Tax Lawyer for Inbound Capital

Foreign persons and companies doing business in the U.S. are taxed on income which is “effectively connected” or “sourced” there.  Other sorts of foreign investors must meet their tax withholding obligations.

Why the distinction for “foreign persons and foreign companies”?  Because U.S. persons are taxed on all their income, no matter where in the world it arises.

It’s possible that, simply by not paying attention, a foreign person could without any intention whatever morph into a U.S. person.

  • For tax purposes, a U.S. person need not be a citizen or even a green card holder.
  • Losing foreign person status can mean exposing your worldwide income to U.S. taxation
  • Tax treaty provisions can significantly impact or alter these general rules

Effectively connected income (“ECI”) is taxed net of the costs to produce it, according to the usual U.S. tax brackets and rules.  Other investment income, i.e., any fixed or determinable annual or periodic payment (“FDAP”), is subject to a flat 30% withholding rate on the full gross amount.

  • In many circumstances, distinguishing between ECI and FDAP income can be difficult
  • The person or entity paying out the distribution is personally liable for any required U.S. tax withholding
  • Tax treaty provisions can significantly impact or alter these general rules

In addition, the Transfer Pricing rules, which act to allocate income between a U.S. business and its related overseas branches, subsidiaries, or parent, can create difficult tax problems for the international investor.

  • The IRS can use these highly technical rules to increase the amount of U.S. income and so its associated U.S. tax
  • The foreign state may do its own, independent income allocation, which could result in the taxpayer being taxed on more that 100% of the total income earned

All this complexity must be managed if foreign persons are to succeed in the U.S. marketplace.  Tom provides his clients the expertise needed both to defend present challenges and to plan for the future.

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Did You Know?

Filing a joint return with your spouse may require you to pay his/her tax liability, even after your divorce is final.