U.S. Taxation for Non-Resident Aliens

1
U.S. Taxation For Non-Resident Aliens
PRESENTED BY
Vivek Shah US Tax Expert Managing Partner
_at_Smart Accountants
Mansi Shah US Expat Tax Expert Sr. Tax Manager
_at_Smart Accountants
2
Overview

• Forms in Detail Corporation
• U.S. Tax Treaties
• U.S. Tax - Foreign Students Gift tax and Estate
  tax Buying Property in USA

Definition The Source Of Income Forms in Detail
Individual Tax treatment for N.R. Alien Forms
in Detail Partnership
3
An alien is any individual who is not a U.S.
citizen or U.S. national. A nonresident alien is
an alien who has not passed the Green Card Test
or Substantial Presence Test.
Definition

• Green Card Test
• The test for determining a persons lawful
  permanent residency in the United States at any
  time during the calendar year is known as the
  Green Card Test.
• Substantial Presence Test
• To meet this test, a person must be physically
  present in the United States on at least
• 31 days during the current year, and
• 183 days during the 3-year period that includes
  the current year and the 2 years immediately
  before that, considering
• All the days a person was present in the current
  year, and
• One-Third (1/3) of the days a person was present
  in the first year before the current year, and
• One Sixth (1/6) of the days a person in the
  second year before the current year.

4
QUESTION

• 1. Mr. X travelled to USA on H-1 B visa and spent
  154 days during 2021 with no prior years travel
  history. He will be considered as
• US Tax resident reporting Global Income
• US Non resident reporting only US source income
• US resident reporting only US source income
• US non resident reporting Global Income

5
The Source Of Income
There are two types of Sources of Income
6
Summary Of Source Rules for Income of
Non-Resident Aliens
Continue
Item Of Income Factor Determining Source
Salaries, wages, other compensation Where services performed
Business income Personal Services Where services performed
Business income Sale of inventory - purchased Where sold
Business income Sale of inventory - Produced Where produced
Interest Residence of payer
Dividends Whether a U.S. or foreign corporation
Rents Location of property
7
Continue
Item Of Income Factor Determining Source
Royalties Natural resources Location of property
Royalties Patents, copyrights, etc Where property is used
Sale of real property Location of property
Sale of personal property Seller's tax home
Pensions Where services were performed that earned the pension
Scholarships Fellowships Generally, the residence of the payer
Sale of natural resources Allocation based on fair market value of product at export terminal.
8
QUESTION
2. Foreign resident/US Non resident alien
performing personal services from foreign country
to US employer(Located in US). This will be
considered as a. U.S Source of Income
b. Foreign source of Income c. Both
d. None of the above
9
U.S. Source Of Income
There are different types of Forms for Non
Resident Individuals and Entities which are as
follows
Taxability Which form is Required
For Individual/ Estate Trust 1040-NR, Form 8804 8805
For Partnership Form 8865/Form 1065
For Corporation Form 1120 F
10
INDIVIDUAL
Now, here we explain all above forms in detail
FORM- 1040 NR (For Individual)

• A Non-resident Alien who is engaged in a trade or
  business in the United States or represented a
  deceased person or represented an estate or trust
  had to file Form 1040-NR.

There are different Due date for filing 1040 NR
Type of Persons Due Date Due date for 2 021
A Person who was an employee and received wages. 15th April 20XX 18th April 2022
A Person who was an employee and did not received wages. 15th June 20XX 15th June 2022
11
Continue
Schedule NEC( Form 1040- NR) - Tax on Income Not
Effectively Connected With a U.S. Trade or
Business

• Include income only to the extent it is a U.S.
  source and not effectively connected with the
  conduct of a trade or business in the United
  States.
• Tax must be withheld at the source of income not
  effectively connected with a U.S. trade or
  business that is paid to non-resident aliens. The
  withholding is generally at a 30 rate.
• The following list gives only a general idea of
  the types of income to include on Schedule NEC
• Income that is fixed or periodic, such as
  interest, dividends, rents, salaries, wages,
  premiums, annuities, other compensation, or
  certain alimony received. Other items of income,
  such as royalties, may also be subject to the 30
  tax.
• Gains, other than capital gains, from the sale or
  exchange of patents, copyrights, and other
  intangible property
• Original issue discount (OID)
• Capital gains in excess of capital losses from
  U.S. sources during 2021. Include these gains
  only if you were in the United States at least
  183 days during 2021.
• Prizes, awards, and certain gambling winnings,
  Proceeds from lotteries, raffles, etc., are
  gambling winnings. A person must report the full
  amount of his winnings unless he is a resident
  of Canada.

12
FORM- 8804 8805 (For Individual)
Continue

• Purpose of Form
• Use Forms 8804, 8805, and 8813 to pay and report
  section 1446 withholding tax based on effectively
  connected taxable income (ECTI) allocable to
  foreign partners (as defined in section 1446(e))
• Use Form 8805 to show the amount of ECTI and the
  total tax credit allocable to the foreign partner
  for the partnership's tax year.
• Foreign partners must attach Form 8805 to their
  U.S. income tax returns to claim a withholding
  credit for their shares of the section 1446 tax
  withheld by the partnership

• Section 1446
• A partnership (foreign or domestic) that has
  income effectively connected with a U.S. trade or
  business (or income treated as effectively
  connected) must pay a withholding tax on the
  effectively connected taxable income that is
  allocable to its foreign partners.
• In most cases, a partnership determines if a
  partner is a foreign partner and the partner's
  tax classification based on the withholding
  certificate provided by the partner.
• Currently, the withholding tax rate for
  effectively connected income allocable to
  non-corporate foreign partners is 37, and 21
  for corporate foreign partners.
• Any portion of such income is allocable under
  section 704 to a foreign partner

13
Tax Treatment Non-Resident Alien

• Meaning Non-resident aliens are subject to U.S.
  income tax only on their U.S. source income. They
  do not have to pay tax on foreignearned income.
• Non- residents are subject to two different tax
  rates
• Effectively Connected Income (ECI)
• Fixed or Determinable, annual or periodic (FDAP)
  Income

14
PARTNERSHIP
FORM- 8865 Return of U.S Persons With Respect
to Certain Foreign Partnership

• Meaning
• U.S. person who controlled the foreign
  partnership at any time during the partnership's
  tax year.
• There are four major categories of tax filers to
  complete the form and the requirements are
  different for each group.

15
FORM- 1065 U.S Return of Partnership Income
Continue

• Income from U.S. Sources may require a foreign
  partnership to file a Form 1065 in a tax year
  where
• The partnership has gross income derived from
  sources within the United States,
• OR
• Gross income connected with a trade or business
  conducted in the U.S. Partnerships that are
  organized outside of the U.S. but have passive
  U.S. investments and are, therefore, required to
  file a Form 1065 and issue K-1s to the U.S.
  partners.

16
CORPORATION
Form 1120 F ( U.S Income Tax Return of a
Foreign Corporation)

• Meaning - Foreign Companies Doing Business in
  the United States
• A foreign corporation may establish a branch or
  Subsidiary company within the US to conduct its
  business activities even though most foreign
  corporations choose to form subsidiary companies
  for tax and nontax reasons.
• Most countries have the ability to subject
  foreign corporations to domestic taxation if they
  form a branch, open an office, employ staff,
  maintain inventory or fixed assets or otherwise
  conduct business activities in the U.S. which
  enables the Federal and state taxing
  administration to assess the foreign corporation
  as though it had a deemed permanent
  establishment.
• Doing business in the USA by foreign companies
  so, they have to fill Form-1120F i.e. U.S Income
  tax Return of a Foreign Corporation.

17
Continue

• Who Must File?
• Who was engaged in a trade or business in the
  United States, whether or not it had U.S. source
  income from that trade or business, and whether
  or not income from such trade or business is
  exempt from U.S. tax under a tax treaty.

Place Of Office Or Business Due Date Due Date for 2021
Foreign Corporation with an Office or Place of Business in the United States 15th April 20XX 18th April 2022
Foreign Corporation with No Office or Place of Business in the United State 15th June 20XX 15th June 2022
18
(No Transcript)
19
QUESTION

• 3. What is Branch Profit Tax Rate ?
• 21
• 30
• 37
• 15

20
Withholding Of Foreign Person

• After the withholding occurs, foreign investors
  generally do not incur further U.S. tax
  obligations.
• Withholding is necessary because it is the only
  way to guarantee tax collection from foreign
  persons.
• A payee is subject to withholding only if it is a
  foreign person. A foreign person includes a
  nonresident alien individual, foreign
  corporation, foreign partnership, foreign trust,
  foreign estate, and any other person that is not
  a U.S. person. It also includes a foreign branch
  of a U.S. financial institution if the foreign
  branch is a QI.
• So, the gross income and withheld taxes must be
  reported on Form 1042-S (Foreign Persons U.S.
  Source Income Subject to Withholding) to the IRS.
• The payor must also submit Form 1042 (Annual
  Withholding Tax Return for U.S. Source Income of
  Foreign Persons) by March 15

21
United States Tax Treaties With Various Countries

• The United States has tax treaties with a number
  of foreign countries. Under these treaties,
  residents (not necessarily citizens) of foreign
  countries are taxed at a reduced rate or are
  exempt from U.S. taxes on certain items of income
  they receive from sources within the United
  States.
• So, we have to claim benefits of treaties we have
  to file Form 8233 (Exemption From Withholding on
  Compensation for Independent (and Certain
  Dependent) Personal Services of a Nonresident
  Alien Individual)

22

• The name of countries with which the United
  States has tax treaties are as follows

Armenia Cyprus India Malta Romania Trinidad
Australia Czech Republic Indonesia Mexico Russia Tunisia
Austria Denmark Israel Moldova Slovak Republic Turkey
Azerbaijan Egypt Italy Morocco Slovenia Turkmenistan
Bangladesh Estonia Jamaica Netherlands South Africa Ukraine
Barbados Finland Japan New Zealand Spain Union of Soviet Socialist Republics
Belarus France Kazakhstan Norway Sri Lanka United Kingdom
Belgium Georgia Korea Pakistan Sweden United States Model
Bulgaria Germany Kyrgyzstan Philippines Switzerland Uzbekistan
Canada Greece Latvia Poland Tajikistan Venezuela
China Iceland Lithuania Portugal Thailand
23
Treaty Position form for claiming Exemption for
Non- Resident Aliens
Types of FORM Meaning/ Who must file Due Date for 2021
Form W-8 BEN The W-8 BEN is an IRS mandated form to collect Non-resident Alien (NRA) taxpayer information for INDIVIDUAL. The form helps a person claim a reduction or an exemption from the U.S. tax withholding if a person reside in a country with which the United States has an income tax treaty and the income a person received is subject to that treaty.
Form W-8 BEN E Form W-8 BEN E is an IRS mandated form to collect the information for ENTITIES Foreign businesses is withheld at a 30 rate by the payer or withholding agent in the United States
24
QUESTION
4. Which Form is used to claim treaty-based
Exemption? a. Form 1042 b. Form 8233
c. Form W-8 BEN d. Form W-8 BEN E
25
U.S TAXATION ON FOREIGN STUDENTS

• All foreign students are required to file a
  return with the Internal Revenue Service (IRS)
  each year they are in the United States.
• The federal and state tax returns are required
  for those who earn income and the non-employed
  federal form for those who did not earn income.
• But, as per the US Internal Revenue Service
  (IRS), a foreign student temporarily present in
  the US under an F," J," M," or Q" visa who
  substantially complies with the requirements of
  the visa is considered as an Exempt individual"
  for US tax purposes.
• Generally IRS regulations require that 14 percent
  of non-qualified scholarship and fellowship
  payments paid to F, J, Q, or M visa holders be
  withheld as federal income tax unless a person is
  a resident of a country with which the United
  States has an applicable income tax treaty.
• Receipt of fellowship/scholarship grant is
  considered as income effectively connected with
  the conduct of trade or business in the US and
  may be taxable at the normal graduated tax rates
  as applicable to the US citizens.
• It is important to note that the payment a
  foreign student receives as a scholarship or
  fellowship grant will be taxable or not would
  depend on whether the grant is US-source or
  foreign-source income.

26
QUESTION

• 5. Foreign Student living full year in USA and
  Earning U.S Income require to file U.S. return?
• Yes , Form 1040
• Yes, Form 1040 NR
• Yes, 1040 or 1040-NR based on election
• No filing requirements as students are exempt

27
Gift Tax Estate Tax Applicable To Non-Resident
Aliens

• Donors who are nonresidents not citizens of the
  United States are subject to gift taxes for gifts
  made of real and tangible property situated in
  the United States. However, gifts of U.S.
  situated intangible property are not subject to
  the gift tax.
• For nonresident, Non-U.S. citizens (nonresident al
  iens), the estate and gift tax applies at a
  minimum to property that exists within the U.S.
  This includes all tangible and intangible assets
  that physically exist within the U.S. or is
  effectively connected with a trade or business
  in the U.S.
• Nonresident aliens are entitled to the 15,000
  annual gift tax exclusion available to U.S.
  citizens and residents.
• The annual gift tax exclusion for gifts made to a
  non-U.S. citizen spouse increased to 100,000.
  Since 2002, this annual exclusion has increased
  each year and in 2021 the exclusion is 159,000.
• Nonresident aliens receive only a 60,000
  exemption from U.S. estate tax, which is
  equivalent to a 13,000 unified credit and this
  credit can be set-off against Estate Tax only.

28
Non-Resident Aliens Buying Property In U.S.A

• Non-US citizens can buy property since there is
  no citizenship requirement for real estate
  sales.
• The Foreign Investment in Real Property Tax Act
  (FIRPTA) of 1980 was enacted by Congress to
  impose a tax on foreign persons when they sell or
  receive income from a US real property interest.
• In general, income from real property located in
  the US that is owned by a nonresident alien is
  taxed at a 30 (or lower treaty) rate if it is
  not effectively connected with a US trade or
  business.

29
Do You Have Any Questions?
An Informative Session On "U.S. Taxation For
Non-Resident Aliens"
DO LET US KNOW YOUR QUERIES )
Email info_at_smartaccts.com
Site www.smartaccts.com