Taxation of foreign income

Question 1

Earned income

Answer 1

Earned income is foreign source if earned in a foreign country and U.S. source if earned domestically. This also includes employee benefits.

Question 2

Unearned Income

Answer 2

Unearned income is foreign source if received from a foreign resident or for property that is used in a foreign country.

Question 3

Income from the sale of personalty is determined based on the residence of the seller, except:

Answer 3

Inventory is sourced based on the location of the property.

In the case of depreciable property, recapture is sourced where depreciation was claimed. Remaining gain is sourced where title transfers.

Question 4

Income from the sale of intangibles

Answer 4

Income from the sale of intangibles is sourced where the amortization was claimed. Source of income from the use of intangible property is determined by the country in which the property is used.

Question 5

Income from the sale or exchange of real property

Answer 5

Income from the sale or exchange of real property is sourced based on the location of the property. Source of income from the use of tangible real property is determined by the country in which the property is located.

Question 6

Interest income is U.S. source if received from:

Answer 6

U.S. government
Noncorporate U.S. residents
Domestic corporations

Question 7

Foreign source of income

Answer 7

1. If a U.S. corporation receives 80% or more of its active business income from foreign sources over the previous three years then interest received from that corporation is foreign source.
2. Dividends from U.S. corporations are U.S. source and from foreign corporations are foreign source.
3. If a foreign corporation receives 25% or more of gross income from income connected with a U.S. business for the three previous tax years then dividends from that foreign corporation are U.S. source.

4.

Question 8

Outbound transactions

Answer 8

taxation of foreign-source income by U.S. taxpayers

Question 9

Inbound taxation

Answer 9

taxation of U.S.-source income by non-U.S. taxpayers.

Question 10

U.S. Source Income

Answer 10

1. U.S. persons are always taxed on U.S.-source income.

2. Non-U.S. persons are potentially taxed on U.S.-source income.

Question 11

Foreign-Source Income from Outbound Transactions

Answer 11

1. If it is taxed in the United States and the foreign jurisdiction, then a foreign tax credit is allowed.
2. The transfer of assets from the United States to a foreign country may trigger income (depreciation recapture applies).
3. If assets are used in a trade or business outside the United States, gain is deferred unless the property is:
   Inventory or unrealized receivables
   Installment obligations
   Foreign currency

Question 12

Controlled foreign corporations

Answer 12

A CFC is a foreign corporation for which more than 50% of the voting power or value of stock is owned by U.S. shareholders (limited to those who own, directly and indirectly, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation.