Nonresident Aliens and Foreign Corporations Tx 8300

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Nonresident Aliens and Foreign CorporationsTx
8300
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Learning Objectives
You should be able to

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 persons ________ tax rate from
   U.S. business profits.

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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)

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

• ___ U.S. citizen
• U.S. resident
• ______ permanent resident
• Substantial presence
• First ____ election
• Nonresident election
• ___ resident election

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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

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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

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Exception Facts and Circumstances

• U.S. presence in current year lt ___ days
• Foreign tax ____
• Closer __________ to home country
• Not applying for _____ card

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Example Residency Test

• Sean OBrien, 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 2005. 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?

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Exception Exempt Person

• Foreign _________ personnel
• Students
• Teachers and ________
• Professional athletes competing in charitable
  ______ event

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Exception Medical Emergency

• Became sick while visiting ____
• Unable to leave as _________
• Inapplicable to those ______ to U.S. for medical
  treatment

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Exception Transient

• Regular commuters from ______ and ______
• Brief U.S. layovers when traveling between
  ________ locations

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Exception Transient

• _______ crew member
• _______ vessel engaged in international commerce
• If individual
• Temporarily present in ____ and
• Not engaged in ____ trade or business

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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

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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. _______

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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. _______

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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

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Taxing Ordinary Income
ECI
Not ECI
Regular Rates
FDAP at 30
U.S. Source
Regular Rates
Exempt
Foreign Source
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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

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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?

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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?

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

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

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Taxing U.S. Source Capital Gain
ECI
Not ECI
Regular Rates
NRA lt 183 days
Regular Rates
30
NRA 183 days
Regular Rates
Foreign Corp
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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?

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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.

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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

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Trade or Business Examples

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

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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.

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Effectively Connected in General

• Trade or business is a ___________ to ECI
• Several exceptions apply
• ____ of ___________ rule
• Criteria for determining ECI depend on the
  incomes ______

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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

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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 ___

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

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

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

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

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Exclusions Attracting Capital

• Interest on ________ with banks, SLs, and
  insurance companies if not ___
• Dividends from ___ meeting ___ active foreign
  business test times DCs percentage of gross
  income that is ___

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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 lt
  ___ of U.S. debtor receives from debtors
  __________

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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?

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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?

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Exclusions Facilitating Business

• International transportation income if persons
  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

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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

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No Deductions Allowed

• Other personal expenses
• ____ mortgage interest
• Property tax on ________
• ______ expenses
• _______ deduction
• Expenses related to ____ income

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Tax Rates for NRAs
Single
Single schedule
_____ schedule
Head of household
Married
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
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Credits

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

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Tax Computation for NRA
_____ income U.S. capital gains (not ____) -
U.S. capital losses (___ carryovers)
Gross income (other than ___) x ___ (or
lower treaty rate)
U.S. tax on ____ and capital gain
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 ___
U.S. tax before credits - Credits,
prepayments, withholdings U.S. tax liability
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Marginal Tax Rates
Profit 1,000 U.S. tax - 350 EP 650
U.S. Sub
Foreign Parent
MTR tus tdiv (1 - tus) MTR
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Marginal Tax Rates
Now assume the same situation except the dividend
occurs 5 years later and the appropriate discount
rate is 9.
Profit 1,000 U.S. tax - 350 EP 650
U.S. Sub
Foreign Parent
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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 tus tdiv (1 - tus) MTR
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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?

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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 tint MTR
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Anti-Siphoning Rules

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

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Branch Profits Tax
Pre-1987 Historical Perspective
Branch
Profit 1,000 U.S. tax - 350 650
FC
Sub
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BPT Achieves Parity
FCs effectively connected ____ - Increases in
FCs U.S. net _____ Decreases in FCs U.S. net
____ ________ equivalent amount x __ or lower
treaty rate Branch profits tax
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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. Subsidiary U.S. Branch
400 400
ECI U.S. income tax EP or after-tax
profits Dividend or DEA U.S. withholding Remitta
nce