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.