Nonresident Aliens and Foreign Corporations Tx 8300

1. Nonresident Aliens and Foreign CorporationsTx 8300

2. Learning Objectives • 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. You should be able to:

3. 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)

4. Multiple Residency Regimes Foreign Tax System U.S. 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 (________)

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

6. 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

7. 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

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

9. 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?

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

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

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

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

14. 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

15. 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. _______

16. 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. _______

17. 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

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

19. 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

20. 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?

21. 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?

22. 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

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

24. Taxing U.S. Source Capital Gain ECI Not ECI Regular Rates NRA < 183 days Regular Rates 30% NRA ≥ 183 days Regular Rates Foreign Corp

25. 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?

26. 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.

27. 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

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

29. 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.

30. “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 ______

31. 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

32. 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 ___

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

34. 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.

35. 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

36. 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

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

38. 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

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

40. 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 ___.

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

42. 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 ___

43. 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 __________

44. 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?

45. 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?

46. 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

47. 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

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

49. 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

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