Nonresident Aliens and
Foreign Corporations
Tx 8300
Learning Objectives
You should be able to:
1.
2.
3.
4.
5.
6.
Identify __________ aliens,
Explain rules for taxing foreign persons,
Identify ___________ connected income,
Explain _____ of attraction rule,
Calculate tax ________ of foreign persons, and
Determine foreign person’s ________ tax rate
from U.S. business profits.
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)
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
§______
Sourcing Gains
§_____
Income Tax
Outbound
Dual Residency
Tie-Breaker Rules
(________)
Income Tax
Inbound
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 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?
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
ECI
Not ECI
U.S. Source
Regular
Rates
FDAP
at 30%
Foreign Source
Regular
Rates
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
Estimated __________ based on 30% or lower
treaty rate
Most FDAP income
_____ 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
ECI
NRA < 183 days
Regular
Rates
NRA ≥ 183 days
Regular
Rates
Foreign Corp
Regular
Rates
Not ECI
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
Sales
Branch
Manufacturer
Direct
Sale
U.S. Title
Passage
Result:
Solution:
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
Sells inventory
Customer
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
Licenses Technology
for Use Abroad
Licensee
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 ___.
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 parimutuel 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
_____ schedule
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
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)
-
x
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 ___
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
Profit
$1,000
U.S. tax - 350
E&P
$ 650
U.S.
Sub
Foreign
Parent
MTR = tus + tdiv (1 - tus)
MTR =
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
E&P
$ 650
U.S.
Sub
Foreign
Parent
MTR = t us +
t div (1 - t us)
(1 + d)y
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 =
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?
MTR = t us +
t div (1 - t us)
(1 + d)y
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 =
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
Profit
$1,000
U.S. tax - 350
$ 650
FC
Sub
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. Subsidiary
ECI
U.S. income tax
E&P or after-tax profits
Dividend or DEA
U.S. withholding
Remittance
$400
U.S. Branch
$400