SUMMARY ON INTERNATIONAL
TAXATION
Residence-based taxation
- depends on country's relationship to taxpayer (citizen or
resident)
- residence country has primary taxing jurisdiction as a
matter of international law
Tax on worldwide income for US persons
- outbound tax regime
- US entities/individuals exporting/licensing/rendering
services or other business activity outside of the US
US persons
1. Citizens and resident aliens
2. US corporations
3. US partnerships
4. US trusts and estates
US citizens
Citizens for immigration law purposes (R 1.1-1(c))
Resident aliens
1. Green card test
2. Substantial presence test
3. First year election
Green card test 7701(b)(1)(A)(2)(i)
Lawful permanent resident under immigration law
Once a green card older, resident alien until judicially or
administratively to be abandoned or rescinded (R
301.7701(b)-1(b))
,Substantial presence test 7701(b)(1)(A)(2)(ii)
1. Individual in the United States for at least 31 days
during testing year AND
2. 183 during testing year and previous two years using
weighted formula (current x 1, previous x 1/3, pre-previous
1/6)
UNLESS closer connection exception applies
- considered resident alien as of first day of physical
presence
Closer connection exception 7701(b)(3)(B)
1. Less than 183 days in current year
2. Tax home in foreign country (principal place of
business) AND
3. Closer connection (R 301.7701(b)-2(c))
Factors in closer connection R 301.7701(b)-2(d)
1. Permanent home
2. Family
3. Belongings
4. Organizations
5. Banking
6. Business activities
7. Driver's license
8. Voting
9. Residence on formal documents
Exceptions to presence in United States
1. Unexpected, not preexisting medical conditions
(7701(b)(3)(D)) (but considered intended date of departure
R 301.7701(d)(b)(3)
2. Exempt individuals including foreign-government
representatives; teachers/students/trainees; charity
athletes on tournament days (7701(b)(5))
,3. Regular commuters on commuting days, transit
between two foreign points less than 24 hours, crew
members temporarily present unless engaging in some
other trade or business (7701(b)(7))
First year election 7701(b)(1)(A)(iii)
1. Not resident alien under green card or substantial
presence tests in election year
2. Or in prior year
3. Resident of United States under substantial presence in
following year
4. Present for 31 days during election year AND
5. Present for 75% of days during testing period
- may be able to take deductions against investment
income
Special rules for former US citizens/residents
1. Mark to market regime 877A
2. Immigration law prohibiting entry when citizenship
surrendered with principle purpose of tax evasion
Mark to market regime for covered expatriates 877A(a)
(1)
Subject to income tax on net unrealized gain in property
as if sold for FMV on day before expatriation/termination of
residence, in excess of exemption amount ($725k in 2019)
(877A(a)(3))
- may defer gain until disposal
Covered expatriate 877A(g)(2)
Any citizen who relinquishes citizenship or long-term
resident in 8 of preceding 15 years who ceases to be a
lawful permanent resident with:
1. Average annual net income tax liability for previous five
years is greater than $168k
, 2. Net worth greater than 2M on the date OR
3. Fails to meet certification requirements
Relinquishment of US citizenship 877A(g)(4)
1. Formal renunciation
2. Signed statement of voluntary relinquishment after act
of expatriation
3. Certificate of loss of nationality
4. Cancellation
Exceptions to 877A covered expatriates 877A(g)(1)(B)
1. Dual citizen at birth who is still citizen of other country
and resident of US for less than 10/15 previous years OR
2. Relinquished US citizenship before 18 1/2 and resident
of US for less than 10/15 previous years
Domestic corporation 7701(a)(4)
Nationality principle: where incorporated
Incorporated under law of US/any state, including D.C.
Corporate inversions
Practice of relocating corporation's legal domicile to a
lower tax country
- US corporation with foreign subsidiaries taxed on direct
income from anywhere; if reorganized with a foreign
parent, do not include direct income from subsidiaries
US partnerships
Taxed depending on identity of partner in proportion to
capital contributions
US business entity classification: check the box
301.7701-3(a)
1. 2+ members --> corporation or partnership
2. Single owner --> corporation or disregarded entity
US business entity classification: default rules
301.7701-3(b)
TAXATION
Residence-based taxation
- depends on country's relationship to taxpayer (citizen or
resident)
- residence country has primary taxing jurisdiction as a
matter of international law
Tax on worldwide income for US persons
- outbound tax regime
- US entities/individuals exporting/licensing/rendering
services or other business activity outside of the US
US persons
1. Citizens and resident aliens
2. US corporations
3. US partnerships
4. US trusts and estates
US citizens
Citizens for immigration law purposes (R 1.1-1(c))
Resident aliens
1. Green card test
2. Substantial presence test
3. First year election
Green card test 7701(b)(1)(A)(2)(i)
Lawful permanent resident under immigration law
Once a green card older, resident alien until judicially or
administratively to be abandoned or rescinded (R
301.7701(b)-1(b))
,Substantial presence test 7701(b)(1)(A)(2)(ii)
1. Individual in the United States for at least 31 days
during testing year AND
2. 183 during testing year and previous two years using
weighted formula (current x 1, previous x 1/3, pre-previous
1/6)
UNLESS closer connection exception applies
- considered resident alien as of first day of physical
presence
Closer connection exception 7701(b)(3)(B)
1. Less than 183 days in current year
2. Tax home in foreign country (principal place of
business) AND
3. Closer connection (R 301.7701(b)-2(c))
Factors in closer connection R 301.7701(b)-2(d)
1. Permanent home
2. Family
3. Belongings
4. Organizations
5. Banking
6. Business activities
7. Driver's license
8. Voting
9. Residence on formal documents
Exceptions to presence in United States
1. Unexpected, not preexisting medical conditions
(7701(b)(3)(D)) (but considered intended date of departure
R 301.7701(d)(b)(3)
2. Exempt individuals including foreign-government
representatives; teachers/students/trainees; charity
athletes on tournament days (7701(b)(5))
,3. Regular commuters on commuting days, transit
between two foreign points less than 24 hours, crew
members temporarily present unless engaging in some
other trade or business (7701(b)(7))
First year election 7701(b)(1)(A)(iii)
1. Not resident alien under green card or substantial
presence tests in election year
2. Or in prior year
3. Resident of United States under substantial presence in
following year
4. Present for 31 days during election year AND
5. Present for 75% of days during testing period
- may be able to take deductions against investment
income
Special rules for former US citizens/residents
1. Mark to market regime 877A
2. Immigration law prohibiting entry when citizenship
surrendered with principle purpose of tax evasion
Mark to market regime for covered expatriates 877A(a)
(1)
Subject to income tax on net unrealized gain in property
as if sold for FMV on day before expatriation/termination of
residence, in excess of exemption amount ($725k in 2019)
(877A(a)(3))
- may defer gain until disposal
Covered expatriate 877A(g)(2)
Any citizen who relinquishes citizenship or long-term
resident in 8 of preceding 15 years who ceases to be a
lawful permanent resident with:
1. Average annual net income tax liability for previous five
years is greater than $168k
, 2. Net worth greater than 2M on the date OR
3. Fails to meet certification requirements
Relinquishment of US citizenship 877A(g)(4)
1. Formal renunciation
2. Signed statement of voluntary relinquishment after act
of expatriation
3. Certificate of loss of nationality
4. Cancellation
Exceptions to 877A covered expatriates 877A(g)(1)(B)
1. Dual citizen at birth who is still citizen of other country
and resident of US for less than 10/15 previous years OR
2. Relinquished US citizenship before 18 1/2 and resident
of US for less than 10/15 previous years
Domestic corporation 7701(a)(4)
Nationality principle: where incorporated
Incorporated under law of US/any state, including D.C.
Corporate inversions
Practice of relocating corporation's legal domicile to a
lower tax country
- US corporation with foreign subsidiaries taxed on direct
income from anywhere; if reorganized with a foreign
parent, do not include direct income from subsidiaries
US partnerships
Taxed depending on identity of partner in proportion to
capital contributions
US business entity classification: check the box
301.7701-3(a)
1. 2+ members --> corporation or partnership
2. Single owner --> corporation or disregarded entity
US business entity classification: default rules
301.7701-3(b)
