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Substantial Presence Test United States Definition | International Tax Lawyer Minneapolis

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Foreigners who satisfy the Substantial Presence Test constitute a an important and very large category of resident aliens for US tax purposes. Substantial Presence Test is based on the number of days that an individual is physically present in the country. The definition of “United States” varies depending on a particular Internal Revenue Code (IRC) provision.  This brief essay explores the Substantial Presence Test United States definition.

Substantial Presence Test United States Definition: Background Information

In a previous article, I explored in detail the Substantial Presence Test. I will only provide a summary of the test in this essay.

In reality, there are two substantial presence tests; if an individual meets either test, he is a US tax resident unless an exception applies.

The first substantial presence test is met if a person is physically present in the United States for at least 183 days during the calendar year. 26 USC §7701(b)(3).  

The second test (the so-called “lookback test”) is satisfied if two conditions are met: (1) the person is present in the United States for at least 31 days during the calendar year; and (2) the sum of the days on which this person was present in the country during the current and the two preceding calendar years (multiplied by the fractions found in §7701(b)(3)(A)(ii)) equals to or exceeds 183 days. 26 USC 7701(b)(3)(A).  

Let’s discuss how exactly the lookback test works.  The way to determine to determine whether the 183-day test is met is to add: (a) all days present in the United States during the current calendar year (i.e. the year for which you are trying to determine whether the Substantial Presence Test is met) + (b) one-third of the days spent in the United States in the year immediately preceding the current year + (c) one-sixth of the days spent in the United States in the second year preceding the current calendar year. See 26 USC §7701(b)(3).

Substantial Presence Test United States Definition: Definition of United States

Treas. Regs. §301.7701(b)-1(c)(2)(ii) define “United States” for the purposes of the Substantial Presence Test.  In particular, the regulations state that “United States” includes all fifty states of the United States and the District of Columbia.  Moreover, the definition of “United States” also includes: “the territorial waters of the United States and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources”.  Id.

Moreover, the regulations specifically exclude all possessions and territories of the United States as well as the air space over the United States. Id.  For example, time spent in Puerto Rico will not count toward the substantial presence test. Similarly, if an alien flies over the United States on a plane and never lands, then the IRS will exclude this day from the count.

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

The Substantial Presence Test United States Definition is just one of a huge array of complications in US international tax law.  This is why you need to secure the help of Sherayzen Law Office for professional help with US international tax issues, including tax compliance, tax planning and offshore voluntary disclosures.  We have helped hundreds of taxpayers around the world.  We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Residents versus Nonresidents: US Tax Differences | International Tax Lawyer Minneapolis

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There is a huge difference between the US tax obligations of a US tax resident versus nonresident alien. This brief essay strives to outline the main differences in the US tax treatment of tax residents versus nonresidents.

Residents versus Nonresidents: Worldwide Income Taxation

One of the key differences in the tax treatment of residents versus nonresidents is concerning what income is subject to US taxation.  A resident alien is subject to worldwide income taxation similarly to a US citizen. It does not matter where the income is earned, whether it 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 – a resident alien is always subject to worldwide income taxation.

Moreover, a resident alien may also be subject to highly invasive anti-deferral tax regimes such as Subpart F rules and GILTI tax (see below). Under these regimes, a resident alien may have to recognize income that the IRS deems that he earned, but there was no actual distribution.

On the other hand, a nonresident alien may have to pay US taxes on only four types of income. First, US-source income (that the Internal Revenue Code does not otherwise exclude from taxation) that the IRS considers as FDAP income (fixed, determinable, annual or periodical income) under IRC §871(a) (see below more on this subject). Second, a nonresident alien has to pay US taxes on US-source capital gains.  Third, a nonresident alien has to declare on his US income tax returns all ECI (Effectively Connected Income) income from a trade or business within the United States. Finally, certain other US-source and certain other foreign-source income under highly limited exceptions. All other income is excluded from taxation of nonresident aliens.

Residents versus Nonresidents: Deductions

On the other hand, a resident alien has available (at least hypothetically) a far broader range of deductions, including a more expanded list of itemized deductions (for example, mortgage interest, property taxes, et cetera) and a standard deduction.

A nonresident alien, however, has available a far more limited range of deductions.  First, deductions related to the ECI earnings. Second, only three specific kinds of itemized deductions: casualty/theft losses from property located in the United States, charitable contributions to qualified US charities only and one personal exemption (which is a moot point at the time of this writing). Third, a nonresident alien can only claim a standard deduction in the case of a few income tax treaties that allow the claim of a standard deduction; otherwise, the standard deduction is not available.

Residents versus Nonresidents: Tax Filing Status

If a resident alien marries another resident alien or a US citizen, then the couple may elect to file a joint US tax return. Married Filing Jointly is probably the most beneficial tax filing status in the United States.

On the other hand, nonresident aliens (if they want to keep their nonresident status) married to a resident alien or a US citizen can only file as “married filing separately”.  In most situations, this is the most unfavorable tax filing status from the US tax perspective.

Residents versus Nonresidents: US International Information Returns

Compliance with US international information returns is potentially a huge difference between the US tax burden of residents versus nonresidents. A resident alien may be required to file a bewildering array of US international information returns depending on his particular situation.  A failure to do so may result in the imposition of very high IRS penalties.

The main examples of such returns are: 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.

Residents versus Nonresidents: Tax Withholding on US-Source Income

There are several situations in which a payment to a non-US person may be classified as a US-source income and subject to tax withholding under IRC §§1441 and 1442 solely due to the “US resident” classification of the payor.  Here, I am referring to a situation where the US tax code classifies an interest payment as US-source income only because it is a resident alien made the payment. If such a payment were made by a nonresident alien, then it would be foreign-source income not subject to US tax withholding.

The most common example of such a situation involves interest payments.  Under §861(a)(1), interest paid by noncorporate resident of the United States is US-source income potentially subject to tax withholding. However, if the individual is a nonresident alien for US tax purposes, then the interest is not US-source income exempt from US tax withholding, at least under IRC §§1441 and 1442.

As a side note, I should mention that if the interest made by a US tax resident is classified as “portfolio interest” under §871(h), it would be exempt from the 30% tax withholding pursuant to §§871(a)(1) and 881.  There is also a potential for the exclusion from tax withholding under a particular tax treaty. As always, an international tax attorney should analyze each particular set of facts in its own context in order to determine whether income would be subject to US tax withholding.

Residents versus Nonresidents: Anti-deferral Tax Regimes

A US tax resident may be subject to a wide variety of various US anti-deferral tax regimes, such as PFIC (Passive Foreign Investment Company), GILTI, Subpart F rules, et cetera.

Moreover, a situation may occur where US resident classification as resident under the IRC does not impact this particular individual’s US income tax obligations but may affect such obligations of other US persons.  The most common example is the classification of a foreign corporation as a Controlled Foreign Corporation or CFC. 

Imagine where a person is a US tax resident under the IRC but utilizes the “tie-breaker” provisions of an income tax treaty to continue being classified as a nonresident alien. In this case, this individual’s US income tax obligations are the same as before. However, for the purposes of classifying a foreign corporation as a CFC, he remains a US tax resident. For example, if he owns 10% and the other US owners own at least 41% of this foreign corporation, then the corporation itself will become a CFC without any regard to the treaty provisions. See Reg. §301.7701(b)-7(a)(3).

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

In this article, I summarized some of the most important US tax differences between US residents versus nonresidents.  There are many more complexities and tax traps in this area of law.

This is precisely why you need to contact Sherayzen Law Office for professional help with your US tax classification and any other US international tax issue. Our firm has extensive experience in advising clients concerning their US tax status and the potential US tax consequences of a particular US tax classification.

Contact Us Today to Schedule Your Confidential Consultation!

Saving Clause | International Tax Lawyer & Attorney Minneapolis

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The Saving Clause is a provision that all US income tax treaties contain. In this brief essay, I will introduce the readers to the Saving Clause, its purpose and its effect.

Saving Clause vs. Savings Clause

The first thing to note is that the proper way to refer to this important tax treaty provision is “saving clause” and not “savings clause” (see, for example, 2016 US Model Income Tax Treaty, article 1(4)).  You will still see sometimes various articles and even tax provisions (for example, §7852(d)(2)) incorrectly use “savings clause”.

Saving Clause: Effect on US Citizens

The Saving Clause provides that the United States may tax its citizens as if the tax treaty were not in effect. Here is a common example of the clause from the US-Spain tax treaty: “Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect” (italics added).

In other words, the Saving Clause prevents US citizens who are classified as income tax residents of the treaty country from claiming a different tax treatment that would otherwise be available under the treaty to noncitizens who are residents of the treaty country. For example, a US citizen cannot claim an exemption from certain income otherwise exempt for a noncitizen who is a resident of a treaty country.

Saving Clause: Effect on US Residents

The impact of the Saving Clause on US residents is more complicated.  The Clause usually provides that the United States may tax its residents as determined by a treaty (usually in an Article 4) as if the treaty were not in effect.  Usually, these resident provisions would contain tie-breaker rules. This would mean that an individual who is a resident alien under §7701(b) but a resident of the treaty country under the treaty, then the saving clause cannot deny the individual any of the exemptions from US tax law or reductions in US tax that are provided by the treaty to residents of the treaty country. In such cases, the saving clause would have limited impact on residents.

If, however, a tax treaty does not contain the tie-breaker provisions in its definition of a tax resident (as some old treaties), then the impact of the Saving Clause may be tremendous and even dispositive. In this situation, the Saving Clause assures that an individual who is, at the same time, a resident alien under the Internal Revenue Code IRC) provisions and a resident of the treaty country under the treaty country’s laws will still be taxed as a US resident alien irrespective of the tax treaty.

Saving Clause: Worldwide Income Reporting and Foreign Asset Disclosure Requirements

The application of the Saving Clause may have tremendous impact on an individual’s US tax obligations.  First of all, I remind the readers that, absent treaty limitations, all US tax residents are taxed on their worldwide income. This is the rule irrespective of whether the income is earned, whether it is repatriated to the United States and whether it is subject to foreign tax withholding.

Moreover, US Persons may also be subject to multiple US information return reporting requirements, including FBAR, Form 8938, Form 5471, et cetera.  In this context, it is important to remember that the definition of a “US Person” is broader than the definition of a “resident” for income tax purposes. In other words, a person may be a nonresident for tax purposes due to a tax treaty provision, but he will still be a US Person for the purposes of filing an FBAR or another US information tax return.

Contact Sherayzen Law Office for Professional Help with Your US International Tax Compliance

If you are a US tax resident or a US person, you may be subject to highly complex US international tax requirements.  In order to ensure your full compliance with US international tax provisions, contact Sherayzen Law Office for professional help.

Since 2005, Sherayzen Law Office has helped hundreds of US taxpayers to resolve their prior US tax noncompliance and assure their continuous compliance with US international tax laws.  We have extensive experience with all major US tax compliance requirements such as: worldwide income tax compliance, FBAR, Form 926, Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, FATCA Form 8938, et cetera. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Foreign Inheritance Tax Attorney Minneapolis | International Tax Lawyer Minnesota

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Receiving a foreign inheritance may open a litany of US international tax compliance obligations. Therefore, one of the first things you should do is to seek the help of an international tax attorney who specializes in foreign inheritance reporting.  If you reside in Minneapolis, Minnesota, you need to look for a Foreign Inheritance Tax Attorney Minneapolis. You will find that Sherayzen Law Office Ltd. is very likely to be the perfect fit for you.

Foreign Inheritance Tax Attorney Minneapolis: Why Foreign Inheritance is So Important to Your US international Tax Compliance

There are two main reasons why receiving a foreign inheritance may be a critical event for your US international tax compliance. First, receiving a foreign inheritance means that you have additional assets, income and transactions to report to the IRS.  The way that US international tax law works, it means that it is usually more than just one requirement is triggered. Rather, it may be a set of issues and reporting obligations that require an experienced international tax attorney to resolve them correctly. 

The multitude and complexity of issues can be fairly large: from the reporting of the foreign inheritance itself, income recognition, transfer of cash/assets to the United States to additional reporting requirements concerning newly acquired foreign assets and offshore voluntary disclosures involving prior noncompliance. You should keep in mind that noncompliance with these requirements may result in the assessment of high IRS penalties.

The second reason why a foreign inheritance is so important and so dangerous is the relative complacency with respect to and even complete nonrecognition of the potential US tax consequences of receiving a foreign inheritance with all of the multitude of issues to which I alluded above.  The problem is not just that many US taxpayers are completely ignorant of the fact that a foreign inheritance may require extensive US tax compliance. Even worse, many taxpayers erroneously but ardently believe that a foreign inheritance is something completely unrelated to the United States and should not have any US tax consequences. At best, they may focus on Form 3520 reporting while overlooking the complexity of the rest of the issues involved in receiving a foreign inheritance.

This is precisely why I highly recommend consulting an international tax lawyer with extensive experience in foreign inheritance US tax reporting, such as Sherayzen Law Office, if you have received or about to receive a foreign inheritance.

Foreign Inheritance Tax Attorney Minneapolis: International Tax Lawyer

I just mentioned that you need to seek the help of an international tax attorney rather than just a foreign inheritance tax attorney.  Why is that?

The answer is simple: a foreign inheritance attorney is first and foremost an international tax lawyer – i.e. a lawyer with profound knowledge of and extensive experience in US international tax law, particularly in the area of US international tax compliance. This means that a lawyer must be familiar with such common US international tax forms as Form 3520 (critically important for foreign inheritance reporting) and Form 8938.  He must also understand and be able to identify related US international tax compliance forms such as Forms 3520-A, 5471, 8858, 8865 cetera.  Of course, every US international tax lawyer must be very familiar with FinCEN Form 114 commonly known as FBAR.

In addition to these information returns, an international tax lawyer must be familiar with all types of foreign income reporting.  This requirement includes the knowledge of foreign rental income, PFIC compliance, GILTI income, capital gains concerning foreign real estate, et cetera.

Sherayzen Law Office is a highly experienced international tax law firm with respect to all of these income tax and information return requirements, including specifically all of the aforementioned forms.

Foreign Inheritance Tax Attorney Minneapolis: Tax Planning

It is highly prudent to engage in tax planning concerning a foreign inheritance. This is important not only for the purpose of limiting future tax burdens, but also to control future US tax compliance costs.  

Sherayzen Law Office has extensive experience in foreign inheritance US tax planning for its clients in Minneapolis and all over the world.  We also have a highly valuable experience of combining income tax planning with offshore voluntary disclosures.

Foreign Inheritance Tax Attorney Minneapolis: Offshore Voluntary Disclosures

Perhaps you learned late about your US international tax compliance requirements concerning foreign inheritance. In fact, this is a very common situation. In this case, you will find yourself in a very uncomfortable position of facing potentially multiple high IRS penalties for multiple violations of US international tax law.

For this reason, your foreign inheritance tax attorney must also have a profound understanding of the IRS voluntary disclosure options. In fact, in my experience, a discussion of a foreign inheritance often leads to the identification of past US international tax noncompliance and the immediate discussion of IRS offshore voluntary disclosure to remedy past noncompliance.

Offshore Voluntary Disclosures is a core area of our international tax practice at Sherayzen Law Office. We have helped hundreds of US taxpayers worldwide, including in Minneapolis, to bring their tax affairs into full compliance with US tax laws. This work included the preparation and filing of all kinds of offshore voluntary disclosures including: SDOP (Streamlined Domestic Offshore Procedures), SFOP (Streamlined Foreign Offshore Procedures), DFSP (Delinquent FBAR Submission Procedures), DIIRSP (Delinquent International Information Return Submission Procedures), et cetera.

Contact Sherayzen Law Office for Professional Foreign Inheritance Tax Help

Sherayzen Law Office is an international tax law firm that specializes in US international tax compliance, including foreign inheritance reporting.  We have helped numerous clients around the world with their foreign inheritance US tax compliance. We can help you! Hence, if you are looking for a Foreign Inheritance Tax Attorney Minneapolis, contact us now to schedule Your Confidential Consultation!

FACC Seminar (French-American Chamber of Commerce Seminar) | News

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On October 19, 2017, Mr. Eugene Sherayzen, an owner of Sherayzen Law Office and a highly experienced international tax attorney, conducted a seminar titled “Introduction to U.S. International Tax Compliance for U.S. Owners of Foreign Businesses” at the French-American Chamber of Commerce in Minneapolis, Minnesota (the “FACC Seminar”). The audience of the FACC Seminar consisted of business lawyers and business owners.

The FACC Seminar commenced with the breakdown of the title of the seminar into various parts. Mr. Sherayzen first analyzed the tax definition of “owner” and contrasted it with the legal definition of owner. Then, he identified who is considered to be a “U.S. owner” under the U.S. international tax law.

During the second part of the FACC Seminar, Mr. Sherayzen discussed the definition of “foreign” (i.e. foreign business) and the definition of the concept of “business”, contrasting it with a foreign trust. At this point, the tax attorney also acquainted the attendees with the differences between the common-law and the civil-law definitions of partnership.

Then, the focus of the FACC Seminar shifted to the discussion of the U.S. international tax requirements. The tax attorney stated that he would discuss four major categories of U.S. international tax requirements: (1) U.S. tax reporting requirements related to ownership of a foreign business; (2) U.S. owner’s tax reporting requirements related to assets owned by a foreign business; (3) U.S. tax reporting requirements related to transactions between a foreign business and its U.S. owners; and (4) income recognition as a result of anti-deferral regimes.

Mr. Sherayzen first discussed the U.S. tax reporting requirement related to the ownership of a foreign business. In particular, he covered Forms 5471, 8865 and 8858. The tax attorney also introduced the catch-all Form 8938. In this context, he also explained the second category of U.S. international tax requirements concerning the assets owned by a foreign business.

The next part of the FACC Seminar was devoted to the U.S. tax reporting requirements concerning transactions between a foreign business and its U.S. owners. Mr. Sherayzen explained in detail Form 926 and Schedule O of Form 8865, including the noncompliance penalties associated with these forms. The tax attorney also quickly reviewed Form 8886 for participating in transactions related to tax shelters. The discussion of the complex penalty system of Form 8886 surprised the audience.

The last part of the FACC Seminar was devoted to the income tax recognition and other U.S. tax reporting requirements that arise by the operation of anti-deferral regimes. Both, the Subpart F and the PFIC regimes were covered by the tax attorney.