Posts

Green Card US Tax Residency Relationship | International Tax Lawyers Miami

/in , /by

The definition of a US tax resident consists of various categories.  Among them are US Permanent Residents or “green card” holders.  This article explores Green Card US tax residency relationship.

General Rule: Green Card Holders are US Tax Residents

A lawful permanent resident of the United States is a US tax resident. IRC §7701(b)(1)(A)(i). IRC §7701(b)(6) defines the lawful permanent resident as: (1) the individual who has been “lawfully accorded the privilege of residing permanently in the United States as an immigrant in according with the immigrations laws” at any time during the calendar year, and (2) “such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).”

Green Card US Tax Residency: Physical Presence in the United States Does Not Matter

As you can see from the definition above, the green card test does not depend on where the US permanent resident actually resides.  In other words, even if a green card holder spent very little time (just enough to maintain his green card) in the United States, he is still a US tax resident.

Green Card US Tax Residency: Entry into the United States is Critical

Contrary to the actual physical presence after becoming a US tax resident, the entry into the United States with a green card is a highly important event.  As the regulations explain, a green card holder is not a “resident alien” for US tax purposes until he actually enters the United States while holding his green card.  “The residency starting date for an alien who meets the lawful permanent resident test (green card test), described in paragraph (b)(1) of § 301.7701(b)-1, is the first day during the calendar year in which the individual is physically present in the United States as a lawful permanent resident.” §301.7701(b)-4(a).

This means that, if an alien receives a green card but never enters the United States, he will never be a “resident alien” for US tax purposes. Of course, presumably, the green card will eventually lose its validity for failure to maintain it.

However, once the alien enters the United States with his green card, he becomes a resident alien for US tax purposes exactly on that day.  His US tax residency will last until the green card is revoked or he is considered to have abandoned his US permanent residency either judicially or administratively.

Green Card US Tax Residency: US International Tax Implications

Since obtaining a green card is pretty much equivalent to becoming a US tax resident, we must explore the implications of becoming a US tax resident especially from the US international tax perspective.  In a previous article, I already explored in detail the differences between US tax obligations of a resident alien (for US tax purposes) versus nonresident alien. Here, I will highlight the most important of these obligations from the US international tax perspective.

The first obvious US tax consequence of getting a green card and becoming a US tax resident is worldwide income taxation.  The United States government taxes its tax residents on their worldwide income, irrespective of where they earn this income. It also does not matter whether the green card holder’s foreign income is subject to taxation in a foreign country, whether it has been repatriated to the United States, whether it comes from pre-US funds, et cetera.  The obligation to report foreign income on US tax returns is absolute (of course there may be some treaty-based specific exceptions).

Second, a US tax resident may have to report deemed income based on the various anti-deferral tax regimes, such as Subpart F rules, GILTI, et cetera.

Finally, a US tax resident must also comply with all of his US information returns obligations, such as FBAR (officially FinCEN Form 114, the Report of Foreign Bank and Financial Accounts), Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, Form 8938, Form 926, et cetera

Contact Sherayzen Law Office to Understand Your US International Tax Obligations as a Green Card Holder

If you have a green card and you wish to understand your US international tax obligations, you should contact the international tax law firm of Sherayzen Law Office.  We have extensive experience in advising green card holders concerning their US tax obligations, including compliance with US international information returns.  If you have not compliant with your US tax obligations, then we can help bring your US tax affairs into full compliance with US tax laws.

Contact Us Today to Schedule Your Confidential Consultation!

Inbound Transactions Tax Framework | US International Tax Lawyer & Attorney

/in , /by

Inbound transactions deal with Non-US persons who operate in and/or derive income from the United States. This introductory essay opens a series of articles concerning US taxation of inbound transactions. Today, I will set forth the general inbound transactions tax framework; in future articles, I will explore in more detail each element of this framework.

Inbound Transactions Tax Framework: General Guiding Principals

US taxation of inbound transactions is mainly based on the following guiding principle – nexus to the United States. In other words, the US government taxes Non-US persons in a different manner depending on the level and extent of a Non-US person’s activities in the United States.

The more extensive and regular these activities are, the more likely the income derived from these activities to be taxed by the IRS on a net-income basis (as opposed to gross income) at graduated tax rates. On the other hand, if a Non-US person’s activities are limited, less frequent and more passive, then they are likely to be subject to a completely different type of taxation – the one based on gross income at a set rate.

This “US nexus” principal is subject to numerous exceptions due to the fact that the inbound transactions tax framework incorporates two additional goals. The first goal is the US government’s attempt to design the framework in a manner which would attract foreign investments into the United States. For this reason, the Internal Revenue Code (“IRC”) may exclude entire categories of income from US taxation either directly or by altering the source-of-income rules (i.e. excluding certain income from the definition of “US-source income”).

Second, as a counter to the “attraction of foreign investments” principal, the US government wishes to make sure that all income of Non-US persons that needs to be taxed is actually taxed and there is no inappropriate non-taxation of US-source income. As a result of the IRS efforts to ensure the effectiveness of this principal, certain types of income are subject to special regimes of taxation. The most prominent example is the taxation of foreign investments in US real property.

Finally, one should remember to consult US income tax treaties for country-specific exceptions. In particular, treaties often modify tax-withholding provisions with respect to various categories of US-source income.

Inbound Transactions Tax Framework: Main Test

The analytical framework for the taxation of inbound transactions is comprised of a test with seven critical questions. The answers to each question will point us to the right sections of the Internal Revenue Code and establish the correct tax treatment for specific types of income.

  1. Is the person who derives the income is a US person or a Non-US person?

Obviously, if the answer to the question is “US person”, then we are not dealing with an inbound transaction, but a domestic investment. Hence, the taxation of a transaction or investment should be examined under a different tax framework (the one that applies to US persons) than the inbound transactions tax framework.

The difference between these tax frameworks is huge. A US person is subject to worldwide income taxation, whereas a Non-US person is generally taxed only on the income derived from US business activities and US investments.

2. Is it a US-source income?

The question whether a Non-US person derives US-source income or foreign-source income is of huge importance and complexity. The answer to this question involves the analysis of relevant source-of-income rules as modified by a relevant tax treaty.

Generally, Non-US persons are taxed only on their US-source income. This means that if it is determined that the income is derived from a foreign-source, none of it is likely to be subject to US taxation. However, certain types of foreign-source income deemed “effectively connected” with US business activities may still be taxed in the United States. Hence, even if the answer to this question #2 is “no”, you must still continue your analysis by answering question #4 below.

3. Does the Non-US person engage in US trade or business activities?

The determination of whether a Non-US person engages in “trade or business within the United States” depends highly on the facts of a case. In a future article, I will discuss in more detail what the IRS and the courts have determined this term of art to mean.

4. Is the income effectively connected to these US trade or business activities?

The term “effectively connected income” or ECI is one of the most important concepts in US international tax law. It may include not only US-source income generated by a US trade or business, but also certain foreign-source income closely related to a US trade or business. In a future article, I will explore ECI in more detail.

5. Is the ECI subject to a special tax regime such as BEAT or Branch Tax?

The ECI of a foreign person may be subject to a special tax regime related to US companies owned by a foreign person or US branches of a foreign corporation. I will discuss each of these regimes in more detail in the future.

6. If the Non-US person is not engaged in US trade or business activities, is his US-source income classified as FDAP (Fixed, Determinable, Annual or Periodic) income?

FDAP income typically includes passive investment income, such as interest, dividends, rents and royalties. Unless modified by a treaty, FDAP income is subject to a 30% tax withholding on gross income. I will cover FDAP income in more detail in the future.

7. Is this FDAP income subject to an IRC or Treaty Exemption?

In order to promote foreign investment into the United States, certain types of FDAP income are entirely exempted rom US taxation. These exemptions can be found in the IRC or a relevant tax treaty. Again, I will discuss FDAP exemptions in more details in a future article.

Inbound Transactions Tax Framework: Information Returns

In addition to income tax considerations, it is important to remember that the answers to the questions above may lead to the determination of additional compliance requirements in the form of information returns. For example, if a Non-US person engages in a US trade or business through a foreign-owned US corporation, then this corporation may likely have to file Form 5472. A failure to file relevant information returns may lead to an imposition of significant IRS penalties.

Contact Sherayzen Law Office for Professional Help With US Tax Compliance and Planning

If you are a Non-US person who has income from the United States or engages in business activities in the United States, contact Sherayzen Law Office for professional help with your US tax compliance. We have helped hundreds of taxpayers around the world and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Re-attribution: General Rule | International Tax Lawyers Miami

/in , /by

This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. Today, I would like to focus on the §318 re-attribution rule. In this article, I will explain the general §318 re-attribution rule and mention the exceptions. I will discuss the exceptions in more detail in future articles.

§318 Re-attribution: General Rule

Generally, under the IRC §318(a)(5)(A), stock constructively owned by a shareholder under any of the §318 attribution rule is deemed to be actually owned for the purposes of re-attribution to others. In other words, except for limitations mentioned below, the constructive ownership of stock can be further attributed to other persons.

For example, if a husband owns stocks in Corporation Y and his wife is deemed to owned these stocks under the family attribution rules of §318(a)(1)(A)(i), then these constructively-owned stocks can be further attributed from the wife to Corporation X under the shareholder-to-corporation rules of §318(a)(3)(C) if the wife owns 50% or more of the value of stocks issued by Corporation X.

§318 Re-attribution: Great Burden on Taxpayers

The breadth of the §318 re-attribution rule can present a huge challenge to taxpayers. Both individuals and entities must maintain correct ownership records to allow their tax attorneys to properly determine their ownership of stock under §318 and their consequent tax obligations.

The dangerous reach of the §318 re-attribution rule can be demonstrated by the following example. Let’s suppose that corporation X has 200 shares outstanding and all of the shares are owned as follows: H owns 100 shares, his wife W owns 60 shares and his son S owns 40 shares. Additionally, H owns 25% in partnership P.

Under the §318 family attribution rules, H actually owns 100 shares and constructively owns another 100 shares (i.e. his wife’s and his son’s shares) of X. Under §318(a)(5)(A), H’s constructive ownership of 100 shares is deemed to be actual ownership for the purposes of re-attribution of stock. Consequently, under the partner-to-partnership rules of §318(a)(3)(A), 100% ownership of X is now attributed to P.

This can get even worse. Assuming the same facts, what if P also actually owns 50% of the value of the stock of corporation Y? Then, under §318(a)(3)(C), Y would be a constructive owner of 100% of X, because these shares were attributed first to H and, then, from H to P.

§318 Re-attribution: Restrictions

It is obvious that, without any limitations, such an extensive re-attribution of stock can easily get out of hand and spread to cover persons who have no relationship to the original owners. For this purpose, the US Congress imposed certain restrictions on the re-attribution of stock under §318(a)(5)(A). Each provision §318(a)(5)(B)–§318(a)(5)(D) imposes limitations on re-attribution of stock where the relationship between the original owner and the person subject to stock re-attribution no longer justifies the assertion of constructive ownership. I will detail these restrictions in future articles.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

If you own foreign assets, including foreign business entities, you have the daunting obligation to meet all of your complex US international tax compliance requirements; otherwise, you may have to face the wrath of the IRS in the form of high noncompliance penalties. In order to successfully meet your US international tax compliance obligations, you need the professional help of Sherayzen Law Office.

We are an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers worldwide with their US international tax compliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Option Definition | US International Tax Lawyer & Attorney

/in , /by

This article continues our series of articles on the IRC (Internal Revenue Code) §318 constructive ownership rules. In this article, I would like to introduce the readers to the infamous §318 option attribution rules. Before we delve into the discussion of the constructive ownership rules for options, however, it is important to understand what “option” actually means for the purpose of §318. Hence, today, I will focus on the §318 option definition.

§318 Option Definition: Main Rule

An option is a right to obtain stock at a certain price and date. I want to emphasize that option is not an obligation, it is a right which a taxpayer may or may not ever exercise.

Such a broad §318 option definition includes a great variety of options: options to purchase stock, option to acquire unissued stocks (as long as a shareholder has the right to obtain stock at his election – see Rev. Rul. 68-601), certain warrants and debentures that may be converted into stocks (as long as there are no contingencies, other than time, that must be met before the conversions rights can be exercised – see FSA 200244003), et cetera.

§318 Option Definition: Rights Not Considered Options

Not all rights to acquire stock, however, are considered options for the purposes of §318 option definition. There is a large number of exceptions, but all of them are centered around the concept of some type of restrictions on the exercise of the option. I will list below the five most popular exceptions which are not considered options under §318(a)(4):

First, a right to acquire stock is not an option if the optionee does not have control over the exercise of the option. For example, if there are many contingencies which can prevent exercise of an option, then this is not an option of the purposes of §318(a)(4). See FSA 199915007.

Second, a corporation’s right to buy back its own stocks is not an option for the purposes of §318. Rev. Rul. 69-562.

Third, a right of first refusal is not an option for the purposes of §318. For example, if the right to purchase stock is contingent on the obligor’s decision to sell, then this is not an option under §318(a)(4). TAM 8106008. We can even broaden the rule not only to a right of first refusal, but to almost all situations where the exercise of option depends on the other party’s decision to sell.

Fourth, certain stock appreciation rights are not options if they only entitle the owner of these rights to cash benefits, but do not permit acquisition of stock. Of course, if contract entitles the owner to the right to acquire stocks, then such stock appreciation rights may actually be options §318. See PLR 9341019.

Finally, the right to acquire stocks is not an option under §318 if such transfer is restricted and requires consent. For example, the IRS held in TAM 9410003 that such an arrangement (i.e. restriction on the transfer of shares without other shareholders’ consent) combined with the right of first refusal did not constitute an option to acquire those shares.

§318 Option Definition: Exceptions to Restrictions

I would like to warn the readers, however, that not all restrictions on exercise of an option automatically exclude a right to acquire a stock from the §318 option definition. We can outline two broad exceptions to restrictions here.

First, where the control over the decision to exercise the option rests with the holder of the right to purchase a stock, such a restriction is insufficient to prevent this arrangement to be treated as an option. See Rev. Rul. 68-601.

Second, where the restriction is fixed in time. For example, under FSA 200244003, a warrant is an option if there are no contingencies or limitations on the right to exercise other than time limitation. Similarly, if the right to acquire shares can only be exercised on a fixed date, it is an option. Rev. Rul. 89-64.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Concerning Foreign Corporations

If you are an owner of a foreign corporation, you are facing a very difficult task of working through the enormous complexity of US international tax compliance requirements and trying to avoid the high IRS noncompliance penalties. In order to be successful in this matter, you need the professional help of Sherayzen Law Office.

We are an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers worldwide with this issue, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Upstream Corporate Attribution | International Tax Lawyers Florida

/in , /by

In a previous article, I discussed the rules for the downstream attribution of corporate stocks under the IRC (Internal Revenue Code) §318. Today, I would like to discuss the §318 upstream corporate attribution rules.

§318 Upstream Corporate Attribution: Two Types of Attribution

There are two types of §318 corporate attribution rules: downstream and upstream. Under the downstream corporate attribution rules, stocks owned by a corporation are attributed to this corporation’s shareholders. The upstream corporate attribution rules are exactly the opposite: stocks (in another corporation) owned by shareholders are attributed to the corporation. This article will focus on the upstream attribution rules.

§318 Upstream Corporate Attribution: Main Rule

Under §318(a)(3)(C), a corporation is deemed to be the constructive owner of all stocks owned directly or indirectly by its 50% shareholder. The 50% threshold is determined by value of the stock in the corporation. Id.

Of course, this rule applies only to stocks owned by shareholders in another corporation; a corporation can never be a constructive owner of its own stock under §318(a)(3)(C). Treas. Reg. §1.318-1(b)(1).

§318 Upstream Corporate Attribution: 50% Threshold

“In determining the 50-percent requirement of section 318(a)(2)(C) and (3)(C), all of the stock owned actually and constructively by the person concerned shall be aggregated.” Treas. Reg. §1.318-1(b)(3). In other words, for the purpose of upstream corporate attribution under §318, all actual and constructive ownership of a shareholder should be considered in order to determine whether th 50% value ownership threshold is met.

Let’s consider the following hypothetical to illustrate this rule: H owns 50% of value of the stock of X, a C-corporation, while his wife W owns 50% of the value of stock in Y, another C-corporation; the rest of Y’s stock is owned by unrelated third-parties. The question is how much of X’s stock ownership is attributed to Y.

We should begin our analysis by stating that, under the family attribution rules of §318(a)(1)(A), H’s shares in X are attributed to W; in other words, W is a constructive owner of 50% of the value of X’s stock. Since W is a 50% value-owner of Y’s stock, Y is deemed to own the stock actually and constructively owned by W under the operation of §318 upstream corporate attribution rules. This means that Y constructively owns 50% of X’s stock, even though W has no actual ownership of X.

§318 Upstream Corporate Attribution: S-Corporations

It should be emphasized that the §318 upstream corporate attribution rules do not apply to S-corporations with respect to attribution of corporate stock between an S-corporation and its shareholders. Rather, in such cases, S-corporation is treated as a partnership and its shareholders as partners. See §318(a)(5)(E). Hence, corporate stocks owned by a shareholder are fully attributed to the S-corporation irrespective of the value ownership of a shareholder in the S-corporation.

Keep in mind, however, that the usual constructive ownership rules for corporations and shareholders apply for the purpose of determination of whether any person owns stock in an S-corporation.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Concerning Foreign Corporations and Other Foreign Businesses

If you are an owner of a foreign corporation or any other foreign business entity, you are facing a very difficult task of working through the enormous complexity of US international tax compliance and trying to avoid the high IRS noncompliance penalties. In order to be successful in this matter, you need the professional help of Sherayzen Law Office.

We are an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers worldwide with this issue, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!