INTERNATIONAL CLIENTS

Nonresident aliens are not taxed on certain kinds of interest income as follows, per Internal Revenue Code subsections 871(h) and (i), provided that such interest income arises from one of the following sources:

1. A U.S. bank
2. A U.S. savings and loan association
3. A U.S. credit union
4. A U.S. insurance company
5. Portfolio Interest (Described in Chapter 3 “Exclusions From Gross Income” – “Interest Income” – “Portfolio interest” of Publication 519, U.S. Tax Guide for Aliens)

If the nonresident alien individual uses Form 1040NR to report his income, then such nontaxable interest income shall not be reported anywhere on Form 1040NR except in response to question L on page 5 of Form 1040NR.

If the nonresident alien individual uses Form 1040NR-EZ to report his income, then such nontaxable interest income shall not be reported anywhere on Form 1040NR-EZ. The erroneous reporting of such interest income on Form 1099 by one of the institutions listed above shall not cause such interest income to be included in the gross income of the nonresident alien recipient if such recipient has filed the proper income tax return.

A nonresident alien individual should not deliver Form W-9, Request for Taxpayer Identification Number and Certification, to a U.S. bank, U.S. savings and loan association, U.S. credit union, or U.S. insurance company. Instead, he should deliver Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to such institutions in order to put them on notice that he is a nonresident alien and that the interest income accruing to his account at such institutions is not reportable to the IRS, except in the case of U.S. bank accounts held by residents of Canada. Refer to Treasury Regulation 1.6049-8(a).

For more information Visit our Office or Ask to our Accountants.

Interest paid to foreign investors outside of the U.S. on non-bearer obligations issued after July 18, 1984. Also includes interest paid on registered bearer bonds that are sold through financial institutions to foreign markets. In all cases, the obligations may not be held by a U.S. citizen..

For more information Visit our Office or Ask to our Accountants.

Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). This applies whether or not there is any connection between the income, and the trade or business being carried on in the United States, during the tax year.

Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as ECI. You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States. Whether you are engaged in a trade or business in the United States depends on the nature of your activities.

You are considered to be engaged in a trade or business in the United States:

• If you are temporarily present in the United States as a nonimmigrant on an “F,” “J,” “M,” or “Q” visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in “F,” “J,” “M,” or “Q” status is treated as effectively connected with a trade or business in the United States.
• If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.
• You usually are engaged in a U.S. trade or business when you perform personal services in the United States.
• If you own and operate a business in the United States selling services, products, or merchandise.
• Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.
• Income from the rental of real property may be treated as ECI if the taxpayer elects to do so.

 NOTE: If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are NOT engaged in a trade or business in the United States.

For more information Visit our Office or Ask to our Accountants.

An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If you are any of the following, you must file a return:

1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year, however, if your only U.S. source income is wages in an amount less than the personal exemption amount, you are not required to file.
2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
3. A representative or agent responsible for filing the return of an individual described in (1) or (2),
4. A fiduciary for a nonresident alien estate or trust, or
5. A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax.

You must also file an income tax return if you want to:

1. Claim a refund of overwithheld or overpaid tax, or
2. Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.

For more information Visit our Office or Ask to our Accountants.

If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose under Internal Revenue Code section 871(d) to treat all income from that property as income effectively connected with a trade or business in the United States. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. It also includes gains from the sale or exchange of real property and from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest.

You can make this choice only for real property income that is not otherwise connected with your U.S. trade or business.

If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed.

This choice does not treat a nonresident alien, who is not otherwise engaged in a US trade or business, as being engaged in a trade or business in the United States during the year.

 Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Include the following in your statement.

1. That you are making the choice.
2. Whether the choice is under Internal Revenue Code section 871(d) (explained above) or a tax treaty.
3. A complete list of all your real property, or any interest in real property, located in the United States. Give the legal identification of U.S. timber, coal, or iron ore in which you have an interest.
4. The extent of your ownership in the property.
5. The location of the property.
6. A description of any major improvements to the property.
7. The dates you owned the property.
8. Your income from the property.
9. Details of any previous choices and revocations of the real property income choice.

This choice stays in effect for all later tax years unless you revoke it.

Revoking the choice. You can revoke the choice without IRS approval by filing Form 1040X, Amended U.S. Individual Income Tax Return, for the year you made the choice and for later tax years. You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. If this time period has expired for the year of choice, you cannot revoke the choice for that year. However, you may revoke the choice for later tax years only if you have IRS approval. For information on how to get IRS approval, see Regulation section 1.871–10(d)(2).

For more information Visit our Office or Ask to our Accountants.

Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor’s personal tax status and regardless of whether the United States has an income treaty with the foreign investor’s home country.

The method by which rental income will be taxed depends on whether or not the foreign person who owns the property is considered “engaged in a U.S. trade or business.”  Ownership of real property is not considered a U.S. trade or business if it consists of merely passive activity such as a net lease in which the lessee pays rent, as well as all taxes, operating expenses, repairs, and interest in principal on existing mortgages and insurance in connection with the property. Such passive rental income is subject to a flat 30 percent withholding tax applied to the gross income rather than the “net rent” received. Thus, the real estate taxes, operating expenses, ground rent, repairs, interest and principal on any existing mortgages, and insurance premiums paid by the lessee on behalf of the foreign owner-lessor, must be included in gross income subject to the 30 percent withholding tax. The gross income and withheld taxes must be reported on Form 1042-S, Foreign Persons U.S. Source Income Subject to Withholding to the IRS and the payee by March 15 of the following calendar year. The payor must also submit Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, by March 15.

If, on the other hand, the foreign investor is engaged in a U.S. trade or business such as the developing, managing and operating a major shopping center, the rental income will not be subject to withholding and will be taxed at ordinary progressive rates.  Expenses such as mortgage interest, real property taxes, maintenance, repairs and depreciation may then be deducted in determining net taxable income. The nonresident must make estimated tax payments for the tax due on the net rental income, if any. The only way these expenses can be deducted, however, is if an income tax return Form 1040NR for nonresident alien individuals and Form 1120-F for foreign corporations is timely filed by the foreign investor.

Foreign individuals and foreign corporations may elect to have their passive rental income taxed as if it were effectively connected with the U.S. trade or business. Once such an election is made by attaching a declaration to a timely filed income tax return, there is no obligation to withhold even in a net-lease situation. Once made, the election may not be revoked without the consent of the IRS.

Unless the foreign investor has properly informed the property manager that the rental income is to be treated as “effectively connected income” by submitting to the property manager with a fully completed Internal Revenue Service Forms W-8ECI, Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States , the property manager should withhold thirty percent (30 percent) of the gross rental receipts so as to avoid personal liability. A fully completed Form W-8ECI must include a valid U.S. tax identification number for the foreign landlord (in other words, the rental agent must withhold and remit the 30 percent tax to the IRS until this requirement is satisfied).  A real property manager who collects rent on behalf of a foreign owner of real property is considered a withholding agent and is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties, and where applicable, criminal sanctions.  Property managers who do not comply with these rules will be held liable (either individually or through their company) for 30 percent of gross rents, plus penalties and interest.  Also, property managers need to report annual rents collected on behalf of foreign landlords on Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.  These are the equivalent of Forms 1096 and 1099-MISC but are for foreign owners.

For more information Visit our Office or Ask to our Accountants.

Foreign persons are generally subject to U.S. withholding tax at a 30% rate on the gross amount of certain income they receive from U.S. sources. By providing a completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to the U.S. payer (also known as the U.S. withholding agent) before or at the time income is paid or credited, you are:

• Establishing that you are not a U.S. person,
• Claiming that you are the beneficial owner of the income for which Form W-8BEN is being provided, and
• If applicable, claiming a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the United States has an income tax treaty. In order to claim a reduced rate or exemption from tax under an income tax treaty, the Form W-8BEN must include a valid U.S. taxpayer identification number.

The completed Form W-8BEN must be provided to the U.S. payer (also known as the U.S. withholding agent) before or at the time income is paid or credited.

For more information Visit our Office or Ask to our Accountants.

To enforce the system of withholding, the Internal Revenue Code defines a “withholding agent” to be any person in whatever capacity (including lessees and managers of U.S. real property) having the control, receipt, custody, disposal or payment of income that is subject to withholding. Thus, a real property manager who collects rent on behalf of a foreign owner of real property is clearly considered a withholding agent. A withholding agent is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties and, where applicable, criminal sanctions. The statute of limitations does not start until a withholding return is filed by the withholding agent. Once the return has been filed, the statute of limitations begins to run at the later of two dates: the date of actual filing of the correct return or April 15 of the calendar year in which the return should have been filed. The withholding agent will remain liable if he actually knows that the foreign owner’s statements are false. The withholding agent’s duty of inquiry seems to be a “reasonably prudent test,” measured by all facts and circumstances.

A nonresident who fails to submit a timely filed income tax return loses the ability to claim deductions against the rental income, causing the gross rents to be subject to the 30 percent tax.  Generally, the nonresident will need to retroactively file at least six years of delinquent income tax returns, or all prior year tax returns, if they have held the rental property for less than six years. However, the ability to elect to treat the rental income as effectively connected with a U.S. trade or business will be lost after 16 months from the original due date of the return, and the remaining back years may be subject to tax under the gross income method.  Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor’s status and regardless of whether the United States has an income treaty with the foreign investor’s home country. For more information Visit our Office or Ask to our Accountants.

Generally, you do not need to withhold tax on income that is effectively connected with a U.S. trade or business if you receive a Form W-8ECI on which a foreign payee represents that:

1. The foreign payee is the beneficial owner of the income,
2. The income is effectively connected with the conduct of a trade or business in the United States, and
3. The income is includible in the payee’s gross income.

This withholding exemption applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation).

The exemption does not apply, however, to:

1. Pay for personal services performed by an individual,
2. Effectively connected taxable income of a partnership that is allocable to its foreign partners.
3. Income from the disposition of a U.S. real property, or
4. Payments to a foreign corporation for personal services if all of the following apply:
   1. The foreign corporation otherwise qualifies as a personal holding company for income tax purposes (Refer to IRC Section 542),
   2. The foreign corporation receives amounts under a contract for personal services of an individual whom the corporation has no right to designate, and
   3. 25% or more in value of the outstanding stock of the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform or may be designated as the one to perform, the services called for under the contract.

The beneficial owner of the income should file Form W-8ECI with the withholding agent to claim an exemption from withholding on ECI income.

For more information Visit our Office or Ask to our Accountants.

In general, the buyer or other transferee of U.S. real property must withhold tax on the sales proceeds when it acquires the U.S. property from a foreign person. This withholding serves to collect U.S. tax that may be owed by the foreign person.

By law, the buyer must withhold 10% of the proceeds from the sale of U.S. real property by a nonresident alien. Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests , is used to report details of the sale, including the amount of U.S. tax withheld, and transmit the information to the seller and the IRS.

The gain on the sale of your U.S. real property must be reported on Form 1040NR, U.S. Nonresident Alien Income Tax Return. The amount of U.S. federal income tax withheld that is listed on your Form 8288-A must be entered in order for you to receive credit for the tax withheld.

If the property you sold was owned by both you and your spouse, two Form 1040NR tax returns will need to be filed. You will need to each separately complete your own individual Form 1040NR.

If you incur a loss on the sale of the U.S. real property, you will need to file the Form 1040NR to claim a refund for the taxes withheld and reported on Form 8288-A.

For more information Visit our Office or Ask to our Accountants.

U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property (as described in section 6038B(a)(1)(A) of the Internal Revenue Code) to a foreign corporation.

The U.S. transferor must file the Form 926 – and the additional information required under Regulations section 1.6038B-1(c) and Temporary Regulations sections 1. 6038B-1T(c) (1) through (5) and 1.6038B-1T(d) – with their income tax return for the tax year that includes the date of the transfer.

The person could be subject to a penalty for failure to file equaling 10% of the fair market value of the property at the time of the exchange/transfer if the taxpayer fails to comply with the filing requirement. The penalty will not apply if the failure to comply is due to reasonable cause and not willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the exchange/transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided.

For more information Visit our Office or Ask to our Accountants.