Coming to America – Helpful Guides to What You Need to Know
People moving to the United States (U.S.), especially those with substantial wealth, need to organize their financial affairs before landing here.
In addition, those planning to do business in the U.S. need to insure they consider key tax issues relating to the organization, operation, repatriation of profits and exit of a foreign-owned U.S. business. For those who plan ahead, there can be significant tax savings.
Pre-Immigration Tax Planning
The U.S. tax system is complex. U.S. citizens and residents are subject to income taxes on worldwide income and, typically, transfer taxes on their worldwide assets. Non-residents on the other hand, are generally only subject to tax on income that is effectively connected with a U.S. trade or business (including gains on the sale of real property) and dividend payments from U.S. corporations (through withholding tax). In addition, non-residents are generally subject to U.S. gift and estate tax only on certain U.S. situs assets, real or tangible personal property.
An individual who is not a U.S. citizen (an alien) is treated as a U.S. tax resident (also known as a resident alien) during a particular taxable year, and therefore subject to U.S. federal income tax on a worldwide basis (unless an applicable treaty provides otherwise), if such individual (1) is a lawful permanent resident of the U.S. at any time during such calendar year (the green card test), (2) satisfies the substantial presence test or (3) makes an election to be treated as a U.S. tax resident. In general, an individual is treated as a lawful permanent resident of the U.S. at any time if, (1) such individual has the status of having been lawfully accorded the privilege of residing permanently in the U.S. as an immigrant in accordance with the immigration laws (i.e., a green card), and (2) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). Further, in general an individual who is not a U.S. citizen or a green card holder will also be treated as a U.S. tax resident during a particular calendar year if he is physically present in the U.S. for 183 days or more during that calendar year or at least 31 days during that calendar year and satisfies the physical presence test under the three-year look-back rule (the substantial presence test). Knowing your residency status and planning accordingly can help minimize first-year taxes and provide a window to take action prior to actually becoming a resident. It is also important to understand how residency status impacts your estate and gift tax position. Our guide, Coming to America – U.S. Tax Planning for Foreign Individuals, provides helpful information regarding residency, pre-residency income tax planning and pre-domicile transfer tax planning.
U.S. Tax Planning for Foreign-Owned U.S. Operations
In additional to individual considerations, there are also key U.S. tax issues that should be considered in establishing a foreign-owned U.S. business enterprise in the U.S. Of course, foreign is a relative notion. Used herein, it means a non-U.S. business entity (assumedly a corporation) owned by non-U.S. shareholders. Our guide, Coming to America – U.S. Tax Planning for Foreign-Owned U.S Operations, is intended to outline the key tax issues relating to the organization, operation, repatriation of profits and exit of a foreign-owned U.S. business. It describes the three organizational forms (subsidiary, branch and partnership), highlighting their pros and cons. The guide further describes the considerations involved in deciding whether to capitalize the venture with debt or equity financing, including a discussion on the limits of interest deductibility. It also discusses the tax issues involved in staffing the U.S. business with either U.S. or foreign nationals. The guide further considers the various means to repatriate the profits of the U.S. business, including interest, royalties, and in-bound sales as well as methods for exiting the investment. There are, of course, a number of home country legal and tax issues that must also be considered in structuring an outbound investment (i.e., from a non-U.S. jurisdiction into the U.S.) which is outside the scope of this guide.
It is important to weigh any planning ideas against your personal and business objectives. Paying careful attention to how U.S. tax planning interacts with tax treaties and the tax and property laws in other countries is a critical part of this planning.