Tag Archives: pre-immigration tax planning

America, the Tax Haven for the U.K. Entrepreneur

One thing is clear for the American Presidential Debates.  The U.S. wants jobs and more jobs. Nowhere is this clearer than in the U.K -U.S. income tax treaty. Continue reading

Pre-Immigration Planning and the IRS Checkmate with the Check the Box Election

Seminars can be the worst place for your tax planner.

I have been to many, of course.  CPAs and attorneys are required to go.  

We hear speakers review their PowerPoints.. as if they are the Bible. But, in reality, most PowerPoints are a copy of someone else’s PowerPoint.  And so it is with courses on pre-immigration tax planning because of a little known IRS regulation issued six years after this tax plan became famous, in 1997.

We all have egos and love to show off to our clients a quick fix to a complex problem.  So, when we hear a speaker with a great looking PowerPoint saying “check the box” is the greatest pre-immigration tax planning,  then we think  “yes”!

Some  people never do their own  research.  Here on this blog, every article is researched by me.  Anyway back to the issue.  For many and maybe most non-resident aliens, the check the box election will not work.  To make matters worst.. it is an IRS tax time bomb exploding the day you become a U.S. person (which means your subject to U.S. tax on your worldwide income.

Here’s what is happening.

Mr. Smith is a U.K. citizen and U.K. tax resident. He is successful and owns quite a few UK companies with business in the UK and the EU. Mr. and Mrs. Smith decide to move the U.S.to expand their businesses.  They move to the U.S. after obtaining a Green Card.

Their tax planners had been to an international tax seminar.  They even took the PDF file of the material.  Mr. Smith was told that U.S  tax planning was complicated but that he need to make what the Americans’ call “check the box” election and solve his immigration tax problem  He was thrilled… what an easy fix to a complicated tax issue.

The tax planners prepared the Form 8832. Since it did not affect UK tax law, Mr. Smith was told that he could file the Form at any time.  A few weeks later, the Smiths signed the Form and it was submitted to the IRS.

A few months later, the Smith family arrived in Florida at their seaside home.  They promptly had $9,000,000 of US taxable income.  When they filed the Form 8832, the UK company was not “relevant” to the IRS.  However, when the Smith arrived in America, they had an obligation to file Form 5471 (the tax return for a controlled foreign corporation).  The check the box election is effective the day they arrived (and not when the Form was filed).

The value of their UK companies was $10,000,000.  Their tax cost was their capital investment, $1,000,000.  The $9,000,000 gain is the $10,000,000 minus the $1,000,000.

You can find the little known IRS regulation that causes this terrible result on this link.

We recommend that you work with the IRS and get their okay of your tax plan with a private letter ruling (get more information on this link).

If you would like to brainstorm your international tax planning, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 for a complimentary consultation.

Easy Tax Planning for Tax Free Foreign Income for the Non-resident and Foreign Corporation

A foreign person does not pay U.S. income tax on many types of U.S. income.  Unlike the UK and Europe, the U.S. can be the company’s headquarters and not pay tax U.S. taxes on the foreign income.

Avoiding the value added tax increases the business working capital by 25%.  While the VAT is often as low as 17%, the UK or EU business pays the VAT with after income tax profits.   This causes the VAT to be a 25% drag on working capital.

The U.S. is the only industrialized country that does not charge this anti-business tax. The tax planning rules for determining tax-free foreign source income are summarized in the guide below in blue print.

Learn the easy tax international planning  in my ten minute Blog Tax Talk Show below.
Summary of Source Rules for Income of Nonresident Aliens
Item of IncomeFactor Determining Source

Salaries, wages, other compensation

Where services performed

Business income:
Personal services
Where services performed
Business income:
Sale of inventory -purchased
Where sold- where the customer takes possession of the property.  A foreign business can warehouse and store their inventory in the U.S. This is a popular way to avoid the VAT.

Business income:
Sale of inventory -produced

Where produced (Allocation may be necessary)

Interest

Residence of payer- except for bank deposit interest is tax free to the foreign person

Dividends

Foreign source when paid by a  foreign corporation
U.S. source from a domestic corporation

Rents

Location of property

Royalties:
Natural resources
Location of property

Royalties:
Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller’s tax home

Pensions

Where services were performed that earned the pension

U.S. Stock Market & Commodity ProfitsTreated as tax-free foreign source income

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations.

*Exceptions include:
a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the Puerto Rico economic activity credit or possessions tax credit.
b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.