Source: http://gswlaw.com/international-investors-and-us-income-taxes/
Timestamp: 2017-10-21 05:03:34
Document Index: 790046799

Matched Legal Cases: ['§7701', '§7701', '§ 701', '§7701', '§7701', 'Art 4', '§6114']

International Investors and US Income Taxes
International Investors | 03. Nov, 2016 by admin | 0 Comments
International Investors who immigrate to the United States will either be taxed as a resident alien (subject to US income tax on their world-wide income) or a non-resident Alien (subject to US income tax on US source income, only).
2. Resident Alien Individuals (Green Card Test; Substantial Presence Test, (IRC §7701(b)(1)(A));
3. Domestic Corporations
4. Domestic Partnerships
6. Any Trust
A foreign national is taxed in the United States on world- wide income if they are classified as a U.S. income tax resident, under one of two tests:
1. Lawful Permanent Resident Test
A non-green card holder will be classified as a U.S. income tax resident if they meet the substantial presence test found in IRC§7701(b)(3)(IRC § 701 (b)(1) (A)(ii)):
Non-resident aliens have special tax rules and have to file Form 1040 NR annually with the IRS (or face both civil and criminal penalties for tax non-compliance). US income tax treaties (61 to date) may ameliorate taxes due for the non-resident aliens subject to the treaty provisions.
U.S. Income Tax (Non-Resident Aliens)
1. “FDAP” Income
U.S. Source “FDAP Income” i.e., Fixed or Determinable Annual or Periodical Income (e.g., salaries, wages, interest, rents, dividends, royalties, annuity payments and alimony).
Capital gains from US sources are only subject to US income tax if the E-2 investor is either:
1. Present in the US for more than 183 days, or
2. The gains are effectively connected to a US trade or business (which includes gains from sale of US real property).
Non-resident Aliens are subject to US income tax on their investment income (known as “FDAP income” i.e. Fixed or Determinable Annual or Periodical Income) or their Income which is effectively connected to a US trade or business.
Under U.S. Federal Income Tax Laws, an alien is either taxed as a resident alien (subject to U.S. Income Tax on world-wide income) or a non-resident alien (subject to U.S. Income Tax on U.S. source income).
Non-Resident Alien: U.S. Tax Resident
An alien is classified as a resident alien (U.S. tax resident) if:
1. He is a U.S. lawful permanent resident at any time during the calendar year (i.e., has a “green card”).
2. He meets the “substantial presence test” (present in the U.S. for 122 days per year over a 3 year period).
An alien satisfies the “substantial presence test” for any calendar year (the “current year”) if:
1. He is in the U.S. for at least 31 days during the current year.
2. The sum of the number of days in the U.S. in the current year and two preceding calendar years equals or exceeds 183 days (“183 day test”).
3. For the “183 day test”, each day in the U.S. in the current year is counted as a full day. Each day in the U.S. in the first preceding calendar year is counted as 1/3 of a day, each day of presence in the second preceding calendar year is counted as 1/6 of a day (IRC §7701(b)(3)(A)(ii)).
“Substantial Presence Test”: Closer Connection Exception
An alien who meets the substantial presence test may avoid being classified as a U.S. tax resident if:
1. He is present in the U.S. for fewer than 183 days during the calendar year.
2. He maintains a tax home in a foreign country during the entire current year.
3. He has a closer connection to the foreign country (i.e., his tax home) during the current tax year.
4. He timely files IRS form 8840, and has not applied for a “green card” (IRC §7701(b)(3)(B) and (C)).
The United States has 61 income tax treaties (see below). To be eligible for the benefits of an income tax treaty, an individual must qualify as a resident of either the U.S. or the other country that is a party to the treaty (“the contracting state”).
The U.S. Model Income Tax Treaty (Art 4(1)) defines “resident of a contracting state” as “any person who, under the laws of that state is liable for tax in the state, by reason of his domicile, residence, citizenship, place of management, place of incorporation”.
If an alien is classified as both a U.S. tax resident and a resident of its treaty partner (“dual resident”), the tax treaties contain “tie-breaker” provisions which determine the dual resident’s tax residence status as follows:
1. Tax resident in country with permanent home.
2. If permanent home in both countries, tax resident in country with “center of vital interests” (personal and economic interests).
3. If the center of vital interests cannot be determined, tax resident in country in which he has a habitual abode.
4. If the habitual abode is in both (or neither) countries, he is a tax resident of the country in which he is a national).
An alien who claims the benefit of a treaty, to be classified as a non-resident, will still be subject to U.S. federal income tax as a non-resident alien.
A non-resident alien who relies on a U.S. tax treaty for an exemption from U.S. tax that is effectively connected with a U.S. trade or business is required to file IRS Form 8833 to disclose the tax exemption reliance (IRC §6114; Treas Reg 301.6114-1).
The US currently has 61 treaties for income tax.