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US Source-of-Income Rules | MSBA Seminar 01282021 | International Tax Lawyer & Attorney

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Once we have established that this is a non-US Person, the next question is: Is this person getting a US-source income? This is a critical question of huge importance and huge complexity. Why is it important? Because non-US Persons generally, (there are exceptions) are taxed on their US-sourced income. This means that if the income that this person is getting is not US-sourced income, then it’s not taxed in the United States at all. On the other hand if it’s a US-source income, then we have to go through a more complex situation. By the way, if it’s not a US-sourced income, as I have mentioned, we still have to look into whether this is an effectively-connected income. I will discuss this a little bit later during the presentation.

Now, I imagine this is a complex issue in how you determine what is US-source income and what is not US-source income. I am going to simplify this analysis; it’s basically a three-step process. First, you have to classify the income; that is, is it interest, is it dividends, royalties, income from services, etcetera. Then you have to find the particular tax provision that applies to this particular class of income, and the final step is to apply the particular facts of your client’s case to that tax provision.

Let’s go over a few of the most common examples:

Interest income: Interest income is generally sourced to the residence of the obligor. Most often, ‘obligor’ means ‘by the power’. Not always, but most often. This rule applies to individuals, corporations and partnerships. Now the interesting thing is that this may lead to some very unusual situations. For example, if a US Person resides in France and this US Person is an obligor and the obligee, a French person resides in the United States, and the US Person pays interest on the income on his obligation, on the loan; then, this interest would be classified as foreign-sourced income, more precisely French-sourced income, even though it’s a US person who is paying it. Again, rather than solve the obligor, not the nationality.

Dividends: aside from some limited exceptions, it depends on whether the corporation that pays the dividend is a foreign corporation or a domestic corporation. Dividends paid by a US corporation is always US-sourced income; dividends paid by a foreign corporation is almost always a foreign-sourced income but there is this important 25% income exception. Basically, if 25% or more of the corporation’s gross income for the past three years was ECI income that is effectively connected to the trade of business in the United States, then you have to apportion this dividend between the percentage income between the ECI income verses foreign-source income. Think about what it means: that a foreign dividend from a foreign company, incorporated in a foreign country, and this dividend is paid out to a foreign person who lives in a foreign country, actually may result in US-source income. This is a paradox; this tells you just how complex US International Tax Law is. Prior to 2005, unless there was an exception and there were a number of exceptions, including treaty exceptions, but technically speaking, if no exception applies, this person would have been expected to file a US tax return and pay US tax on that US portion of his foreign dividend. Of course, that would almost never happen but there was some litigation in the early years.

Rents and Royalties: sourced to the place where the property is used. This rule is going to be very important with respect to tax planning that involves intellectual property.

Sales of Personal Property: extremely complex because you really have to dig into the facts of the case. In general, sales of personal property are sourced to the residence of the seller. There are special rules, depreciable personal property and there are special rules concerning a situation where there is a permanent establishment outside of the United States or inside of the United States, actually, as well. The biggest issue, and this is going to be very relevant for the purposes of inbound transactions, is sale of inventory; this situation is very common. For example, a few years ago, I had a case where a foreign parent was producing some goods, inventory and basically sending it to a distribution center here in the United States. The general rule here is that inventory sales are sourced to the place of sale; that’s very important – sourced to the place of sale. What is the place of sale? Generally speaking, the place of sale is where the title is passed, but it gets a lot more complex; there are some exceptions that I have given to you. For tax planning purposes, this is a huge issue when it comes to inbound transactions.

Sale of US Real Property: generally, US-source income, even if this real property is held through another entity.

Income from Services: that is sourced to the place where the services are performed. For example, if you go to France, and perform some work there and get paid for that work, even though you are a US Citizen, even if you don’t reside in France, the payment that you receive for the services you performed in France is going to be considered French-sourced income. It gets more complex if you perform services in more than one country, then you have to apportion the payment between these countries and the usual method is time-basis allocation.

MSBA IBLS CLE January 28 2021: Definition of US Person | International Tax Lawyer & Attorney

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The first question, when a client comes to the office, should be: “Is it a US Person?” I say ‘it’ because a client may not be only an individual but also a corporation, a trust or an estate. This question may not be that easy to answer, as it may appear in the beginning.

Let’s talk about individuals first, who are US Persons? US Citizens and US Tax Residents. Now, ‘US Citizens’ is not a very complex category; although, there are some complexities. For example, if in the case of ‘Accidental Americans’, when the person was born in the United States but never lived here – that person spent their entire life outside of the United States, or when a person has one US parent and one non-US parent. In general, it’s not that difficult to verify if a person is a US Citizen or not.

‘US Tax Residents‘ is a more complex issue because it includes green card holders, that is, US permanent residents, the Substantial Presence Test – so basically, people who were here for enough time to pass the Substantial Presence Test and people who declare themselves as US Tax Residents. Now you may ask, who in their right mind would declare themselves a US Tax Resident? It actually happens quite often and I can tell you that in many cases, people do that without even understanding that they have declared themselves a US Tax Resident. For example, when you have one US spouse and one non-US spouse and they file a joint tax return – the non-US spouse just declared herself to be a US Tax Resident.

The second category of US Persons concerns corporations and partnerships, basically business entities. The rule here generally, I emphasize the word generally, is that any corporation or partnership organized under the laws of the United States or any of its 50 states, is a US Person.

Trusts are more complex. In order for a trust to be a US Person, it must meet both the court test and the US control test under the IRC Section 7701(a)30(e). I am going to over-generalize here; generally, if one of the trustees is a US Person and the trust document allows for a US court to exercise a jurisdiction over the trust’s administration, the test will be satisfied. That is, this trust would be a US trust; both tests must be satisfied in order for the trust to be a US trust.

Regarding estates, that doesn’t happen very often in the foreign direct investment situation, but generally speaking, a US estate is any estate that is not described in Section 7701(a)31. I provided a definition for you here. You can read it; it basically has to do with US-source income and what is includable in the gross income of Subtitle A. Now, the important thing to understand is that if you are dealing with a US person, you are not dealing with an inbound transaction, that is this entire tax-framework that I am discussing, doesn’t apply to US Persons. You have to look at a different set of rules. Us Persons, by the way, are taxed on their worldwide income. If this is not a US Person, then we deal with the inbound transactions tax frame.

FATCA Lawyer: Connection Between UBS Case and FATCA

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Hello, and welcome to Sherayzen Law Office video blog; my name is Eugene Sherayzen and I’m an international Tax Attorney and owner of Sherayzen Law Office, Ltd.

Today, we are continuing our blog from Zurich, Switzerland and as you can see, we have UBS in the background; this is the UBS headquarters (in Switzerland). What I would like to talk about today, is what happened after UBS caved in to the IRS demands to turn over the names of US taxpayers who own accounts at UBS.

This happened in 2008. What happened next is quite remarkable. Basically, once one of the largest Swiss banks admitted that it can be bullied into submission by the IRS, the rest of the banks started to follow suit. The influence of the US Government grew enormously from that point on. The next thing that happened after the UBS defeat was the creation of the 2009 Offshore Voluntary Disclosure Program or OVDP. During the program, which was extremely successful, the IRS has collected an enormous amount of information about Swiss banks sufficient for it to make the next step and the next step was the enactment of FATCA.

FATCA is a huge topic. Let’s just say that FATCA revolutionized the entire legal landscape of International Tax Compliance. FATCA pretty much put an end to unlimited bank secrecy that existed prior to the 2008 UBS case. Next time, we will discuss more of what FATCA meant for International Tax Compliance and then we’ll also talk about the 2011 OVDI Program and the 2012 OVDP with it’s successor, the 2014 OVDP Program (now closed).

Thank you for watching, until the next time.

US Tax Reporting of Foreign Investment Accounts | FBAR Lawyer

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Hello, and welcome to Sherayzen Law Office video blog; my name is Eugene Sherayzen and I’m an international Tax Attorney and owner of Sherayzen Law Office, Ltd.

Today, we’re continuing our series of blogs from Zurich, Switzerland and in fact, we are standing in front of Swissquote. This is the company that trades Swiss stocks and the reason why it’s important is because there are still a lot of taxpayers with Swiss stocks who do not realize that even if they disclose their Foreign Bank Accounts, they also have to disclose their Foreign Stock Trading Accounts and Foreign Mutual Funds. All of this has to be disclosed to the IRS.

Now, how do you disclose it? There are two main forms that you need to worry about: FBAR, the Foreign Bank and Financial Accounts Report or Form 8938 which is attached to your tax return. Also, if you are investing in Foreign Mutual Funds, e.g. Swiss Mutual Funds through Swissquote, you also need to disclose them on Form 8621, which is quite complex.

If you would like to learn more about what you need to do in order to stay in US Tax Compliance, with respect to your Foreign Investment Accounts, you can contact me directly at (952) 500-8159 or you can email me at [email protected].

Thank you for watching, until the next time.

Foreign Accounts & US Tax Residency | International Tax Lawyer United States

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Hello, and welcome to Sherayzen Law Office video blog; my name is Eugene Sherayzen and I’m an international Tax Attorney and owner of Sherayzen Law Office, Ltd.

Today, we’re continuing our series of blogs from the Czech Republic. I would like to talk to you about persons who are US Taxpayers and who have Undisclosed Bank Accounts and other Foreign Assets in the Czech Republic.

What is it that they need to do once they find out about their prior tax noncompliance? First of all, we need to figure out who is a US Tax Resident. “US Tax Resident“, is a broad category; it includes all US Citizens, all US Permanent Residents and everyone who satisfied the Substantial Presence Test.

Now this definition, in its pure form, applies only to the income tax return. When we talk about forms like FBAR, Form 8938 and other similar US International Information Returns, the definition changes. It doesn’t change much but it does change a little bit. For FBAR purposes we’re talking about US Persons; if we are talking about Form 8938, we’re talking about Specified Individuals and Specified Domestic Entities.

The difference between these definitions, as I said, is very small, but there are differences. In some instances, you can be a non-resident alien for income tax purposes and still have to file FBAR. Similarly, you may have to file FBAR but you don’t have to file Form 8938. It is the job of your International Tax Attorney to determine which form applies to you, whether you are a US Tax Resident for a certain form and a non-resident with respect to an income tax return.

The most important thing is if you fall into any of the categories that I’ve mentioned, you are a US Tax Resident for income tax purposes. So, whether you are US Citizen, a US Permanent Resident or you satisfied the Substantial Presence Test, if you satisfy any of these requirements, then you have to disclose your Foreign Accounts and if you have not disclosed your accounts, then at that point you need to contact an International Tax Attorney; that’s the first step that you need to do.

Contact me in order to determine what your penalty exposure is and what the best way is to conduct your Voluntary Disclosure.

You can call me at (952) 500-8159 or you can email me at [email protected].

Thank you for watching!