering services in U.S. is not engaged in a U.S. trade or business if –Compensation ≤ ______, –U.S. presence ≤ ___ days, and –Services rendered for either Foreign person ___ _______ in U.S. trade or business or Foreign place of business ____ person maintains

Trade or Business Examples _______ sales to U.S. customers via _________ agent Selling items in U.S. via employees with power to ________ Certain single events

Non-Trade or Business Examples Mere _____________ Mere ___________ of passive income Mere ________ of stock or real estate Mere _____________ of business opportunities Mere _______ of goods in U.S. for export ______ sales without using employees, agents, or office in U.S.

“Effectively Connected” in General Trade or business is a ___________ to ECI Several exceptions apply ____ of ___________ rule Criteria for determining ECI depend on the income’s ______

ECI without U.S. Trade or Business Elect to treat real property income as ___ _________ income of possession banks from ____ obligations Gain from selling ____ real property interest Deferred receipts from _____-year business ____ from selling property within __ years U.S. business use

Residual Force of Attraction When a foreign person engages in a ____ trade or business All ____ ______ income other than –FDAP income, –Income specifically excluded, and –Capital gain Is treated as ___

Example: Force of Attraction Manufacturer Sales Branch U.S. Title Passage Result: Solution: Direct Sale

Is It ECI? If U.S. source income –_____ use test –Business __________ test If foreign source income, it must be attributable to a U.S. _____ to be ECI.

U.S. Source Income as ECI Asset use test –Was the income derived from assets ________ used or held for ______ use in a U.S. trade or business? –Is interest income from the assets below ECI? Trade receivables Temporary investment of idle working capital in U.S. T-bills Long-term investment of excess capital in U.S. T-bills for future product lines

U.S. Source Income as ECI Business activities test –Were activities of U.S. trade or business a ________ factor in realizing the income? –Are the income items below ECI? Fees a service business earns Interest income of a financing business Premiums of an insurance company Royalties of a business that primarily licenses intangibles Dividends of a dealer in stocks and securities

Foreign Source Income as ECI Pre-1966 Historical Perspective FC Sales Office Customer Sells inventory

Foreign Source Income as ECI FSI usually is not ___ ECI only if –Foreign person has ____ office that is –_________ factor in earning FSI and regularly used –To earn Royalties from using intangibles ______ Dividends or _______ in financing or securities business Inventory profit when _____ passes abroad

Foreign Source Income as ECI FC U.S. Office Licensee Licenses Technology for Use Abroad

Foreign Source Income as ECI FC Sales Office Customer Sells inventory In effect, inventory profit of a U.S. office is: (i)USSI that is ___ or (ii)FSI that is not ___.

Exclusions Attracting Capital –Interest on _________ –Dividends from some ____ –__________ interest Facilitating Business –International ______________ income –_________ exchange or training-related income –Certain _________ income

Exclusions Attracting Capital Interest on ________ with banks, S&Ls, and insurance companies if not ___ Dividends from ___ meeting ___% active foreign business test times DC’s percentage of gross income that is ___

Exclusions Attracting Capital Most nations exempt interest on debt in the _________ market U.S. persons had difficulty raising capital in _________ market Congress enacted §______ in 1984 Excludes interest income foreign persons owning < ___% of U.S. debtor receives from debtor’s __________

Example: Bank Deposit Awni is an Egyptian national and resident. He buys a C.D. from a U.S. bank and earns $37,000 interest. Does the U.S. tax this interest? Why or why not?

Example: Dividend from DC Sophia, a Greek citizen and resident, receives $70,000 dividends from a U.S. company. How much of her dividends should she report as gross income?

Exclusions Facilitating Business International transportation income if person’s home country ___________ Income NRAs receive from foreign employers while temporarily in U.S. for _______ or cultural exchange _______ income from blackjack, baccarat, craps, roulette, big-6 wheel, and certain pari- mutuel bets

Deductions Allowed Expenses related to ECI –State and local income tax paid on ___ –Expenses of employment _____ to ____ –Unreimbursed _______ expenses Three personal expenses –Personal _______ loss for property in ____ –_________ contribution –___ personal exemption

No Deductions Allowed Other personal expenses –____ mortgage interest –Property tax on ________ –______ expenses –_______ deduction Expenses related to ____ income

Tax Rates for NRAs Single Single schedule Head of household Married _____ schedule Married filing _______ schedule Married to U.S. person and making ___ resident or ___________ election Married filing joint schedule _________ spouse if home country is Canada, Japan, Korea, or Mexico Married filing _____ schedule

Credits Foreign persons are eligible for most credits under U.S. law FTC can only offset U.S. tax imposed on ___

Tax Computation for NRA _____ income U.S. capital gains (not ____) - U.S. capital losses (___ carryovers) Gross income (other than ___) x ___% (or lower treaty rate) Effectively connected income - Deductions for AGI related to ___ Adjusted gross income - Employee expenses related to ___ - State and local ______ tax related to ECI - Personal casualty loss (if ____ property) - Charitable contribution - ___ personal exemption Taxable ___ x Graduated rates U.S. tax on ____ and capital gain + U.S. tax on ___ U.S. tax before credits - Credits, prepayments, withholdings U.S. tax liability

Marginal Tax Rates MTR = t us + t div (1 - t us ) MTR = Foreign Parent Profit$1,000 U.S. tax E&P$ 650 U.S. Sub

Marginal Tax Rates Foreign Parent Profit$1,000 U.S. tax E&P$ 650 U.S. Sub Now assume the same situation except the dividend occurs 5 years later and the appropriate discount rate is 9%.

Example: Marginal Tax Rate An Italian company owns all the stock of Domco. Domco earns $________ and currently remits all after-tax profits as a dividend. Assume a 35% U.S. effective tax rate. The U.S.- Italy income tax treaty specifies a dividend withholding rate of __%. Italy does not tax the dividend. What is the marginal tax rate on the U.S. profit? MTR = t us + t div (1 - t us ) MTR =

Example: Marginal Tax Rate An Italian company owns all the stock of Domco. Domco earns $________ and expects to remit all after-tax profits as a dividend in ten years. Assume a 35% U.S. effective tax rate and a 9% discount rate. The U.S.-Italy income tax treaty specifies a dividend withholding rate of __%. Italy does not tax the dividend. What is the marginal tax rate on the U.S. profit?

Example: Marginal Tax Rate An Italian company owns all the stock of Domco. Domco currently remits all its profits as deductible interest. Assume a 35% U.S. effective tax rate. The U.S.-Italy income tax treaty specifies an interest withholding rate of ___%. Italy may impose a residual tax. What is the marginal tax rate on the U.S. profit before considering the Italian income tax? MTR = t int MTR =

Anti-Siphoning Rules ____ capitalization rules require a reasonable debt-to-equity ratio Interest ________ rules disallow deductions Some countries keep interest and royalty withholding rates ____

Branch Profits Tax Pre-1987 Historical Perspective Branch FC Sub Profit$1,000 U.S. tax $ 650

BPT Achieves Parity FC’s effectively connected ____ -Increases in FC’s U.S. net _____ + Decreases in FC’s U.S. net ____ ________ equivalent amount x __% or lower treaty rate Branch profits tax

Example: Branch Profits Tax Forco earns $___ ECI. Assuming U.S. operations remit half of their after-tax earnings and a 35% U.S. tax rate, should Forco structure its U.S. operations as a branch or subsidiary? How much profit does Forco receive under each structure? U.S. SubsidiaryU.S. Branch ECI U.S. income tax E&P or after-tax profits Dividend or DEA U.S. withholding Remittance $400