person on the income of a foreign corporation that is owned in whole or in part by that person. Therefore, U.S. persons may form a foreign corporation to conduct foreign activities without incurring U.S. taxes before receipt of distributions from the corporation or a sale of the corporation’s stock. However, Congress and the U.S. Treasury have adopted rules, regulations, notices, and significant annual reporting requirements for controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), in addition to foreign disregarded entities, foreign branches, or qualified branch units (QBUs), and foreign partnerships.
The United States has entered into tax treaties and conventions with many foreign countries. In general, those treaties affect the U.S. taxation of foreign persons, not U.S. persons. The “Saving Clause” in each treaty generally gives the United States the right to tax its corporations, citizens, and residents as if the treaty had never come into force. In certain cases, a tax treaty may limit the U.S. taxation of U.S. persons. Examples of such help for U.S. citizens and residents include (a) the allowance of U.S. foreign tax credits, with special source rules for purposes of Section 904; (b) tax treaty or protocol clauses that prevent discriminatory treatment of foreign persons that are U.S. residents and of domestic corporations owned by foreign persons; (c) exemptions for certain types of income; (d) the allowance of certain deductions; and (e) the use of competent authority procedures (for example, mutual agreement procedures or “MAP”) to resolve inconsistent treatment by the United States and the foreign treaty country.
U.S. Outbound Tax Concepts
Exporting U.S. products to foreign countries
Exporting or performing services to foreign persons outside the United States
Foreign branch of a U.S. business — Section 987Section 987 may apply when the U.S. taxpayer operates in a branch form (such as a check-the-box foreign disregarded entity or a foreign partnership) and such branch is a QBU with a functional currency different than that of its owner.
New benefits and tax provisions available only to C corporations under the TCJA
Subpart F income from CFCs
global intangible low-taxed income (GILTI) from CFCs
Dividends Received Deduction (DRD) or Participation Exemption applicable for C corps that own at least 10% of a foreign corporation — Section 245A
Investment in U.S. property by a CFC — Section 956
Section 863(b) sourcing rules modifications
Foreign tax credits (FTC)Direct foreign tax credit, Section 901Indirect or deemed-paid credit, Section 902 (repealed by the TCJA)Allowable credit calculated on Forms 1118 (corporate) or 1116 (individual)
Limitation on FTC, Section 904
U.S. shareholders of PFICs
Limits on interest expense for U.S. businesses (that is, 30% of adjusted taxable income [ATI])
Knowledge check
1 Section 987 addresses which issue?Currency translation values at the time of a transaction.Character of gain or loss.Foreign branches that are QBUs.Transfer pricing.
U.S. Inbound Tax Concepts
Investment or passive types of income from U.S. sources (for example, fixed, determinable, annual, or periodical [FDAP]) — Sections 871 and 881
Effectively connected income (ECI) derived from a U.S. trade or business (ECI from a U.S. trade or business) — based on IRC, U.S. case law, and IRS rulings
Business profits attributable to a U.S. permanent establishment (PE) — based on U.S. tax treaties and conventions
Interest expense limitation or the thin capitalization and anti-earnings stripping rules, Section 163(j)
Debt versus equity U.S. tax law
Foreign Investment in Real Property Tax Act (FIRPTA) — the disposition of a U.S. real property interest by a foreign person (the transferor) is subject to U.S. source withholding tax. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. Sections 897 and 1445. PATH Act revisions
Base erosion and anti-abuse tax (BEAT) — Section 59A
Modified Section 1446(f) and new Section 864(c)(8) reverses the holding within the Grecian Magnesite Mining case, and reverts to the original holding in Rev. Rul. 91-32 for U.S. income tax treatment of foreign partners who sell their interest in an operating U.S. partnership (that is, a U.S. partnership that has ECI from engaging in a U.S. trade or business)
Other fundamental U.S. international tax concepts
Choice of entity classification, U.S. “check-the-box” rulesSection 7701, and Treasury Regulation 301.7701-1, -2U.S. tax law governs the classification of a form of foreign business organization for U.S. tax purposes. The check-the-box regulations under Section 7701, generally effective January 1, 1997, provide that any “business entity” that is not required to be treated as a corporation is an “eligible entity” that may choose its classification. The regulations provide default classification rules. Eligible entities may elect out of the default rules. Entities that wish to change their previous classification must also do so by filing an election that qualifies for purposes of Section 7701.Form 8832 is known as the “check-the-box” election form, or the entity classification election form.
Sourcing of income and (allocation of) expenses
Tax treaties and conventionsTax treaties generally reduce withholding tax rates between Treaty partner jurisdictions and contain provisions that allow for procedures to avoid double taxation on one item of income by the same taxpayer by two different taxing jurisdictions and or States.
Transfer pricing rules — intercompany or related party transactions, Section 482Requires an arm’s length price or rate on an intercompany or related party transaction under Section 482, Treasury Regulations under Section 482, and Organization for Economic Co-operation and Development (OECD) rules.OECD’s base erosion and profit shifting initiativeCountry by Country (CbC) reporting
U.S. statutory withholding tax rules for FDAP income under chapter 3 (regular) and chapter 4 (FATCA for financial services industry) of the IRC
International tax fundamental concepts
Definition of “U.S. person”
The term “United States person” means
a citizen or resident of the United States;
a partnership created or organized in the United States or under the law of the United States or of any State, or the District of Columbia;
a corporation created or organized in the United States or under
