Let’s suppose it is indeed US-source income; then the next question that we have to deal with is whether this non-US person engages in US trade or business activities. Just to repeat myself, if it is not a US-sourced income, generally speaking, it’s not taxable; but you see here and there that in order to get there, we still have to find out if this income is somehow effectively connected to a US trade or business.
The issue of US trade or business activities is another complex issue. As I’ve said, all of the questions that are contained in this flowchart – all of them are complex with exceptions upon exceptions; all with difficulties. As I’ve said before, a lot of things concerning inbound transactions are fact-dependent. It is even more-so when we talk about US trade or business activities because there is no actual definition of what a US trade or business activity is; it is highly factually-dependant. However, based on the cases and the IRS guidance I’ve given you sort of a general rule: A US trade or business exists if the foreign corporation activities within the United States are considerable, continuous and regular.
Let’s deal with a few examples to help us figure out what we’re looking at; common examples are:
‘Consistent attempts to market products and services in the United States’, is considered to be a US trade or business. This is very important, especially in situations concerning intellectual property and situations where the intellectual property is actually outside of the United States. Marketing within the United States may unintentionally result in US-source income.
On the other hand, clerical or collection-related activities do not produce US trade or business. This is also very common; I’m pretty sure that a lot of you have dealt with a situation like this before where a foreign person sets up an LLC, say in Delaware, simply to collect the payments for the work performed overseas or for royalties related to intellectual property which is located overseas. Just setting up an office for an LLC in the United States for collection-related activities will not result in US-source income.
Another common issue concerns agents. If there is an agent of a US corporation in the United States that has the authority to conclude contracts, and he regularly exercises this authority; then this would be sufficient to find that a US trade or business exists.