U.S. Taxation of Foreign Persons: General Overview

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Unlike U.S. citizens, U.S. resident aliens and domestic corporation which are taxed under the Internal Revenue Code on their worldwide income, the IRS applies a special tax regime to foreign persons. The general rule (subject to numerous exceptions) is that foreign persons are only taxed on their U.S.-source income of specified types and income effectively connected (or treated as “effectively connected”) with a trade or business conducted by such foreign persons within the United States.

For example, generally, capital gains which are not effectively connected with a U.S. trade or business are not subject to U.S. income tax. Be careful, though, because even this seemingly simple rule contains conceptions. The most common exception can be found in IRC Section 871(a)(2). Pursuant to this provision, net capital gains from U.S. sources are taxable to nonresident alien individuals who are present in the United States for 183 days or more during a taxable year even if the gains are not effectively connected with the conduct of a U.S. trade or business.

One can distinguish three main categories of income which is relevant to determining the taxation of foreign persons – effectively connected income, fixed and determinable annual or periodical income, and U.S. source capital gains. Each of these three categories follows specified rules and contains numerous exceptions. Moreover, often, these provisions have to be coordinated with the other provisions in the IRC.

Contact Sherayzen Law Office to Understand Your U.S. Tax Liability

The taxation of foreign persons is a very complex tax question, and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your U.S. tax liability. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced tax firm will guide you through the complex web of rules concerning U.S. taxation of foreign persons, and help you determine your U.S. tax liability.

Non-recognition Transactions Involving Foreign Corporations: Top Three Reporting Requirements

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When we are talking about nonrecognition transactions, we generally mean mergers, spinoffs, and contributions of capital. When such transactions involve foreign corporations, U.S. tax laws impose a number of reporting requirements.

In this brief essay, I will generally discuss the top three reporting requirements for U.S. persons who are involved in nonrecognition transactions involving foreign corporations.

First, IRC Section 6038B and corresponding IRS regulations require that certain information be reported to the IRS on Form 926 for outbound transfers. This means that Form 926 may be required where a U.S. person transfers (or is deemed to transfer) property, including cash, to a foreign corporations. In some case, a similar requirement applies when a foreign corporation is transferred in a IRC Section 355 transaction, such as a spinoff, to certain other foreign or domestic persons (there are also special rules involving transfers to foreign partnerships). Also, keep in mind that a transfer of intangible property to a foreign corporation may also result in additional filing requirements. Other transfers, such as indirect stock transfer, may create a deemed transfer to a foreign corporation.

The second group of requirements is centered around the tax-free transfer of the stock of a domestic corporation to a foreign corporation. IRC Section 367(a) and attendant regulations required the transferred U.S. target to give notice.

The third group of requirements concerns foreign corporations that participate in certain tax-free inbound and foreign-to-foreign reorganization. Pursuant to IRC Section 367(b), the IRS regulations required notice to be filed with the IRS with respect to such reorganizations.

Contact Sherayzen Law Office For Legal Advice Regarding Non-Recognition Transactions Involving Foreign Corporations

This brief essay only provides some of the contours of the reporting requirements regarding non-recognitions transactions involving foreign corporations; it should not be relied upon in determining your IRS reporting requirements.

Rather, if you have any questions with respect to your reporting requirements involving such transactions with respect to foreign corporations, you should contact Sherayzen Law Office. Our experienced international tax firm will assist you in identifying your IRS reporting requirements and help you comply with them.

Who Must File Form 8858

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If a U.S. person owns or is considered to be the owner of a Foreign Disregarded Entity (“FDE”), then he must file Form 8858. In general, there are three different groups of persons who may be required to file the Form.

1. Direct “Tax Owners” of FDE

The instructions to Form 8858 define a “tax owner” as a “person that is treated as owning assets and liabilities of the FDE for the purposes of U.S. income tax law.” Thus, this group of filers includes U.S. persons who are direct owners of FDEs for U.S. tax purposes. For example, a natural person A owns 100% of FDE; therefore, A is required to file Form 8858.

2. Category 4 and 5 Filers of Form 5471 With Respect to a CFC That Owns the FDE

The second group of filers includes U.S. persons that are either category 4 or 5 filers of Form 5471 with respect to a controlled foreign corporation (“CFC”) if the CFC is the tax owner of the FDE.

3. Category 1 and 2 Filers of Form 8865 With Respect to CFP That Owns the FDE

Finally, the third group of filers includes U.S. persons that are either Category 1 or 2 filers of Form 8865 with respect to a controlled foreign partnership (“CFP”) if the CFP is the tax owner of the FDE.

Multiple Filers Exception

In some cases, a multiple filers exception may apply in order to avoid unnecessary filing of the same information. This exception works in conjunction with Forms 5471 and 8865 instructions for multiple filers of same information.

Contact Sherayzen Law Office To Determine Whether You Must File Form 8858

This article contains only general background information and should not be relied upon to determine whether you are required to file Form 8858.

If you are unsure about whether you must file Form 8858, contact Sherayzen Law Office for legal advice. Our experienced international tax firm will help you comply with your U.S. tax reporting obligations, including the determination of whether you are required to file Form 8858.

Foreign Disregarded Entities: Form 8858 Introduction

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In my international tax practice, I have encountered frequent examples where business owners fail to comply with the U.S. tax reporting requirements with respect to a “foreign disregarded entity” (“FDE”). Therefore, in this essay, I will try to make some very broad observations with respect to the entity and Form 8858.

FDE is a business entity that is a foreign corporation under local law, but, is, or has elected under the “check-the-box” rules of Treas. Regs. §301.7701-3 to be disregarded as, an entity separate from its owner for U.S. federal income tax purposes.

If a U.S. person owns or is considered to be the owner of an FDE, then he must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, with respect to such FDE. The ownership may be a direct, indirect, or constructive; the IRS provides certain guidelines in order to determine whether an indirect or constructive ownership of an FDE exists.

One of the most dangerous aspects of Form 8858 is that it may need to be filed in conjunction with Forms 8865 or 5471. Failure to properly file Form 8858 is likely to render Forms 8865 or 5471 incomplete, resulting in significant penalties being imposed.

While Form 8858 is used in part to compute the taxable income or E&P (earnings and profits) of the FDE, the Form also serves an important function for the IRS – an audit guideline for the IRS examiners. This becomes most obvious by looking at the Schedule G questions, which appear to focus on potential audit issues.

Contact Sherayzen Law Office For Legal Help With Disregarded Entities

This very short legal note is intended only to point out some very broad contours with respect to FDEs, Form 8858 and its purposes. The subject matter is extremely complex and should be only approached with the help of an international tax attorney.

If you have any questions with respect to Form 8858 compliance, contact Sherayzen Law Office by phone or email. Our experienced international tax firm will guide you through the complex maze of the IRS regulations with respect to Form 8858 and help you comply with its complex tax accounting and reporting requirements.

Child Tax Credit and Foreign Earned Income Exclusion

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The U.S. government allows eligible parents to take a tax credit for up to $1,000 per qualifying child. In addition to various issues with respect to what constitutes a “qualifying child”, there are various complications with respect to the eligibility of the parents.

In this short essay, I will concentrate solely on the interaction of the parents’ income eligibility for the child tax credit and the foreign earned income exclusion.

General Income Limitations

Generally, in order to take full advantage of the child tax credit, the parents’ adjusted gross income (AGI) should be below a certain amount. The AGI amount will depend on your filing status as follows:

Married filing jointly – $110,000.

Single, head of household, or qualifying widow(er) – $75,000.

Married filing separately – $55,000.

If your AGI is above the relevant threshold, then you must reduce your child tax credit at the rate of $50 per each $1,000 of income above the threshold

Foreign Earned Income Exclusion and Income Limitation Calculation

Under I.R.C. §911, if certain conditions are met, Foreign Earned Income Exclusion allows a qualified individual to exclude as much as $92,900 (for tax year 2011) of his foreign earned income from taxable gross income. This means that, if eligible, you may reduce your AGI by as much as $92,900.

What happens then to the income limitation calculations for the purposes of the child tax credit?

Generally, in order to avoid giving U.S. taxpayers who work abroad an unfair advantage, the IRS requires you to follow the modified AGI rules in determining your income for the child tax credit phase out purposes. Under the modified AGI rules, you should add the amount excluded on lines 45 and/or 50 of Form 2555 to your regular AGI.  This means that you are adding the excluded amount back to your AGI to determine your eligibility for the child tax credit.

Thus, the Foreign Earned Income Exclusion is not likely to have any affect on your AGI calculations for the purposes of determining whether your income is above the child tax credit threshold and how much.

Contact Sherayzen Law Office For Legal Help With the Foreign Earned Income Exclusion

If you have any questions with respect to how Foreign Earned Income Exclusion works, contact Sherayzen Law Office at [email protected]. Our experienced international tax firm will guide you through the complex maze of the interaction of various sections of the U.S. tax law with the Foreign Earned Income Exclusion.