Category Archive for ‘Tax Law’

Katya Yoffe Interview: International Business and Residence in the U.S. – What You Need to Knowby kyoffelaw

 

Please find a link to the Taxlinked Article here

Katya Yoffe has been interviewed by Taxlinked.net and is featured in this week’s Spotlight. A copy of the interview is pasted below:

SPOTLIGHT 06 January 2015
Katya Yoffe
Law expert at The Law Office of Katya Yoffe
TL: What are the tax implications for foreigners living and working in the United States?

KY: Residents and non residents are taxed differently in the United States. Foreigners should be aware that the definition of a “resident alien” under the Internal Revenue Code is not the same as the definition used for purposes of immigration. Section 7701(b) of the IRC defines a resident alien under two tests, known as the “green card test” and the “substantial presence test”. The green card test identifies a resident alien as an individual who is a permanent resident of the United States under immigration laws.

The substantial presence test identifies foreign individuals who spend substantial periods of time within the United States as resident aliens. This test is met if the foreign individual was present within the U.S. at least 31 days during the current year and 183 days during the 3 year period that includes the current year and the 2 preceding years, determined as follows:
all days present in the current year
1/3 of the days present in the first preceding year
1/6 of the days present in the second preceding year
It is quite common for foreign individuals traveling to the United States for work or other purposes to be unaware of the substantial presence test. The only exemptions provided under the substantial presence test for the purpose of counting days of presence are individuals temporarily present in the U.S. on behalf of foreign governments, teachers and trainees under J or Q visas, students under F, J, M or Q visas, professional athletes competing in charitable sports events, and certain individuals with medical conditions.

Foreign individuals who travel frequently to the United States and do not file U.S. tax returns should be aware of the substantial presence test and be sure to keep track of their travel records. Individuals who travel to the United States on a regular basis frequently for professional or recreational purposes find themselves unwittingly falling within the definition of U.S. resident under the Tax Code.

Aliens deemed U.S. residents under the substantial presence test may still be treated as nonresidents by establishing a closer connection to a foreign country. The closer connection test is met if the individual is present in the U.S. for less than 183 days out of the year, maintains a tax home in a foreign country during the year, and can demonstrate a closer connection to that foreign country via the location of residence designated by the individual on forms and documents, permanent home, family, business activities, etc.

It is important to note that the closer connection test may only be met by filing a U.S. tax return and making a closer connection exception claim.

Source Rules: Income of Nonresident Aliens

U.S. residents are taxed on their worldwide income. This includes interest, dividends, wages or other compensation, royalties and rental income from both within and outside the United States. Nonresidents, however, are generally taxed only on U.S. source income. Income is generally considered U.S. source if the location of the activity or the sale of property for which the payment is being made is in the United States. This may include interest, dividends, rents and royalties, employment income, compensation for personal services and sale of real and personal property.

U.S. source rules for nonresident aliens can be complex. Heavily nuanced rules exist to address many issues involving the nature of the income-generating activity, the amount of time the nonresident alien has spent in the U.S. and the type of income received. These rules address numerous matters such as the sale of intellectual property, interest income, scholarships and grants, inventory and so forth. Nonresident individuals who work both within and outside the United States will need to prorate their compensation to figure out how much is U.S. source.

Foreign Persons: U.S. Trade or Business Income

When a foreign person engages in a U.S. trade or business, all U.S. source income connected with the activity of the trade or business is considered Effectively Connected Income (ECI). ECI is taxed at the same graduated rates applicable to U.S. citizens and resident aliens (or lesser rate if permitted by treaty). Deductions are permitted against ECI.

Foreign Persons: Nonbusiness U.S. Source Income

Most of the forms of U.S. source income received by foreign persons that are not ECI are subject to a flat withholding tax of 30 percent (or lower treaty rate). These types of income are referred to as Fixed, Determinable, Annual, or Periodical (FDAP) income and includes interest, dividends, rents, salaries, wages, fixed or determinable annual or periodical gains, profits and income. The obligation is imposed on the payor to withhold the tax in order so as to ensure its collection. Deductions are not permitted against FDAP income. If FDAP income is also classified as ECI in a given situation, however, it will be subject to the ECI rules explained above.

Certain types of investments such as the sale or exchange of capital assets or real property are subject to special rules

TL: What do foreign companies need to know when doing business in the United States, particularly in terms of taxation and other regulations?

KY: The income sourcing rules discussed above are extremely important for foreign companies to understand. Foreign companies should also be aware that the United States has a number of different taxing jurisdictions. Taxes are levied on the federal level as well as by states, counties, cities, towns and villages.

Foreign companies should also be aware of the various entity classifications in the United States. Foreign companies may register a branch office in the United States or a subsidiary company.

A branch is part of a company and not a separate legal entity in the United States. A foreign company may establish a U.S. branch. Choosing to open a U.S. branch requires careful consideration on both the state and federal level and an awareness of special tax considerations such as the Branch Profits Tax.

A subsidiary is a wholly separate legal entity owned by a foreign parent company and may be formed as one of several different types of entities. A corporation, for example, is a separate legal entity created under state law. Although basic laws governing corporations are similar, differences exist between states that may influence a foreign entity in choosing where to form and operate. Furthermore, a corporation that conducts business outside its state of incorporation may also be required to register to do business in other states. Registration generally subjects a corporation to taxation in that state.

A partnership is an association of two or more persons formed to carry on a business for profit as co-owners. A partnership is any type of unincorporated organization by which business is conducted and which is not a corporation, trust or estate. Each state has its own laws governing partnerships. Partnerships are generally subject to pass-through taxation. Each partner recognizes a proportionate share of profit and loss regardless of whether it is distributed to the partners. Partnership law can allow for flexibility in the allocation of profits and losses, as well as distributions, as long as it meets certain standards dictated by the IRS regulations.

The limited liability company (LLC) is a structure that provides limited liability for its owners (similar to a corporation) while maintaining a single level of tax (as in a partnership).

Each type of entity has its own benefits and drawbacks. Foreign businesses should consult carefully with an attorney in the United States who is familiar with both taxation and corporate law in order to form the optimal structure.

TL: What would be a good international tax planning strategy for European-based companies and/or families seeking to purchase commercial and residential units in the United States?

KY: It depends on the investor’s goals and priorities. Individual ownership or the use of an LLC generally provides the best income tax results as they allow for pass through taxation and the investor will enjoy the benefit of the long term capital gains rate. There are two issues here, however.

The first big drawback is that conduct of a real estate business through anything other than a corporation will not permit a foreign investor to maintain anonymity. Ownership individually or via a pass through entity such as an LLC or partnership requires the foreign investor to file a U.S. tax return.

The second problem is that a nonresident alien’s individual or pass through ownership of U.S. real property may subject the nonresident alien to a substantial U.S. estate tax on the equity value of the real property.

The drawback of corporate ownership is that the ordinary income rates and capital gain rates of a corporation are the same rate. Corporations are also taxed twice-first at the company level and subsequently on distributions to shareholders. Furthermore, payment of dividends by a corporation to its nonresident shareholder might be subject to an additional US withholding tax.

Various methods exist to create tax planning strategies for foreigners interested in purchasing U.S. real estate. Depending on the foreign investor’s needs, it may be advisable to own property outright; to establish one or multiple U.S. entities to own and manage real estate; to establish a foreign corporation to own a U.S. real estate holding company or U.S. property outright; and to even set up a trust to manage the foreign corporation. One important planning tool to keep in mind when developing a strategy is any tax treaty that may exist between the U.S. and the foreign investor’s home country. Such a tax treaty may prevent double taxation, reduce or eliminate the U.S. branch profits tax and reduce U.S. taxes on a foreign investor’s interest, dividends and business income earned from within the U.S.

Katya Yoffe’s Article on EB-5 Investor Visa Published by TaxLinked.Netby kyoffelaw

Katya Yoffe has recently been published in Taxlinked.net’s e-book on residency investment schemes around the world. Katya’s article provides an overview of the EB-5 Immigrant Investor Visa, a visa that enables foreigners to obtain permanent residence for themselves and their immediate families through investment.

The e-book may be accessed here:

Residency-Visa-Schemes-TaxLinked.net-©-20141-1

IRS Reminds Those with Foreign Assets of U.S. Tax Obligationsby kyoffelaw

Reminder from the IRS:

“WASHINGTON — The Internal Revenue Service reminds U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a U.S. tax liability and a filing requirement in 2014.

The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details.

Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income. See Taxation of Nonresident Aliens on IRS.gov.

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attachSchedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, see Report of Foreign Bank and Financial Accounts (FBAR).

Taxpayers abroad can now use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $58,000 or less can use brand-name software to prepare their returns and then e-file them for free. A second option, Free File Fillable Forms the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return. Check out the e-file link on IRS.gov for details on the various electronic filing options.

A limited number of companies provide software that can accommodate foreign addresses. To determine which will work best, view the complete Free File Software list and the services provided. Both e-file and Free File are available until Oct. 15, 2014, for anyone filing a 2013 return.

Any U.S. taxpayer here or abroad with tax questions can use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools assemble or group IRS forms, publications and web pages by subject and provide users with a single entry point to find tax information.”

IRS Foreign Disclosure Requirements: Form 5472by kyoffelaw

Foreign corporations engaged in a U.S. trade or business and U.S. corporations with more than 25% foreign ownership are required to file Form 5472 with the IRS. The purpose of Form 5472 is to provide certain information to the IRS when a “reportable transaction” occurs (such as sales, rents, royalties, interest) between a reporting corporation and a related party. This disclosure requirement is not limited only to transactions between a reporting corporation and its 25% foreign shareholder but also extends to transactions with foreign entities that are related to the foreign 25% shareholder.

A separate Form 5472 is filed for each foreign or domestic related party with which the reporting corporation engaged in a reportable transaction during the year.

The 25% ownership requirement is generally applied to a  foreign person owning 25% of a US corporation either directly or indirectly (via other entities). If certain conditions are met Form 5472′s disclosure requirements may not apply to multiple foreign persons owning 25% of a US corporation in the aggregate. Form 5472 is often overlooked when a foreign owner of a U.S. company is a silent partner. It is important to keep in mind that if such foreign ownership exists it does not matter what role the foreign owner has in the US company.

Form 5472 must be filed with a reporting corporation’s annual tax return. It is extremely important that a 5472 be filled out properly. As of 2013 the IRS is now assessing an automatic $10,000 penalty for failing to file the form on time and an additional $10,000 for every subsequent year that the form is not filed. A substantially incomplete Form 5472 may be considered by the IRS as constituting failure to file.  Furthermore, the IRS uses Form 5472 as a starting point for inquiring into transfer pricing. Forms filed correctly and in a timely manner not only ensure that reporting corporations avoid penalties but also aids in reducing IRS audit risk.

IRS Foreign Disclosure Requirements: Form 5471by kyoffelaw

Form 5471 is an information return that allows the IRS to tax foreign profits prior to their distribution as dividends (known as Subpart F income).

U.S. citizens, residents and entities such as LLCs, corporations, trusts, or partnerships (U.S. “persons”) serving as officers, shareholders or directors in certain foreign corporations may be required to file Form 5471 under the following circumstances:

1. A U.S. person becomes a director or officer of a foreign corporation

2. a U.S person acquires an ownership interest in a foreign corporation in excess of certain authorized limits

3. a U.S. person disposes of stock in a foreign corporation that reduces its interest in the foreign corporation to less than certain authorized limits

4. a U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year

5. a U.S. person is a 10% or more shareholder in a foreign corporation that is a ‘controlled foreign corporation’ for an uninterrupted period of at least 30 days in a year and that person owns that stock on the last day of the year. CFC is defined as a foreign corporation that has U.S. shareholders (counting only those with a 10 percent or more interest) that own on any day of the tax year of the foreign corporation more than 50% of the total combined voting power of all classes of its voting stock, or the total value of the stock of the corporation.

The rules governing determination of ownership interest are complex and include not only direct but also indirect and constructive ownership.  5471′s are required under circumstances beyond the direct purchase or sale of an interest in a foreign corporation by a U.S. person.

A $10,000 penalty is imposed for each form per year for failure to submit the form to the IRS.  Additional penalties of up to $50,000 are charged for instances of continued failure.  A U.S. person in default is also subject to a reduction of 10% of the foreign taxes available for credit.  Additional reductions may be applied to cases in which a U.S. person continues to fail to file. A $10,000 penalty is applied in the event that a U.S. person fails to report certain types of specific transactions.  Criminal penalties may also apply for failure to properly file the 5471.

For more information please visit the IRS instruction page or contact us with any questions.

The Foreign Earned Income Exclusion and Housing Deductionby kyoffelaw

Are you a United States citizen or permanent resident working abroad? If so, it is important to keep in mind that the United States taxes you on your worldwide income. However, there are a number of important tax benefits that may be available for you, such as the foreign earned income exclusion, foreign housing exclusion and foreign housing deduction. Subject to certain rules, you may currently qualify to exclude up to $97,600 from your 2013 income.  Additionally, it is possible to exclude or deduct certain payments for foreign housing.

If your foreign source employment income falls below the excluded amount you still must file an annual tax return.

Generally if you are self employed abroad the foreign earned income exclusion only applies to income taxes and does not apply to self-employment taxes. Therefore even if your foreign earned self employment income falls below the exclusion amount you must still pay self employment taxes at the rate of 15% on your net foreign source self employment income.

The foreign earned income exclusion and the foreign housing exclusion/deduction are all based on foreign earned income. Foreign earned income is defined by the IRS as salaries, wages, commissions, bonuses and self-employment income for services performed in a foreign country. Foreign earned income must received for services  performed during a period that your tax home is in a foreign country and during which you meet either the “bona fide residence test” or the “physical presence test”.

Tax Home

Your tax home is the location in which you are permanently or indefinitely (you expect to remain in such location for more than one year) located for work. It is the location of your main place of employment regardless of your family home.

Bona Fide Residence Test

The Bona Fide Resident Test is met if you are a U.S. citizen or resident (who is a citizen of a country with which the U.S. has a tax treaty with non-discrimination provisions) and a bona fide resident of a foreign country for at least one full tax year. If you are a U.S. resident and citizen of a foreign country without a non-discrimination clause in its tax treaty with the U.S. you may use the physical presence test.

The IRS will determine whether you qualify as a bona fide resident based on your individual circumstances. Factors used to evaluate bona fide residence include:

-Residence (i.e. a purchase or rented home, employer provided housing, hotel)

-Whether family members reside with you overseas or in the U.S.

-Whether you pay taxes to a foreign government

-The terms of your employment

-Foreign visa type and duration

-Maintenance of U.S. home

Establishing bona fide residence is based on a careful evaluation of an individual’s particular circumstances. No single factor determines whether or not an individual meets the bona fide residence test.

Physical Presence Test

To meet the physical presence test an individual must be physically present in a foreign country/countries for 330 days in a period of 12 consecutive months. Or, to put it differently, an individual must have been physically present in the United States no more than 35 days during any 365 day period.

Foreign Individuals Subject to U.S. Taxationby kyoffelaw

by Katya Yoffe

Nonresident Alien or Resident Alien? Foreign Individuals and the “Substantial Presence” Test

Residents and non residents are taxed differently in the United States. Foreigners should be aware that the definition of a “resident alien” under the Internal Revenue Code is not the same as the definition used for purposes of immigration. Section 7701(b) of the IRC defines a resident alien under two tests, known as the “green card test” and the “substantial presence test”. The green card test identifies a resident alien as an individual who is a permanent resident of the United States under immigration laws. The substantial presence test identifies foreign individuals who spend substantial periods of time within the United States as resident aliens. This test is met if the foreign individual was present within the U.S. at least 31 days during the current year and 183 days during the 3 year period that includes the current year and the 2 preceding years, determined as follows:

-all days present in the current year

-1/3 of the days present in the first preceding year

-1/6 of the days present in the second preceding year

It is quite common for foreign individuals traveling to the United States for work or other purposes to be unaware of the substantial presence test. The only exemptions provided under the substantial presence test for the purpose of counting days of presence are individuals temporarily present in the U.S. on behalf of foreign governments, teachers and trainees under J or Q visas, students under F, J, M or Q visas, professional athletes competing in charitable sports events, and certain individuals with medical conditions.

Foreign individuals who travel frequently to the United States and do not file U.S. tax returns should be aware of the substantial presence test and be sure to keep track of their travel records. Individuals who travel to the United States on a regular basis frequently for professional or recreational purposes find themselves unwittingly falling within the definition of U.S. resident under the Tax Code.

Aliens deemed U.S. residents under the substantial presence test may still be treated as nonresidents by establishing a closer connection to a foreign country. The closer connection test is met if the individual is present in the U.S. for less than 183 days out of the year, maintains a tax home in a foreign country during the year, and can demonstrate a closer connection to that foreign country via the location of residence designated by the individual on forms and documents, permanent home, family, business activities, etc.

It is important to note that the closer connection test may only be met by filing a U.S. tax return and making a closer connection exception claim.

Source Rules: Income of Nonresident Aliens

U.S. residents are taxed on their worldwide income. This includes interest, dividends, wages or other compensation, royalties and rental income from both within and outside the United States. Nonresidents, however, are generally taxed only on U.S. source income. Income is generally considered U.S. source if the location of the activity or the sale of property for which the payment is being made is in the United States. This may include interest, dividends, rents and royalties, employment income, compensation for personal services and sale of real and personal property.

U.S. source rules for nonresident aliens can be complex. Heavily nuanced rules exist to address many  issues involving the nature of the income-generating activity, the amount of time the nonresident alien has spent in the U.S. and the type of income received. These rules address numerous matters such as the sale of intellectual property, interest income, scholarships and grants, inventory and so forth. Nonresident individuals who work both within and outside the United States will need to prorate their compensation to figure out how much is U.S. source.

Foreign Persons: U.S. Trade or Business Income

When a foreign person engages in a U.S. trade or business, all U.S. source income connected with the activity of the trade or business is considered Effectively Connected Income (ECI). ECI is taxed at the same graduated rates applicable to U.S. citizens and resident aliens (or lesser rate if permitted by treaty). Deductions are permitted against ECI.

Foreign Persons: Nonbusiness U.S. Source Income

Most of the forms of U.S. source income received by foreign persons that are not ECI are subject to a flat withholding tax of 30 percent (or lower treaty rate). These types of income are referred to as Fixed, Determinable, Annual, or Periodical (FDAP) income and includes interest, dividends, rents, salaries, wages, fixed or determinable annual or periodical gains, profits and income. The obligation is imposed on the payor to withhold the tax in order so as to ensure its collection. Deductions are not permitted against FDAP income. If FDAP income is also classified as ECI in a given situation, however, it will be subject to the ECI rules explained above.

Certain types of investments such as the sale or exchange of capital assets or real property are subject to special rules and will be investigated later in this blog.

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