Tag Archives: French tax treaty

Tax Savings with International Tax Treaty Planning for the Resident Alien

Citizens of Canada, the U.K., Australia, New Zealand, the European Community, have a unique tax advantage while living in the U.S.  Tax treaties with these countries provide a unique and little-known tax savings. 

This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should. 

If you have any questions, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 or visit our website – https://www.intltaxcounselors.com.  

International tax planning starts with these essential concepts:
Resident Aliens

resident alien’s income is taxed in the same manner as a U.S. citizen.

They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties.  The resident alien must report these amounts whether from sources within or outside the United States.  Depositing of income outside the U.S. is taxable.

If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident.  Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.

Nonresident Aliens  

Nonresident aliens are usually subject to U.S. income tax on U.S. source income.  In some cases, foreign source business income can be subject to U.S. tax.  You will learn more in my book, International Taxation in America for the Entrepreneur.

Dual-Status Aliens  

dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year.  This can occur when you obtain your green card.

Income Types

U.S. Investment income is taxed at a flat 30% of the gross income.  If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.

Business income is taxed on a net income basis.  The alien has the same tax rates as an American.  In some cases, an NRA’s foreign business income is taxed by the U.S.  This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.

Tax Withholding on Foreign Persons

Payments of U.S. income to foreign persons are subject to the  withholding tax rules.  In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income.  This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.

Taxpayer Identification Numbers (TIN) for the non-citizen

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN).  Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.

Sale of Real Estate 

Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate.  In some cases, the withholding tax applies to refinancing.  The withholding tax does not replace the income tax.  Aliens must file an income tax return.  The tax withheld is a credit towards the total tax.  If the total tax exceeds the tax withheld, they get a refund.

Saving Taxes with Tax Treaties 

The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties.  If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.

Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code.  Tax treaties allow you to pay less tax.

Estate Taxes

All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes.    Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance.  They are not entitled to the $5,000,000+ exemption that is allowed for Americans.  Accounts with brokerage firms are frozen upon the alien’s death.   Tax treaties may allow the alien to avoid U.S. gift and estate taxes.

Become an Expert

Become an expert with my book, International Taxation in America for the  Entrepreneur, available on this link and feel free to call me with any questions that you have.

 

 

How European and U.K. Companies Start a Business in the United States

International small business owners starting operations in the United States face unbelievable tax laws.   Many items allowed in the U.K. and Europe is “illegal” in the U.S.   By the word “illegal” I do not mean that you will go to jail because you naively break the tax laws.  However, you will get hit with a large tax penalty.

So, I want to list the international tax transactions that are not allowed.

  1.   Thin Capitalization.  The funding of your business is where the foreign investor makes his (or her but for this blog, I will use “his”) mistake.     Corporations must be funded with $1 of capital for every $3 of shareholder debt.  For example, Samfunds his U.S. corporation with a $1,000.    $10 is for the common stock and $990 is  a loan.The loan is documented with a promissory note and director minutes.The corporation makes a profit and repays the loan.  U.S. tax law classifies that loan as capital and the repayment is taxable to Sam as dividend income.   The interest paid the on the loan is not deductible.  The interest is also taxable to Sam as a dividend.
  2.  Management Fee.  Sam, aware of the double taxation issue of a corporation, decides to remit the profits to his U.K. company as a management fee.   U.S. tax law looks at the both the form (a management agreement) and the economics.   The IRS audits the corporation and asks proof of the management services provided by the U.K. company.  Sam has a story but he has no proof.   He is taxed two times.  The corporate taxable income is increased by the management fee.Next, the payment of the management fee is treated as a dividend. Sam is taxed on the dividend income.  Both the corporation and Sam are charged a large tax penalty.     Additionally, the state where he is operating also taxes the corporation.
  3.    Salary.  Sam does not take a salary from the corporation.  He is paid by his U.K. company.  He spends one third of the year in the U.S.  One third of his U.K salary is taxable to both the IRS and to the state where the business is located. Sam is not a U.S. tax resident.   He owes U.S. income taxes because he was in the U.S. and for no other reason. 
  4.  Tax Treaties.  The French, the Netherlands and the U.K.  tax treaty provides a tax advantage by eliminating double taxation   To take advantage of the tax treaty, you must reside in the country and use a company formed in the tax treaty country.  The operation in the U.S. is considered a branch.   The U.S. has a law called “branch profits tax”.This law is designed to prevent double tax the profits.  However, the treaties don’t prevent the branch profits tax.The treaties prevent double taxation of the income tax.   The treaties provide that your home country will allow an offset of your home country tax for the income taxes your corporation paid to the U.S.

If you are looking to start a business in the U.S., then please contact me  ([email protected]) for assistance in setting up your business.    Also, I recommend my book as a resource (on this link).