Basics

Question 1

Inbound investment

Answer 1

Foreigners investing in US investments/businesses

Question 2

Outbound investments

Answer 2

US persons investing outside the US

Question 3

What are the 2 different inbound regimes?

Answer 3

FDAP

ECI

Question 4

How is FDAP taxed?

Answer 4

Flat rate (generally 30%) without deductions although gains from sale of US investment assets (other than real estate) are not taxed. Likewise, debt frequently qualifies for the portfolio interest exception.

Question 5

How is ECI taxed?

Answer 5

Regular graduated US tax rates plus branch profits tax (for corporate entities)

Question 6

What is a US person?

Answer 6

an individual or entity subject to worldwide US taxation. These include individuals, domestic partnerships,domestic corps and certain trusts.

Question 7

What is a nonresident alien?

Answer 7

A nonresident alien is an individual who is neither a citizen nor resident of the US.

Question 8

What is a resident alien?

Answer 8

• A resident alien is a type of US person that is an individual foreign citizen that is a US resident.

Question 9

What is a domestic corporation?

Answer 9

• A domestic corporation is a corporation chartered by the US or one of the 50 states.

Question 10

What is a domestic partnership?

Answer 10

A domestic partnership is a partnership organized under the laws of the US or one of the 50 states.

Question 11

What is a foreign corporation or foreign partnership?

Answer 11

A foreign corporation or foreign partnership is a corporation or partnership that is not a domestic corporation or domestic partnership.

Question 12

What is the difference between a branch and a subsidiary?

Answer 12

A branch is a direct business undertaking of a corporation in a country, and there is not separate legal identity between the corporation’s branch in one country and its “home office” in another.

A subsidiary is a separately chartered corporation, and can be either domestic or foreign.

Question 13

Worldwide vs territorial tax

Answer 13

In a worldwide system the taxing country taxes the entire income from all sources of persons connected to it (e.g. by nationality or residence).

In a territorial system, the taxing country taxes only income arising within it.

Question 14

At a high level, what can cause a non US individual to become a US resident?

Answer 14

Immigration status or “substantial presence” (very generally spending 183 or more days in the US during a calendar year).

Question 15

When do the dual consolidated loss rules apply?

Answer 15

When you have a corporate entity that is a member of two different consolidated groups – one domestic and one foreign (with a residence based system).

Question 16

What happens in the dual consolidated loss rules apply?

Answer 16

 A dual consolidated loss cannot reduced the taxable income of other members of a US domestic corporation group.

Question 17

What is a dual consolidated loss?

Answer 17

A loss of a domestic corporation that is (1) subject to worldwide tax by a foreign country or (2) subject to foreign income tax solely on the basis of residence.

Question 18

Why does sourcing matter for U.S. people?

Answer 18

Can impact availability of foreign tax credits

Question 19

Source of interest income for individuals

Answer 19

o Interest paid by individuals is sourced according to their place of residence.
o

Question 20

Source of interest income paid by a guarantor of an individual obligor

Answer 20

Even if interest is paid by a guarantor, the source is the residence of the obligor (not guarantor)

Question 21

Source of interest income for partnerships

Answer 21

Interest paid by a partnership is sourced by residence unless it is interest paid by a foreign partnership engaged in business in the US (and therefore a US resident) if the partnership is predominantly engaged in business outside the US and the interest is not allocable to ECI income.

Question 22

Source of interest income for corporations

Answer 22

Interest paid by corporations is sourced according to the entites’ situs.

Question 23

Source of interest income for branches of foreign corporations

Answer 23

Interest paid by a branch engaged in a US trade or business is treated as if paid by a domestic corporation i.e., has US source (unless it is a foreign branch of a US bank).

Question 24

OID/Market discount source

Answer 24

Same as source for interest

Question 25

Source of income from a “notional principal contract” (including a swap)

Answer 25

The source of NPC income is the residence of the taxpayer receiving it.

Question 26

Dividend source

Answer 26

Dividends generally are sourced according to the place of incorporation of the corporation that pays them.
However, if 25% or more of the gross income of a foreign corporation in the three years preceding the declaration of a dividend is “effectively connected”, then the dividend has US source in the same proportion as the corporation’s income that is effectively connected bears to its entire income.

Question 27

Source of compensation for personal services

Answer 27

Sourced according to the place the services are performed.

Question 28

Source of rents and royalties

Answer 28

Place of use