FAQ’s FOR BUSINESSES COMING TO THE US
Everyone will agree that the world is much smaller now than it has ever been, and it continues to shrink. It is becoming more and more common for Us companies to have international operations, and conversely, for non-US companies to operate in the US.
This is the third in a series of blogs about the tax aspects of non-US companies doing business in the US.
What is the tax base?
For US taxpayers, the tax base and income tax concepts are simple. You are taxed on worldwide income – everything, no matter what country or source the income comes from. For individuals, if you’re green card holder or if you are mostly present here, we’re going to call you a US resident and tax you as a US taxpayer on your worldwide income. For corporations, you are a US resident if you are chartered in the US. Also, if a US corporation re-incorporates outside the US, it could still be treated as a US corporation and liable for US taxes unless properly structured.
The tax base for non-US taxpayers is more complex. You are generally taxed on three types of income categories. First, there is a concept called effectively connected income, that is income effectively connected with a US trade or business. If you come from a treaty country, the buzz word that is used in treaties is whether you have a US permanent establishment.
What exactly is a trade of business is a factual question. Obviously if you’re selling and servicing thousands and thousands of widgets, it’s a business, but when it comes to something less involved and more passive, it can be dicey in terms of whether, or not, it’s a trade or business. ECI is taxed on a net income basis at graduated tax rates.
Category two are special rules for real estate. These rules are under a law called FIRPTA – foreign investment in real property tax act of 1980. Under FIRPTA, gain or loss from the disposition of a US real property interest by a non-US person is taxed as if it were a US trade or business. In other words, that gain or loss would be ECI. To enforce this, those buying from non-US sellers generally must set aside 15% of the purchase price and pay it as a withholding tax to the IRS.
Category three would be, if the non-US person isn’t subject to the ECI regime or the FIRPTA regime, they might be subject to the FDAP (fixed, determinable, annual, or periodic) regime. This would include income from interest, dividends, rents, royalties, and other types of fixed income that aren’t necessarily tied to a trade or business activity. Foreign persons are generally subject to 30% tax on US source income received. Payers are charged with the job of enforcing this, and withholding the 30%, or lesser amount if a tax treaty says so, from payments they would otherwise pay the owner, and turning it over instead to the IRS.
What about taxes for employees sent to the US?
The most basic question is to determine whether the employee is a US resident or a non-resident. As discussed earlier, US residents are taxed on worldwide income, so the answer to this will have a tremendous impact on tax and reporting obligations. This residency question also integrates with immigration and work visa status, so a complete understanding of the situation is needed.
The US payroll tax system will also have impact. Social Security and Medicare taxes are split between the employer and the employee. There is also disability insurance & unemployment insurance, which have their own computations and limitations.
There are also peculiarities, such as:
- The first year or last year could very well be a dual status year, in which part of the year is as a non-resident and part of the year is as a resident.
- US tax filings require a multitude of foreign related disclosures including FBAR, foreign financial assets, CFCs, foreign trusts, foreign partnerships, etc.
- Getting authorization to work in the US could take some time. A US entity employer may need to be formed and the immigration and work visa process could depend on how this is coordinated.
- The employee might have tax filing requirements in their home country which might impact their filing options in the US as well as in the state where they work.
- If the employee is coming here with a spouse or other family members, the above considerations, as well as others, may also apply to them.
- If the employee comes from a treaty country, it would be important to understand treaty terms and their effects.
In the coming weeks, we will provide a continuation of the ongoing blog series on doing business in the US. If you have questions about how you or your business may be impacted, please contact us.
If you have questions about how you or your business may be impacted, please contact Daniel Won, at: DWon@SingerLewak.com