international tax lawyer minnesota

Foreign Investment in Real Property Tax Act

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The IRS generally taxes U.S. taxpayers on all income, from any source derived.  Foreign taxpayers, on the other hand, will usually only pay U.S. taxes on income sourced in the U.S.  However, under The Foreign Investment in Real Property Tax Act (“FIRPTA”), the IRS treats gain on the disposition of certain U.S. property and interests as if it were “effectively connected” with the conduct of a U.S. trade or business, and thus subject to U.S. tax, even if foreign individuals or businesses are not actually engaged in a U.S. trade or business.  (In general, effectively connected income consists of both U.S.-source income and certain types of foreign source income earned by non-resident aliens and foreign corporations engaged in the conduct of a trade or business within the U.S).

Penalties for failure to comply with the IRS provisions can be substantial, so taxpayers and purchasing agents should be aware of these rules if they are involved in such transactions.

The FIRPTA Withholding Tax

The FIRPTA income tax withholding provisions (IRC Section 1445 and related sections) require purchasers or agents acquiring U.S. real property interests (“USRPI)” from foreign persons to withhold 10 percent of the amount realized on the disposition, subject to certain exemptions.  In general, a USRPI is any direct interest in parcels of real property located in the U.S., and any interests in a U.S. corporation (such as shares, but not including solely a creditor interest).

The IRS defines “disposition” for this provision to include disposition for any purpose of the Internal Revenue Code, including but not limited to: sales or exchanges, liquidations, redemptions, gifts, transfers, and similar transactions.  “Foreign” persons are broadly defined by the IRS, and include nonresident alien individuals, foreign corporations, partnerships, trusts, estates, and foreign branches of U.S. financial institutions if the foreign branch is a qualified intermediary.  The “amount realized” generally means the sales or contract price of the property (see IRS rules for more detail).

Upon advance request, the IRS has the authority reduce the 10 percent withholding tax to an amount that will cover the estimated tax liability due, if it is determined that the collection of the amount due under applicable IRS provisions will not be jeopardized by the reduction.

Note that special rules apply for distributions of USPRIs by foreign corporations, partnerships, trusts, or estates, and by certain domestic corporations to foreign shareholders.

Penalties

In general, various penalties may be imposed under the applicable FIRPTA provisions.  Penalties apply for failure to file the required Form 8288 when due and for failure to pay the withholding when due.  Additionally, any tax required to be withheld under Section 1445 may be collected, plus interest on the unpaid amount, if the taxpayer fails to do so.  Further, a criminal penalty of $10,000 or five years in prison may be imposed under Section 7202 for willful failure to collect and pay over the required tax.  Corporate officers or other responsible persons may face separate penalties under Section 6672.

Contact Sherayzen Law Office

This article is intended to give a brief summary of some of the issues concerning, and should not be construed as legal or tax advice.  If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs.  Call (952) 500-8159 to discuss your tax situation with an experienced business tax lawyer.

FBAR (Report on Foreign Bank and Financial Accounts) is due on June 30, 2011

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Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN Form 114 formerly Form TD F 90-22.1 (the FBAR form) must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2011).  Notice – this year’s FBAR must be received by the DOT on June 30, 2011.  This rule is contrary to your regular tax returns where the mailing date determines whether the filing is timely.  There are no extensions available – the FBAR must be received by June 30 or it will be considered delinquent.

If you have any questions or concerns regarding whether you need to file the FBAR or how to prepare the form, please contact Sherayzen Law Office directly.  Our experienced international tax firm will guide you through this complex tax issue.

 

FBAR: Exclusion of Personal and Homeowner’s Lines of Credit

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Often, I receive specific questions from my clients with respect to whether certain types of accounts should be reported on the Report on Foreign Bank and Financial Accounts (“FBAR”). Recently, one of my clients wanted to know whether he needs to report his personal and homeowner’s lines of credits on the FBAR.

A little disclaimer before I deal with the main subject of this essay. In this legal note, I do not discuss the situations where you loaned the money to someone else. This essay focus strictly on the money loaned to you.

Generally, whether the money loaned to you should be reported on the FBAR is a highly fact-dependent situation. Most such loans are not reported on the FBAR, because these loans are not considered assets. However, if a loan can be considered as an asset because of the way it is structured or because it is a part of a larger financial arrangement, the loan needs to be reported on the FBAR. You should discuss this situation with an international tax attorney who specializes in FBARs.

The situation with respect to personal and homeowner’s lines of credit, however, is much clearer. The IRS does not regard these lines of credit as assets and does not require you to disclose them on the FBAR. While this is a general rule, you should call us to discuss your specific situation in order to make sure that nothing in your situation makes these lines of credit reportable.

Contact Sherayzen Law Office to Get FBAR Help

If you have any questions with respect to FBAR or voluntary disclosure, Sherayzen Law Office can help. Our international tax firm has guided our clients throughout the United States through voluntary disclosure and FBAR reporting, making sure that the rights of our clients are protected and they pay only fair taxes and penalties.

Tax Treaties

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Tax treaties are bilateral agreements between two countries that generally provide relief from taxation for individuals who are covered. The U.S. has tax treaties with more than 50 different countries. The U.S. has a formulated a Model Income Tax Treaty to assist in negotiations of future tax treaties. In general, treaties will grant one country primary taxing rights to items of income, and the other country will be required to give a credit for taxes paid.

Primary taxing rights typically depend on either the residency of taxpayers, or the presence of a permanent establishment in a treaty country. A permanent establishment generally is defined to be a branch, factory, office, workshop, mining site, warehouse, or other fixed places of business.

Under most tax treaties, residents (and sometimes, citizens or nationals) of foreign countries will be exempt from U.S. taxes on certain items of income, and taxed at a reduced rate on other specified items. For example, many U.S. tax treaties reduce the withholding tax rate on interest and dividends, and other certain kinds of investment income. The rates and items of taxation vary according to the terms of each treaty. If there is no tax treaty between the U.S. and another country, or a treaty does not cover a certain type of income, a resident (national or citizen, if applicable) of a country will be subject to U.S. taxes.

Under these same tax treaties, though U.S. residents or citizens are subject to U.S. income tax on their worldwide income, they will be exempt from tax, or taxed at a lower rate, in general on certain items of income sourced from another country subject to the tax treaty. Many treaties utilize savings clauses to prevent U.S. residents or citizens from using provisions of a treaty to avoid paying taxes on U.S. source income.

Do you have questions concerning international tax issues? Contact Sherayzen Law Office at (952) 500-8159 to discuss your tax situation with an experienced tax attorney.