EB-5 Investor Visa (U.S. Tax Issues)

Written by admin on May 20th, 2011

vital interests cannot be determined, tax resident in country in which he has a habitual abode. 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).

Income Tax treaty benefits are available only to a “resident” of a country and special rules may apply to determine residency of trusts, estates, flow-through and hybrid entities.  Relief from double taxation is afforded a treaty resident by specific provisions allocating taxing jurisdiction over items of income between the two countries that are parties to a treaty, and by a “treaty” tax credit provision.  Administration provisions, providing for mutual agreement procedure and for exchange of information and assistance in collection are intended to prevent tax avoidance and evasion.

Special treaty residency issues are presented by U.S. citizens and aliens admitted for permanent residence in the United States (i.e., “green card holders”).  The United States taxes its citizens and residents on their world-wide income, wherever they reside.  Such individuals may be U.S. Income Tax residents (for tax treaty purposes) even when physically residing outside the U.S.).

Under a treaty’s savings clause, the United States reserves the right to tax its citizens and residents (as determined under a treaty) as if the treaty had not entered into force.  As a result, U.S. citizens and residents may not use a U.S. Income Tax Treaty to reduce U.S. Income Tax.

Income earned through a fiscally transparent entity (i.e., partnership, limited liability company, grantor trust) will be considered to be derived by a treaty resident if the residency country considers that person as deriving the item of income.

In the case of non-grantor trusts and estates, treaty “residency” (i.e., the liability for income tax) is determined by the domicile, residence, place of management of the estate or trust.  The trust or estate is liable for tax in the treaty per the country (not whether income is liable to tax in the “hands” of the trust/estate or its beneficiaries).

A non-resident partner of a U.S. partnership (trade or business in the U.S.) is taxable by the U.S. in the partner’s share of partnership income (under the branch profits article of a U.S. income tax treaty).  Any gains from the sale of such a partnership interest will be taxable by the U.S. to the extent the gains are attributable to business assets of the partnership (Donroy v. U.S. 301 F.2d 200 (9th Cir 1962), Unger v. Commr 936 F.2d 316 (D.C. Cir. 1991), aff’g T.C. Memo 1991-15; Rev. Rul. 91-32 1991-1 C.B. 107).

Non-resident shareholders of U.S. corporations are subject to a 30% statutory withholding tax on U.S. source dividends that are not “effectively connected” business income and paid to a non-resident (IRC §871(a), 881(a), 1441(a)).  The withholding rate may be reduced by treaty.

Income tax treaties seek to prevent double taxation by:

Assigning primary taxing jurisdiction over a resident to one treaty partner. Limiting source country taxation of income. Providing a foreign tax credit by the resident country for items of income taxed by both the source and residence countries.

Under U.S. Income Tax treaties, interest, royalties (intellectual property: copyrights, patents, trademarks) is taxable by the owner’s country of residence (i.e., the source country attributes the income to owner’s country of residence).

Under U.S. Income Tax treaties, source country taxation is preserved for real estate income (i.e., the source country has the primary taxing right).  The source country does not have the exclusive taxing right; avoidance of double taxation depends upon the residence country granting a tax credit for source country tax.

Capital Gains

Under U.S. domestic tax rules, the U.S. retains the right to tax gains realized by a non-resident from the sale of U.S. real property holding companies (IRC §897).  Gains realized by a non-resident from the sale of personal property are “foreign source” and not taxable by the U.S. (IRC §865).

Under U.S. tax treaties, gains from the sale of real property are taxable by the country in which the real property is located.  The source country has the primary taxing right which is not an exclusive right.  Avoidance of double taxation will depend upon whether the resident country grants a credit for source country taxes.

Personal Services

          Income from employment may be taxed in the country of residence.  Income from furnishing personal services (i.e., not employee services) is taxed by the source country as “business profits” derived from furnishing personal services.  Income that may be taxed as business profits includes all income from the performance of the personal services carried on by the partnership and any income from ancillary activities to the performance of these services.

          For employees, compensation for personal services (i.e., dependent personal services) may be taxed by the employee’s residence country and by the source country, to the extent the services are performed in the source country (see U.S. Model Income Tax Treaty Art. 14(1)).

          The source country retains the right to tax all compensation from dependent personal services.  If three (3) conditions are satisfied, dependent personal services income is exempt from source country taxation:

The employee is in the source country for less than 183 days during the calendar year in which services are performed. The compensation is paid by an Employer who is not a resident of the source country. The compensation is not a deductible expense by a permanent establishment that the employer has in the source country (U.S. Model Income Tax Treaty Art. 14(2)).

Athletes & Entertainers

Under the U.S. Model Income Tax Treaty Art 16(1), performance income of an athlete or entertainer may be taxed by the source country if gross receipts paid by the entertainer or athlete exceed ,000 for the taxable year.  If gross receipts exceed ,000, the full amount paid the athlete or entertainer may be taxed (not just the excess over ,000).  Tax may be imposed under Article 16 even if the performer would have been exempt from tax under Article 17 (Business Profits) or Article 14 (Income from Employment) of the U.S. Model Income Tax Treaty.

If an “employer” corporation provides the entertainer/athlete’s services, the income may be taxed in the country in which the activities are exercised unless the contract pursuant to which the personal services are performed allows the Employer Corporation to designate the individual who is to perform the personal activities (U.S. Model Tax Treaty 16(2)).

Income is deemed to accrue to the Employer Corporation if it controls or has the right to receive gross income in connection with the performer’s services (Article 16).

Foreign Tax Credits

          Under the Model Treaty, the U.S. as the country of residence provides its citizens and residents with a credit for income taxes imposed by a treaty partner to release double taxation.  The creditable taxes are listed in the treaty (Art 23(1)).  The U.S. statutory foreign tax credit rules determine the amount of the tax credit (U.S. Model Treaty Article 23).  The U.S. will allow a foreign tax credit pursuant to the treaty credit article, even if a credit would not otherwise be available under the U.S. statutory foreign tax credit rules.

Administrative Provisions

U.S. Income Tax Treaties grant permission to authorities of each country to deal directly with each other to resolve taxation disputes, to exchange information and assist each other in tax collection (Model Treaty Art. 25: Mutual Agreement Procedures, Art 26: Exchange of Information).

Income Tax Treaties (61)

Australia Income Tax Treaty Austria Income Tax Treaty Bangladesh Income Tax Treaty Barbados Income Tax Treaty Belgium Income Tax Treaty Bermuda Income Tax Treaty Bulgaria Income Tax Treaty Canada Income Tax Treaty China Income Tax Treaty Cyprus Income Tax Treaty Czech Republic Income Tax Treaty Denmark Income Tax Treaty Egypt Income Tax Treaty Estonia Income Tax Treaty Finland Income Tax Treaty France Income Tax Treaty Germany Income Tax Treaty Ghana Income Tax Treaty (Ships and Aircraft) Greece Income Tax Treaty Hungary Income Tax Treaty Iceland Income Tax Treaty India Income Tax Treaty Indonesia Income Tax Treaty Ireland Income Tax Treaty Israel Income Tax Treaty Italy Income Tax Treaty Jamaica Income Tax Treaty Japan Income Tax Treaty Jordan Income Tax Treaty (Shipping and Aircraft) Kazakhstan Income Tax Treaty Korea Income Tax Treaty Latvia Income Tax Treaty Lithuania Income Tax Treaty Luxembourg Income Tax Treaty Malta Income Tax Treaty Mexico Income Tax Treaty Morocco Income Tax Treaty Netherlands Income Tax Treaty New Zealand Income Tax Treaty Norway Income and Property Tax Treaty Pakistan Income Tax Treaty Philippines Income Tax Treaty Poland Income Tax Treaty Portugal Income Tax Treaty Romania Income Tax Treaty Russia Income Tax Treaty Slovak Republic Income Tax Treaty Slovenia Income Tax Treaty South Africa Income Tax Treaty Spain Income Tax Treaty Sri Lanka Income Tax Treaty Sweden Income Tax Treaty Switzerland Income Tax Treaty Thailand Income Tax Treaty Trinidad and Tobago Income

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