Taxation of foreign nationals by the US—2016 Taxation of foreign nationals by the US—2016

2 Taxation of foreign nationals by the US—2016

Contents

Executive summary 5 Chapter 1: Resident aliens 7 Chapter 2: Nonresident aliens 17 Chapter 3: Filing requirements 20 Chapter 4: Foreign investment in real property 22 Chapter 5: Other taxes 28 Chapter 6: Tax planning 33 Chapter 7: Immigration, visa, and nationality considerations 39 Appendix A: Key figures 48 Appendix B: US Federal tax rates 49 Appendix C: United States income tax treaties 51 Appendix D: Family-based immigration categories 54 Appendix E: Employment-based immigration categories 55 Appendix F: Countries whose citizens may be eligible for the Visa Waiver Program 56 Appendix G: Nonimmigrant (temporary) visa categories 57 Appendix H: Countries whose citizens may be eligible for E Treaty Trader (E-1) or Treaty Investor (E-2) visas 62 Appendix I: IRS forms and statements location information 65

3 Taxation of foreign nationals by the US—2016

4 Taxation of foreign nationals by the US—2016

Executive summary

A foreign national may be subject to one Tax treaties and other foreign investments should, of two drastically different systems of For many nonresident aliens, the burden of therefore, be reviewed before beginning taxation by the United States depending on US tax is reduced by tax treaties between or ending an assignment in the United whether he/she is classified as a resident or the United States and their home countries. States. Additionally, the United States has a nonresident alien of the United States. The Further, treaties may modify US income a large and sophisticated body of rules determination of residency status is critical. taxation (for example, in determining dealing with the taxation of certain US As a rule, classification as a nonresident residency status) and should be reviewed resident shareholders on income earned foreign national may provide distinct tax in every tax-planning situation involving a by foreign corporations that they control advantages, but, in individual cases, the foreign national. (whether or not the income is distributed) advantages of resident versus nonresident and noncontrolled foreign corporations that status may vary from year to year. Therefore, Foreign investment in real property are primarily investment vehicles, as well as it is important for foreign nationals coming US real property can be a secure, diversified with taxation of the income of certain trusts to the United States to annually review investment for foreign nationals. Many real to their creators. It is almost impossible to the options available to minimize their tax estate investments in personal residences mitigate the effects of these rules once one liability in the United States as well as in are converted into rental properties, and has become a US resident, but there may their home countries. Taxation of Foreign special rules apply to their treatment. be planning opportunities if the rules are Nationals by the United States provides a Depreciation rules (relating to property addressed before a move into the United basic overview of US taxes and how they placed in service after 1998) increase the States. affect foreign nationals. period over which deductions are spread. Passive loss rules may further reduce Immigration, visa, and nationality Resident aliens current tax benefits. Gains on sales of considerations The rules defining residency for US income US real property are taxable regardless Those who want to be employed in the tax purposes are very specific, with only of the residency status of the investor. United States must obtain visas to do so. limited exceptions once the objective criteria Nonresident aliens, however, may have Most visas allowing employment in the or mechanical tests are met. Individuals fewer opportunities to defer capital gains United States require approval by the US classified as resident aliens are taxed on (for example, through such techniques Citizenship and Immigration Services (USCIS) their worldwide income derived from any as like-kind exchanges or corporate prior to visa issuance at US consular posts source. Tax rates are graduated and income reorganization) than residents or citizens. abroad. Additionally, a valid Visa authorizing is determined in the same manner as for US Special reporting and withholding rules may employment in the US, rather than merely citizens. Various elections may be available apply when nonresident aliens own US real allowing an alien individual to reside in the in the first year of residency to reduce the property or “US real property interests” (for US, also authorizes the individual to receive US tax liability. example, stock in a US corporation whose a social security number (SSN). Nonresident principal assets are US real property). and resident aliens who are not eligible for Nonresident aliens SSNs must apply for a taxpayer identification Nonresident aliens are normally taxed Other taxes number following IRS prescribed only on income derived from US sources. In addition to federal income tax, foreign procedures. US-source income that is considered nationals may be subject to social security “effectively connected” with a US trade or and estate, gift, and state taxes. These Certain similar terms have different business, such as salary and other forms of should all be considered in evaluating the meanings when they are used in the compensation, is taxed at graduated rates. tax effects of a US assignment. immigration context than when they are Taxable income from US trade or business discussed for tax purposes. Residency entities can include some kinds of foreign- Tax planning status for tax purposes is different from source income, as well as US-source income. Timing of income recognition and the residency status for immigration purposes. US investment income is generally taxed at length of an assignment can significantly Under certain circumstances, a person a flat 30% tax rate, which may be reduced affect a foreign national’s US tax liability. may be a nonimmigrant for immigration by a tax treaty. Certain types of investment Also, the tax basis (tax cost) of assets may purposes and yet be considered a US income may be exempt from US tax. not be computed for US tax purposes in resident for tax purposes. For immigration the same way as in the foreign national’s purposes, a nonimmigrant is an alien home country. Unrealized appreciation temporarily in the United States who or loss inherent in a personal residence plans eventually to return abroad at the 5 Taxation of foreign nationals by the US—2016

conclusion of his or her stay. A lawful Taxation of Foreign Nationals by the United permanent resident is an immigrant, holds States should serve only as a preliminary a “green card,” and has the right to reside guide. Coordination between foreign and permanently in the United States until he US tax professionals is essential to achieving or she surrenders or abandons permanent overall income tax savings and effective residency. US citizens are immune from asset management in the United States. deportation and may retain their US Deloitte Tax advisers are available to assist citizenship irrespective of where they live. in this important process.

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Chapter 1: Resident aliens

Resident alien defined Under the substantial presence test, Exempt individuals may exclude some days A resident alien of the United States is a an individual must meet the following from this calculation (see p. 8). foreign national who meets either of two conditions to be considered a resident alien: Several substantial presence test objective tests: the lawful permanent •• He/she must be physically present in the calculations are provided in Example 1.1. residence test or the substantial presence United States for thirty-one days in the test. An alien who meets neither test is current year, and The weighting formula permits an alien a nonresident alien for federal income •• He/she must be physically present in the to spend up to 121 days each year in tax purposes for that year. (The test of United States for a weighted average of the United States without becoming an residence is different for federal estate and 183 days over a three-year testing period income tax resident. Also, the alien will not gift tax purposes, and certain states may that comprises the current and the two be considered a US resident for any year impose their own residency rules.) preceding years. Days of US presence are in which he/she has been present in the computed under a weighting formula that Under the lawful permanent residence United States fewer than thirty-one days. counts the following days of presence: test (also known as the green card test), ––All days in the current year an individual is considered a resident alien ––One-third of the days in the from the day that he/she is admitted to preceding year the United States as a lawful permanent ––One-sixth of the days in the second resident (that is, given a “green card”) until preceding year the day that this status is officially revoked or judicially found to be abandoned. While the alien officially has lawful permanent resident status, he/she is considered a US tax resident even while living outside the United States.

Example 1.1:

In each of the cases below, the individual will be considered a resident alien in the current year for federal income tax purposes under the substantial presence test.

Case Days present in Percentage (%) Days counted the United States in test Case 1: Current year 183 100 183 First preceding year 0 33.33 0 Second preceding year 0 16.67 0 183 Case 2: Current year 122 100 122 First preceding year 122 33.33 40.66 Second preceding year 122 16.67 20.34 183 Case 3: Current year 60 100 60 First preceding year 360 33.33 120 Second preceding year 18 16.67 3 183 7 Taxation of foreign nationals by the US—2016

A day of US presence is acquired if an The teacher—trainee and student statuses period, and the other reports income and individual is physically present in the United are conditional on the terms of the visa that deductions for the non-residency period. States at any time during the day. There is no accords that status, even though the visa The includible income and deductions are minimum time needed for the day to count. may remain in effect. For example, a student different for each portion of a dual-status Days are excluded from the calculation for on an F visa who accepts unauthorized year. the following individuals: employment ceases to be exempt and becomes present for purposes of the Therefore, it is important to determine the •• Exempt individuals (see below) substantial presence test even though the starting and ending dates of the period of •• Individuals who regularly commute to visa may remain in effect. residence. The starting date depends on work in the United States from Canada or whether the individual qualifies under the Mexico Closer-Connection Exception. A foreign green card test or under the substantial national satisfying the substantial presence presence test. An alien who meets only the •• Individuals who, while in transit between test may be taxed as a nonresident if he/ green card test becomes a resident on the two points outside the United States, are she is present in the United States for first day that he/she is physically present physically present in the United States for fewer than 183 days during the current in the United States as a lawful permanent less than twenty-four hours during that year (cases 2 and 3 in Example 1.1) and resident. Under the substantial presence trip the foreign national can show that during test, the starting date is generally the first •• Individuals who are not able to leave the entire year, he/she has a tax home in day that the alien is physically present in the the United States because of a medical a foreign country and a closer connection United States in the calendar year. However, condition that arose while they were to that country than to the United States. a nominal presence of up to ten days is present in the United States Form 8840 (Closer Connection Exception disregarded to allow the alien to conduct Figure 1.1 shows a decision tree that can be Statement) must be used to satisfy this pre-move business or make house-hunting used in determining residency status. requirement. Failure to file Form 8840 trips. This nominal presence period may be may result in the disallowance of the excluded only for determining the period Exempt Individuals. Exempt individuals are closer connection exception. of residency; these days must be counted not legally “present” in the United States, in the calculations determining substantial even though they may be physically located Establishing a foreign tax home and showing presence. See Example 1.2. there. These individuals are: a closer connection to a foreign country than to the United States requires an examination •• Employees of foreign governments of various facts and circumstances, such as Example 1.2: •• Teachers or trainees with J visas the location of the individual’s permanent Mr. A, a foreign national who has never •• Students with F and J visas home, family, business, and social and before been a US resident, comes to •• Professional athletes competing in political relationships. This exception is the United States for the first time on 6 charitable (as opposed to commercial) unavailable when certain actions have been February 20X1 and attends a business sports events, but only during actual taken during the current year to change meeting until 10 February 20X1, when competition the foreign national’s status to that of a he returns to his country. On 5 July permanent resident of the United States. Except for professional athletes, the 20X1, he moves to the United States exempt status of an individual also applies Residency Period. In the year that a foreign for the remainder of the year. Mr. A will to members of his/her immediate family. national becomes a US resident (and be considered a US resident alien for Form 8843 (Statement for Exempt sometimes in the year that he/she ceases to 201X1 under the substantial presence Individuals and Individuals with a be a US resident), his/her tax status is that test (the five days in February plus Medical Condition) must be filed to of a dual-status alien. For years in which the 180 days after his move causes explain the basis of a claim to exclude a foreign national is both a resident alien the total days of presence to exceed days of presence in the US for an exempt and a nonresident alien, two returns are 183). The period of residency begins individual (other than an employee of generally prepared, attached to each other, on 5 July 20X1. The trip in February is a foreign government) or an individual and filed simultaneously. One return reports disregarded in determining the start of with a medical condition. income and deductions for the residency the residency period.

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A resident alien who meets the green card Note that regulations governing departing test is considered resident until the day non-greencard holders stipulate that unless that his/her status as a lawful permanent the residency termination statement is filed, resident officially ends—that is, when he/ an individual who meets the substantial she formally revokes the lawful permanent presence test for the year of departure resident status or when an administrative will be considered resident for the entire decision is made that this status has been year. It therefore appears that a departing abandoned, provided for the remainder of individual who meets the substantial the calendar year, his or her tax home was in presence test for the year might simply a foreign country and he or she maintained choose not to file the residency termination a closer connection to that foreign country statement, in order to be considered a than to the United States. Until that time, the full-year resident of the United States. The green card holder is a US tax resident even choice should presumably be made in light when out of the country. of the same considerations that influence the first-year election to be treated as a full- On the other hand, the treatment of a year resident (see Special First-Year Election, departing resident alien who does not hold below)—what other income will thereby a green card is subject to some variation, become subject to US tax, whether the depending on the particular circumstances. choice will allow access to married-filing- joint-return rates, and so on. •• If the individual does not meet the substantial presence test for the year The residency termination date for an alien of departure, the individual is simply a meeting both the substantial presence nonresident alien for the entire year. test and the green card test is the later of •• If the individual meets the substantial the date on which the alien no longer has presence test, the individual is considered lawful permanent residence or the date a resident alien for the entire year, unless on which the alien is last present for the the individual establishes that, following substantial presence test. Up to ten days the departure date, the individual has a of US presence following the termination closer connection with a foreign country. of the US assignment will be disregarded in The individual establishes the closer determining the cutoff date for being taxed connection by attaching a residency as a resident. termination statement to his/her tax return. If a closer connection is thus established, the last day of residence will be the day of departure, and the individual will be a dual-status resident for the year of departure.

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Figure 1.1

Determining resident and nonresident alien status

Yes Possesses a green card?

No Present in the United States for at least 31 days in current year? No Yes

Meets substantial presence test (that is, physically present in the United States for 183 days in 3-year period, counted as all days in current year, plus one-third of days in preceding year, plus one-sixth of days in second preceding year)? No Yes

Still meets substantial Resident alien for all presence test if days Nonresident alien or part of the year as exempt individual disregarded?

Yes No

Present in the United States for at least 183 days in current year? Yes No

Tax home in foreign country for the entire year?

No Yes

Closer connection to foreign country than United States? Connconnection to foreign country than to the United States? No Yes

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Special first-year election to be treated arrival. For purposes of applying the 75% as a resident alien. A special election is test, up to five days of presence outside available to a foreign national who is unable the United States can count as days of to meet the substantial presence test in the presence in the United States. year he/she arrives in the United States but wants to be taxed as a resident in that initial The US tax return containing the first-year year. To make this election, he/she must residency election may not be filed until the satisfy all the following criteria: foreign national has satisfied the residency requirement under the substantial presence •• The foreign national was a nonresident for test for the following year. The foreign all of the preceding year. national may request an extension of time •• The foreign national meets the substantial to file until the necessary period passes presence test in the year following arrival. for satisfying the test in the following year, •• The foreign national is present in the but tax must be paid with the extension United States for at least thirty-one application on the basis that the substantial consecutive days in the year of arrival. presence test will be satisfied in the •• During the year of arrival, the foreign following year. national meets the continuous presence test—that is, he/she is present in the Figure 1.2 is a flowchart for determining United States for at least 75% of the days whether a foreign national qualifies to make between the first day of the thirty-one- the first-year election. See also Example 1.3. day period and the last day of the year of

Figure 1.2

First-year election to be treated as a resident alien

Individual does not meet either green card or substantial presence test in year of arrival.

Individual does not meet either green card or substantial presence test in year before arrival.

Individual does meet substantial presence test in year following arrival.

Individual is present in the United States for (1) at least 31 consecutive days in year of arrival and (2) at least 75% of days beginning with the first day of the 31 day period and ending with 31 December of year of arrival.

Individual may elect to be treated as a resident alien for the year of arrival.

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Taxation of resident aliens Income comprises salary and allowances, Income subject to taxation. All income moving expense reimbursements (see Example 1.3: received by a US resident alien or US Figure 1.3), dividends, interest, gains from Ms. B, a foreign national who had not citizen, derived from any source, is subject selling property, and other income from previously been a US resident, comes to federal income tax unless specifically any source. For example, income received to the United States on 1 November exempt or excluded. A resident alien is by the resident alien employee for services 20X1 on a visa and is present for taxed at graduated rates after allowance performed on temporary business trips thirty-one consecutive days (through for deductions. overseas (outside the United States) is 1 December 20X1). On 1 December, subject to US taxation. (A foreign tax credit she returns to her home country and may be allowed as an offset against the US remains there until 17 December 20X1, tax liability if the individual also pays non-US when she returns to the United States. taxes on this income.) She remains in the United States and meets the substantial presence test Figure 1.3 Moving expenses in 20X2. She may elect to be treated as a resident alien in 20X1 because (1) •• Reimbursements. Qualified moving expenses reimbursed by an employer are she was not previously a resident, (2) excludable from an employee’s gross income as a qualified fringe benefit to the extent she did not meet the green card or they meet the requirements for qualified moving expense reimbursements. Qualified substantial presence test in 20X1 but moving expense reimbursements include any amount received, directly or indirectly, (3) did meet the substantial presence by an employee from an employer as a payment for, or a reimbursement of, expenses test in 20X2, and (4) she was present in that would be deductible as moving expenses if directly paid or incurred by the the United States in 20X1 for thirty-one employee. consecutive days and for 75% of the •• Nonqualified moving expense reimbursements will be included in gross income days following 1 November 20X1. as compensation for services. Examples of nonqualified moving expense reimbursements include reimbursement of meal expenses, house-hunting trips, temporary living expenses, and home purchase and sale costs. These reimbursements would be included in the gross income of the employee as compensation and would be neither deductible nor excludable as qualified moving expenses. •• Deductions. An individual may become eligible for a moving expense deduction if, following an employment-related move, the individual’s new place of work is at least 50 miles farther from his/her old home than was the former place of work. After moving, the individual must generally continue to work as a full-time employee in the new location for at least 39 weeks during the 12 months after the move (or 78 weeks during the subsequent 24 months, if self-employed). A person who meets these tests may claim a full deduction for moving costs (such as transportation of household goods and personal transportation). •• Qualified moving expenses may be deducted only if taxpayers incur the expenses themselves. Qualified moving expenses not reimbursed by an employer are a deduction in computing adjusted gross income (AGI), or an “above the line” deduction. Qualified moving expenses reimbursed by an employer are excludable from an employee’s gross income as a qualified fringe benefit. •• The above rules are modified for moves to locations outside the United States if the foreign national terminates his/her US residency. In such a case, the timing of the reimbursement of nonqualified moving expenses could affect whether it is taxable in the United States. Further, no moving expense deduction is allowed in such a case.

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For individual income tax purposes, income generally refers to cash or the fair market value of property or services received by or made available to the individual. The appreciation in the value of investments or of other property is not income until the property is sold or exchanged for other property. See Example 1.4.

Example 1.4:

Mr. A is a resident alien of the United States for all of 20X1 and receives an annual salary of $45,000. Because of Mr. A’s outstanding performance, his employer awards him an automobile with a fair market value of $16,000. In addition, he receives dividends and interest income of $1,000 from US sources and $600 from sources within his home country. In March 201X1, Mr. A purchases ten shares of ABC Corporation stock for $1,000 and five shares of XYZ Corporation stock for $1,500. He sells the ten shares of ABC stock in August for $4,000, and the value of the XYZ stock at year-end is $2,000.

Mr. A’s total income to be reported for 20X1 is computed as follows:

Compensation from US sources (salary plus car) $61,000 Interest and dividends from US sources 1,000 Interest and dividends from foreign sources 600 Gain from the sale of ABC stock 3,000 Increase in fair market value of unsold XYZ stock — Total income $65,600

Deemed income. US tax law contains a number of provisions less commonly found in the tax laws of other countries, deeming US investors to have received income earned by foreign corporations that they control, by passive foreign investment companies, and by trusts that they have established for the benefit of US persons. These provisions apply fully to resident aliens, and, while these provisions tend to affect few resident aliens, their tax consequences can be surprising. These rules must therefore be considered carefully in evaluating US income tax status. See Example 1.5.

Example 1.5:

The following situations may cause a resident alien to have deemed income: •• Grantor trust. Before moving to the United States, Ms. B established a trust into which she placed certain investments (stocks, bonds, a rental property, and so forth). The trustee may accumulate income or may distribute it to any of the following: Ms. B, her husband, or their minor children. The trust will terminate after ten years, and the property will revert to Ms. B. Ms. B later becomes a US resident alien for income tax purposes. Her trust is considered a grantor trust, and she is subject to tax on all of its income at the time it is earned, regardless of whether it is distributed to her. •• Controlled foreign corporation. Ms. C (who is a resident alien) and two friends (both US citizens) set up a trading company, ABC Company, in a foreign tax haven. ABC Company buys products from their US manufacturing company and sells them around the world. ABC is a controlled foreign corporation, and Ms. C and her friends must include certain amounts of the income ABC Company earns from these sales in their US taxable incomes even if the tax-haven company pays no dividends to them. •• Passive foreign investment company. Mr. D (who is a resident alien) buys shares of stock in a foreign mutual fund whose assets are primarily stocks and bonds. If Mr. D does not make an election to be taxed currently on his share of the corporation’s income (or, in the case of some publicly traded funds, on the annual increase in the stock’s value), he will be taxed on certain distributions from the fund (or on gain from the sale of the stock) with an added interest charge extending back over his entire holding period.

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Deductions from income. Various items •• The individual must not file a joint return jointly rather than separately, and the head- are deductible from income if specifically with another person. of-household tax-rate schedule produces a authorized by statute. The following are the •• The individual must receive over half of his lower tax than the single tax-rate schedule. most common. or her support from the taxpayer. Joint returns in dual-status years. Filing a •• The individual’s gross income for the year Losses from capital transactions. Losses from joint tax return is not possible if one or must be less than the personal exemption capital transactions (such as sales of stocks both spouses are not residents for the full amount. (Note: This test will not apply if and bonds) are deductible to the extent that year. However, two elections are available the individual is the taxpayer’s child and an individual has capital gain income and to married foreign nationals that enable is either less than nineteen years old or are also deductible from ordinary income them to file a joint tax return and qualify a full-time student less than twenty-four up to $3,000. Losses above the $3,000 limit for the lower “married filing jointly” tax years old.) may be carried forward and deducted in rates. The first election may be made by future years. A resident alien’s dependent children an individual who, at the close of the year, must qualify as US residents under the was a nonresident alien married to a US Itemized deductions or the standard deduction. green card or substantial presence test. citizen or resident. The second election is Itemized deductions include state and local For dependents newly arriving in the available to an individual who, at the start of income taxes, real estate taxes, donations to United States, the taxpayer may make a the year, was a nonresident alien and who, US charitable organizations, residential and first-year election (discussed previously) at the close of the year, was a resident alien investment interest expenses (i.e., mortgage for dependent children to be treated as married to a US citizen or resident. Each of interest), and employee business expenses residents when they would not otherwise these elections requires both spouses to including un-reimbursed expenses for travel qualify as US residents for the year. consent. Consequently, for either election, away from home. The sum of a taxpayer’s both spouses must report and pay US tax net itemized deductions after the reduction Other common deductions. Contributions to on their worldwide income for the entire tax is compared to a statutory standard individual retirement accounts and qualified year. Although this additional income must deduction. The larger of the two amounts retirement plans may in some cases be be included, the individual may effectively may be deducted from income. A taxpayer’s deducted. Alimony payments are deductible reduce his/her tax liability because a lower standard deduction is determined by his/ by residents. tax rate may be used (because the married her tax return filing status (see Filing status, filing joint rates may be applied rather than below). Standard deductions for recent tax Filing status. A resident alien taxpayer married filing separate) and additional years are shown in Appendix A. must choose one of the following four filing deductions claimed. Also, any income taxes statuses on his/her tax return: paid to a foreign country may be claimed as Personal exemptions. A resident alien may 1. Single (for unmarried taxpayers only) an itemized deduction or used as a credit claim personal exemption deductions 2. Married filing jointly (for spouses filing against US tax. for himself/herself and a spouse, and a together) dependent deduction for each person he/ 3. Married filing separately (for spouses she supports. These amounts are adjusted filing separately) each year for inflation and are shown in 4. Head of household (for unmarried Appendix A. taxpayers and certain taxpayers married to a nonresident alien, who have To qualify as a dependent, a person must dependents living with them) meet all of the following five tests: Each filing status has its own tax rate •• The individual must be a relative or a full- schedule (see Appendix B). Resident time member of the taxpayer’s household. aliens may use any one of the four •• The individual must be a US citizen or schedules that applies to them and is to resident, or a resident of Canada or their best advantage. Generally, it is more Mexico. advantageous for married couples to file

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Example 1.6 illustrates the joint filing election.

Example 1.6:

Mr. A, a citizen of the United Kingdom, enters the United States with his wife for a five- year work assignment on 15 May 20X1. If they so elect, the couple may file a joint return for 20X1. If no election is made, the husband and wife must file separate returns using the higher married-filing-separately rates, and they will each be taxed on their separate worldwide incomes for the period from 15 May through 31 December 20X1.

Foreign tax credit. Income taxes paid by as a lawful permanent resident officially •• Certification Test—The individual fails a resident alien to a foreign country may ends. Special rules may apply for long-term to certify that he or she satisfied all be deducted as an itemized deduction or permanent residents who relinquish their applicable US tax obligations for the five may be credited against the resident alien’s green card. A long-term permanent resident years before expatriation. US tax liability. Since claiming foreign taxes is defined as an individual who is a lawful as credits reduces the US tax liability on permanent resident (green card holder) of An individual who meets any one of these a dollar-for-dollar basis, it will generally the US for at least part of 8 of the 15 years tests is considered a “covered expatriate”. A produce a lower net tax liability than would preceding termination of residency. “covered expatriate” will be subject to two claiming an itemized deduction. An intricate key tax components; first, a deemed sale of series of limitations applies to the foreign A person who qualifies as a long-term all assets as of the day before expatriation, tax credit. Foreign taxes paid on one type of permanent resident is subject to a special and second, a tax on the receipt of gifts or income cannot be used as credits against US “expatriation” tax upon relinquishing the bequests by a US person from an individual tax on other types of income. Any unused green card if he/she meets any one of the who expatriated after June 17, 2008. credits may be carried back for one year following three tests: Complex rules apply to this special and forward for ten years to reduce US tax •• Net Income Tax Test—For the five-year “expatriation” tax. A long-term incurred on non-US income. period before expatriation, the individual permanent resident who may be had an average annual US income tax subject to these rules should consult Departing aliens liability in excess of certain amounts (see with a qualified tax adviser prior to As described above, a resident alien who Appendix A). relinquishing the green card. meets the green card test is considered •• Net Worth Test—The individual’s net worth resident until the day that his/her status is at least $2 million.

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Tax treaties a disclosure statement claiming residence The United States has negotiated tax treaties in a foreign treaty country could adversely with other countries to reduce the burden affect their continuing qualification for the of double taxation. A treaty may override green card. the income tax laws of the United States for items covered by the treaty. Any item Dual-resident foreign nationals claiming not specifically addressed by the treaty will treaty benefits must file Form 1040NR as be taxed in accordance with US income nonresident aliens with respect to that tax laws. portion of the tax year for which they were considered nonresident. The return must Generally, treaties do not change the US contain Form 8833, Treaty-Based Return taxation of a US citizen or resident. However, Position Disclosure Under Section 6114 or treaties may specifically define or modify 7701(b). Penalties could apply for failure to residency status for purposes of the tax file this form or a similar statement. rules in the treaty. In general, an individual is considered resident in the country in An individual who is a US resident under which he/she is subject to taxation. In some a treaty may also use the treaty’s rules to situations, that individual may be considered reduce taxation in the other country when a resident by both treaty countries under appropriate. For example, a US resident alien their domestic laws. Many treaties include may be able to claim a reduced withholding tiebreaker rules to determine the country tax rate on interest and dividend income of residence for treaty purposes. The generated in his/her home country, provided tiebreaker rules override the domestic laws that he/she is deemed to be a US resident of each country and are based on such under the treaty between the United States factors as the location of the individual’s and the home country. permanent home and his/her economic and Income tax treaty countries. See Appendix personal relationships. C for a list of countries with which the United Individuals who are considered US resident States has income tax treaties in effect. aliens under either the green card or substantial presence test may be able to use treaties to reduce US taxation. For example, a green card holder living abroad and qualifying as a resident of the treaty country under the tiebreaker rule of the treaty may qualify for a US tax exemption or reduction to the extent provided in the treaty. However, the treaties can be used to reduce US taxation only in specific situations.

Green card holders are cautioned that filing Form 1040NR (the nonresident return) with

16 Taxation of foreign nationals by the US—2016

Chapter 2: Nonresident aliens

Taxation of nonresident aliens As illustrated in Table 2.1, nonresident aliens are taxed separately on income from US sources that is not effectively connected with a US trade or business (for example, investment income) and on income that is effectively connected with a US trade or business (for example, business and compensation income). Generally, the source of income is the geographic location where the related services are performed and where the income- producing asset is located. The nonresident alien tax base is compared to the resident alien tax base in Figure 2.1.

Table 2.1 Taxation of nonresident aliens

Type of tax Type of income Tax at graduated rates Income effectively connected with a US trade or business Tax at 30%-or-lower treaty rate US-source income that is not effectively connected with a US trade or business and is fixed or determinable annual or periodic income No tax Foreign-source income of a nonresident alien not engaged in a US trade or business

Table 2.2 Comparison of Resident and Nonresident Alien Tax Bases

Resident alien tax base Nonresident alien tax base All US employment income Some US employment income All foreign employment income All US passive income Some US passive income All foreign passive income All US capital gains US real estate gains All foreign capital gains Some income earned by controlled foreign corporations

Income not effectively connected with a Except in the case of real property US trade or business. A nonresident alien’s investments (see Chapter 4), a nonresident US-source income that is not effectively alien’s US-source net capital gains—gains in connected with a US trade or business is excess of losses from the sale of investment subject to tax at the flat rate of 30% of gross property—are not subject to taxation income (see Table 2.1); no deductions are unless the alien is in the United States for allowed. Treaties may reduce this flat rate. at least 183 days during the year. (Because an individual who is present in the United Income subject to this 30% tax includes States for this period of time is normally a interest, dividends, royalties, rents, and resident under the substantial presence test other fixed or determinable annual or and under the tiebreaker rules of treaties, periodic income. An exception is provided this tax principally affects exempt individuals for portfolio income on certain US such as diplomats, teachers, and students. registered bonds and bank accounts. This See p. 8.) The general exemption for capital interest is not taxed unless it is effectively gains applies regardless of the number of connected with a US trade or business. transactions or amount of gain realized during the year. See Example 2.1. 17 Taxation of foreign nationals by the US—2016

Example 2.1:

Ms. B, a citizen of the Netherlands who is a nonresident alien, periodically visits the New York offices of her company’s subsidiary. During 20X1, she makes five trips to New York and spends a total of 128 days in the United States. During her trips to New York, Ms. B sells stock, and her net profit on twenty separate transactions totals $10,000. (None of the stocks constituted US real property interests. See Chapter 4.) She will not be liable for any US tax on this profit. (Note that she could be taxed on compensation earned during her visits to the United States, as discussed under the heading “Effectively Connected Income,” if the provisions of an income tax treaty do not apply.)

The United States has extensive withholding The term trade or business is not specifically •• Income from real property operated as provisions to ensure the collection of defined. Whether the income arises from a a business or held for investment (see income taxes imposed on nonresident trade or business depends on the nature Chapter 4). aliens. Ordinarily, the 30% (or lower treaty of the activities and the economic interests •• Income from a partnership engaged in a rate) will be deducted from payments made in the United States. Business income US trade or business. to the nonresident alien. (If withholding generally includes the following: is not deducted, the nonresident alien •• An individual’s compensation for personal If an individual is no longer engaged in must file a tax return and pay the tax due; services performed in the United States. a US trade or business but continues to otherwise, the withholding agent (the An exception applies if the amount earned receive income effectively connected to that person paying the income) is liable for the is less than $3,000 and is paid by a foreign business, the income that the individual tax.) A tax return may be filed after year-end employer to a nonresident alien who is in receives may still be considered effectively to request a refund of excess withholding. the United States for fewer than 90 days connected (see Example 2.2). Similarly, during the year. Tax treaties may extend assets used in a trade or business will Effectively connected income. the period for up to 183 days and may generate effectively connected income if Nonresident aliens are taxed separately on increase or eliminate the $3,000 ceiling. sold any time within ten years after the income arising from the activities of—or business ceases. •• Income and profits from the operation of a assets used in—a US trade or business. This business in the United States. income, less allowable deductions, is taxed at the graduated rates that apply to US •• Income from the sale of the capital assets citizens and resident aliens. of a US business or from the sale or disposition of US real property.

Example 2.2:

Mr. A, a foreign national, is in the United States on a three-month assignment and receives compensation of $12,000 in 20X1. He returns to his home country on 15 December 20X1. In 20X2, he receives a bonus of $4,000 related to his services in the United States. The compensation of $12,000 is considered effectively connected income and is taxed at the graduated rates in 20X1. The bonus of $4,000 is also considered effectively connected income and is taxed at the graduated rates in 20X2.

18 Taxation of foreign nationals by the US—2016

Deductions from income. Unlike the not allowed. However, certain treaties allow royalties, received by nonresident aliens. flat tax on gross income not effectively additional exemptions to be claimed for the Therefore, the applicable treaty, if any, connected with a US trade or business, spouse and children residing with the alien should be reviewed to determine whether the tax on effectively connected income in the United States (for example, the treaty the flat 30% tax rate is reduced for the is applied to net income. The deductions with the Republic of Korea). specific type of income. It is also necessary that can be taken by the nonresident alien to establish that the recipient is a qualified against effectively connected income Filing status. Individuals who are resident of the treaty partner country. are limited to personal exemptions, nonresident aliens at any time during the contributions to US charities, casualty tax year normally are not eligible to claim Tax treaties may also exempt nonresident and theft losses, and other expenses that head-of-household status and generally aliens from US taxation on the following are related to the earning of effectively may not file a joint tax return. They must types of income: connected income. Examples of such use the single filing status or, if married, •• Compensation received from a foreign related expenses are travel expenses must file separate tax returns. However, a employer that is not engaged in a US incurred in performing services in the nonresident alien who is married to a citizen trade or business if the employee is in United States while temporarily away from or resident of the United States may elect to the United States for fewer than 183 home, contributions to individual retirement file a joint tax return (see p. 14). days. Some treaties also contain a dollar accounts, and state and local income taxes threshold for tax exemption. Foreign tax credit. Under very unusual imposed on effectively connected income. •• Pensions from former foreign employers. circumstances, a nonresident alien may be •• Compensation and pensions received The standard deduction is not allowed to subject to US income tax on income earned by teachers who are temporarily in the nonresident aliens. Available deductions outside the United States. Should this occur, United States. may be disallowed if tax returns are not filed any resulting US tax liability may, in most •• Foreign income received by students and on a timely basis. circumstances, be offset by any foreign income tax that is also incurred on this trainees who are in the United States for The income tax law allows a nonresident income. maintenance, training, and education. alien to deduct only one personal A list of countries with which the United exemption—for himself or herself—unless Tax treaties States has negotiated tax treaties can be the alien is a resident of Canada or Mexico. Most tax treaties will either eliminate or found in Appendix C. Generally, personal exemptions for a spouse reduce withholding requirements on US and dependents of a nonresident alien are income, such as dividends, interest, and

19 Taxation of foreign nationals by the US—2016

Chapter 3: Filing requirements

When to file private delivery service are also considered Tax returns for individuals are due on filed on the date mailed. Tax returns filed the fifteenth day of the fourth month by a private delivery service which is not an following the close of the tax year (15 April IRS designated private delivery service must for calendar-year taxpayers). An additional reach the IRS office by the required due automatic extension of six months, to 15 date. See Appendix A for a list of currently October, is available by filing Form 4868, designated private delivery services. Application for Automatic Ex¬tension of Time To File US Individual Income Tax If a return is mailed after its original or Return. This extension provides additional extended due date, it is not considered filed time to file the income tax return; however, until actually received by the IRS. it does not extend the date to pay any tax Interest and penalties on balance due owed. Interest will accrue on any amount A properly filed extension relieves the owed until the tax liability has been paid. taxpayer from a late filing penalty on the net If the due date for filing a return (including tax due (4.5% per month for late filing plus the automatic extension) falls on a Saturday, .5% per month for late payment until the Sunday, or national holiday, the due date is payment is made; the combined penalties deferred to the next earliest business day. A may not exceed 25%). It does not, however, return is considered filed on time if there is eliminate the liability for interest that is an official postmark (US or foreign postmark charged on any unpaid tax from the original is accepted) dated on or before the last day due date (without extension). for filing, including extensions. Similarly, returns filed through an IRS designated,

Example 3.1:

Taxpayer B is living in the US as of 15 April 20X2. On 10 April 20X2, he files a valid Form 4868 extension for his 20X1 US income tax return. He then files the return on 15 September 20X2 and there is a $1,000 balance due.

Because B filed his return prior to the 15 October extended due date, there is no late filing penalty assessed. He will be subject to the late payment penalty and interest charges, calculated as follows (assume a 3% annual interest rate):

Late payment penalty: 0.5% x 5 months x $1,000 = $25

5 months counted from 15 April to 15 September

Interest: 3% x 154 days/365 days x $1,000 = $13

154 days counted from 15 April to 15 September

20 Taxation of foreign nationals by the US—2016

Estimated tax Aside from US citizens and lawful unavailable. Alternatively, the taxpayer can Estimated tax payments are required if the permanent residents, only US aliens lawfully use an IRS-approved Certified Acceptance amount of total tax due with the return after admitted to the US and holding a valid Visa Agent (CAA) to help submit the identification withholding is expected to exceed $1,000. which permits the individual to “work” in documentation with Form W-7, or apply in- See Appendix A for a schedule of current the US may receive a SSN. To apply for an person at an IRS Taxpayer Assistance Center year payment due dates. In general, each SSN, the resident alien must submit Form (TAC). Deloitte has entered into a formal installment must be 25% of the lesser of: SS-5 with valid documentation to the Social agreement with the IRS to act as a CAA and 90% of current year tax or 100% of the prior Security Administration (SSA). Generally is able to certify identification documents. In year tax (or 110% of prior year tax if adjusted speaking, category B-1 visa holders and this circumstance, the taxpayer will need to gross income for the current year is in visa waiver business visitors are excluded have a face-to-face meeting with a Deloitte excess of $150,000 for joint filing or $75,000 from the group of aliens eligible for SSNs person, who can attest to the authenticity for married filing separate). If there is an (see Chapter 7). In most cases, spouses and of the passport. Other documentation is underpayment of the estimated tax and no dependents of aliens temporarily working in required, including the attestation that the exceptions apply, a penalty is imposed at the the US are denied SSNs because their visas documents are true and complete copies. interest rate applicable to assessments of only allow them to reside but not work in the However, this option is only available for tax. This penalty is not generally deductible US In that case, ITINs will be required. the taxpayer and spouse. Any dependents for income tax purposes. Interest is not will still need to secure “certified” copies of charged for the late payment of estimated Nonresident aliens, resident aliens and their documentation to apply for an ITIN or tax. The penalty for failure to pay estimated spouses or dependents of aliens not eligible apply through an IRS TAC. Legislation passed tax generally does not apply when tax for a SSN apply for an ITIN following IRS in 2015 requires that ITINs issued prior to liability for the year is less than $1,000, or proscribed procedure using Form W-7, 2013 and those not used on a tax return if there was no tax liability in the preceding Application for IRS Individual Taxpayer within the prior three years will expire on tax-year, provided it was a full 12-month Identification Number. Each ITIN applicant a graduated schedule, beginning in 2017. period (i.e., calendar year tax-year). must submit the original income tax return Contact a Deloitte professional for further for the year which the application is made information. Taxpayer identification numbers along with appropriate documentation as Regardless of US income tax residency proof of identification as an attachment For more information regarding the process status, an individual must have a valid to the completed Form W-7. The preferred of applying for an ITIN, please consult a US Social Security Number (SSN), or valid appropriate documentation to Form W-7 tax adviser. Individual Taxpayer Identification Number is the original passport of the applicant, (ITIN) to file a US income tax return. Family or a certified copy of the passport from members accompanying a taxpayer in the the issuing agency. Notarized copies US also require either an SSN or ITIN to of a passport are not accepted. Other utilize certain dependency exemptions, types of appropriate documentation may credits and preferential tax rates otherwise be submitted as proof of identification not available on the US tax return. should a passport of the ITIN applicant be

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. 21 Taxation of foreign nationals by the US—2016

Chapter 4: Foreign investment in real property

There are no federal restrictions imposed A foreign investor may purchase real and emphasize the need for advance on the ownership of US real estate by aliens. property within the United States in a variety consultation with your tax adviser. However, states may place restrictions on of ways: in his/her own name; through a the ownership of real property by foreign US corporation, partnership, or trust; or In the following discussion, it is assumed nationals. For instance, some restrict—or through a foreign legal entity. The income that the individual purchased real property even prohibit—ownership of land, others and estate tax consequences of owning or in his or her own name. deny the right of an alien to inherit real selling property will vary depending on the Taxation of income from US real estate property, and still others permit land vehicle through which the actual investment Property owned by nonresident aliens. ownership by aliens only if the alien’s is made. Among corporate owners, foreign As previously discussed, US-source rent country of origin grants similar privileges corporations may be subject to the US received by a nonresident alien that is not to US citizens. These state restrictions may branch profits tax, while a US corporation effectively connected with a US trade or be modified or even nullified by various will not. A foreign investor who owns the business is subject to tax at the statutory US treaties. real property directly or through a US rate of 30% of gross income or, if applicable, corporation or partnership will also likely be a lower tax treaty rate. (US tax treaties do Individuals who want to purchase property subject to US estate and gift taxes, although not normally provide for a lower tax rate for should seek legal counsel to determine the insertion of a foreign corporation into rental income from real property.) Such rent whether any restrictions apply in their the ownership structure may eliminate this can result in an extremely disadvantageous circumstances. Individuals should also exposure. These and other tax differences tax position if the property has expenses determine whether a particular state resulting from the form of entity chosen associated with it, as shown in Example 4.1. imposes reporting requirements on foreign to own the property can be important owners of real estate. Contrast this example with Example 4.2.

Example 4.1:

Ms. B, a nonresident alien, holds US residential real estate for rent. In this case, her rental activities do not constitute a trade or business. During 20X1, she receives rental income totaling $15,000 and incurs real estate taxes, mortgage interest, and other expenses that total $12,000. Because her income is not effectively connected with a US trade or business, her US tax for 20X1 would be calculated on a gross basis as follows:

Gross income of $15,000 x 30% = $4,500

Example 4.2:

Assume the same facts as in Example 4.1, except that the rental activities do constitute a US trade or business. In this case, the expenses of carrying the property may be offset against the rental income. The net rental income will be effectively connected income and taxed at graduated rates, as follows:

Gross income $15,000 Expenses (12,000) Taxable income 3,000 Tax (at 10% rate) $ 300

If the individual in this example has other effectively connected income or losses, such as salary or losses from other real estate activities, they may generally be aggregated with the income in this example (although some limitations may apply).

22 Taxation of foreign nationals by the US—2016

Whether a nonresident alien’s rental income applies to all real property located in the Depreciation is subject to the 30% gross tax or to the United States and held for the production The cost of purchasing rental property is graduated rates on a net basis depends of income. Furthermore, the election, once not itself a rental expense. However, the on whether the owner’s rental activity is made, remains in effect for subsequent portion of the purchase price attributable a US trade or business. To be considered years and cannot be revoked without the to buildings, improvements, and other a trade or business, rental activities and consent of the Internal Revenue Service depreciable parts of the property may maintenance of the property must be (IRS). For example, if an individual made be recovered through depreciation regular and continuous, and the owner the election in 20X1, sold the real property deductions taken over the life of the or the owner’s agents must be involved in concerned in 20X4, and purchased a property. Depreciation is not an optional advertising for renters, repairing, and so second property in 20X8, the election would deduction; it must be claimed each year. The forth. In other words, the business of renting continue to be in effect for the second property owner cannot postpone taking the property results from activities beyond purchase. Because of its extensive effect, deduction until some later time. the mere holding of the property and individuals should consult their tax advisers collection of rents. The rental of one small before making this election. The depreciation deduction is a function of property may not be a trade or business. the depreciable basis of the property. This Furthermore, “net” lease arrangements, While the statutory net tax election for basis consists of the original purchase price, under which the tenant pays all expenses real property is a continuing election (and other capital costs incurred in purchasing and merely pays net rent to the owner, are is not easily revoked), a few tax treaties the property (for example, attorney fees, often considered not to be US trades or provide for a similar election on an annual state taxes, broker commissions, and businesses. basis. This annual election is a much more travel and transportation costs), and the liberal treatment; therefore, it is important cost of improvements. Special rules may Election to treat real property income as to review relevant tax treaties carefully to apply when property is acquired by gift or income connected with a trade or business. determine whether an individual can take inheritance. Land itself is not a depreciable The inability to claim deductions against advantage of that election. asset. Therefore, when both land and rental income, as shown in Example 4.1, can buildings are purchased, the total purchase be a severe disadvantage to nonresident Property owned by resident aliens. price must be allocated between the cost of alien property owners. US income tax As previously discussed, no distinction the building and that of the land. law provides an election to treat property is made in the tax treatment of resident income as effectively connected even aliens between income that is effectively Depreciation on residential rental real though it would not be in the absence of the connected with a US trade or business and property located in the United States and election. (A foreign corporation is eligible income that is not effectively connected purchased after 31 December 1986 is to make a similar election.) By making this with a US trade or business. Thus, the net recovered ratably (that is, on a straight-line election, the owner is able to calculate his or of rental income (gross rental income minus basis) over twenty-seven and one-half years. her tax liability on a net basis. rental expenses) will be added to other The recovery period is thirty-nine years for taxable income received from worldwide nonresidential rental property purchased The individual makes this election by filing sources and taxed at graduated tax rates. after 12 May 1993. Removable furniture a statement with his/her tax return. The and fixtures are depreciated over a shorter election cannot be made until gross income recovery period. from real property is reportable, and it

23 Taxation of foreign nationals by the US—2016

Passive loss rules real estate activity is defined as a passive Generally, individuals filing separate or “dual- Since 1986, income or loss from any source activity per se, regardless of the level of status” returns are precluded from using the has been categorized as active, passive, activity by the owner. active participation exception. publicly traded partnership, or portfolio. Each of these classifications attracts specific tax Although rental real estate is statutorily Personal use of rental property. If a consequences for individuals and certain categorized as passive, a very important rental property is also used by the owner or closely held corporations. exception allows a maximum of $25,000 the owner’s family for personal purposes, in real estate losses incurred by resident expenses of that property must first be Generally, the income tax law provides aliens to be used against any type of income, allocated between the rental period and the that losses from passive activities, such as whether passive, active, or portfolio. The personal use period. Expenses allocable rental real estate, may be used to reduce $25,000 exception is subject to a phaseout to personal use are not deductible unless income only from other passive activities, of one dollar for every two dollars of gross specifically allowed. Real estate taxes and not active (salary) or portfolio (interest and US income in excess of $100,000 and mortgage interest are examples of non- dividend) income. Thus, it is not possible to is not available when gross US income business expenses that can be deducted reduce salary income by losses from passive reaches $150,000. by a resident alien or citizen. A nonresident activities. Passive losses not usable in a alien, however, cannot deduct any non- current year can be carried forward until To qualify for this exception, an individual business expenses. sufficient passive income is received to use must meet an active participation test. the losses or until the activity is disposed of, This means the investor must personally This allocation need not be made if the at which time all accumulated losses from participate in the management of the property was rented for fewer than fifteen that activity can be fully used against other property, which includes approving days during the year; in such a case, no types of income. tenants, determining rental terms, or rental income need be reported and no scheduling capital and repair expenditures. rental expenses can be claimed. Passive income comes from a trade or Participation need not always be regular, business in which the individual does not continuous, or substantial. For example, Unless expenses are specifically attributable actively participate in any material way. A provided that the investor participates in to a particular period, they are allocated common source of passive income is an the management decisions, he or she could to the rental period according to the investment by the individual as a limited hire a rental agent to handle the operations following ratio: partner in a limited partnership that without forfeiting the $25,000 deduction. Number of days per year unit is conducts active business. In addition, rental rented at fair rental Total number of days per year unit is used

24 Taxation of foreign nationals by the US—2016

An overall limitation on deductions associated with rental property comes into play if the owner (or the owner’s family) personally uses the residence for more than the greater of (1) 14 days or (2) 10% of the number of days during the year in which the property is rented at a fair rental value. If the owner’s personal use exceeds this limitation, he or she can deduct expenses only to the extent of the rental income from the property (that is, net losses are not allowed). Property owners should therefore carefully monitor the number of days that they personally use rental property. See Example 4.3.

Example 4.3:

Mr. A, a nonresident alien, owns residential real property, which he rents out for ten months of the year. He personally uses the property for the remaining two months.

His rental income for this ten-month period totaled $15,000, and his expenses for the year are as follows:

Expenses Amount ($) Interest 5,000 Property taxes 3,000 Utilities 1,000 Insurance 750 Depreciation 3,750 Commissions 1,500 These expenses must be apportioned between the periods of personal use (two months) and rental (ten months). Because Mr. A uses the property for more than 14 days, he cannot claim a deduction for expenses apportioned to the rental period in excess of $15,000 in any event. Assuming that his rental activity constitutes a US trade or business—or that he has made the election to treat income from real property as trade or business income—his taxable income from renting out the property would therefore be calculated as follows: Rental income $15,000 Less expenses: Interest expense ($5,000 × 10/12) ($4,167) Property taxes ($3,000 × 10/12) (2,500) Utilities ($1,000 × 10/12) (833) Insurance ($750 × 10/12) (625) Depreciation ($3,750 × 10/12) (3,125) Commissions* (1,500) Total expenses (deductible amount limited to $15,000) (12,750) Net rental income $ 2,250

* Commissions are not prorated as they apply specifically to the time period during which this property was a rental property.

25 Taxation of foreign nationals by the US—2016

Sale of property by resident aliens The gain or loss on the sale of residential rental property is the difference between the net selling price (sales price less expenses of sale) and the adjusted basis of the property. A property’s adjusted basis is its original cost less the total amount of depreciation expenses claimed during its life. (The calculation of a gain or loss is illustrated in Example 4.4.)

Example 4.4:

Ms. B, a resident alien, purchased real property for $200,000. She later sells the property for $300,000 (net of expenses of sale). Total improvements made to the property amounted to $10,000, and depreciation claimed during the years it was operated as a business totaled $95,000. The gain on the sale would be determined as follows:

Net selling price (net of sale expenses) $300,000 Adjusted basis: Original purchase price $200,000 Improvements 10,000 Accumulated depreciation $(95,000) (115,000) Gain realized $185,000

A gain will normally be treated as a long term Sale of property by nonresident aliens Any gain from the disposition of a USRPI will capital gain and will be taxed at graduated In general, a gain or loss from a sale or other be taxed at the graduated rates, limited to rates, limited to the maximum individual disposition of US real property interests a maximum tax of 15% or 20% if the USRPI capital gain tax rate of either 15% or 20% (USRPIs) by a nonresident alien is treated is a capital asset and the gain is long-term. on long-term gains. The higher 20% tax as if it were effectively connected with a The higher 20% maximum tax rate applies to rate on capital gain applies to taxpayers trade or business within the United States, individuals falling in the highest graduated falling in the highest graduated ordinary regardless of the property’s actual use. All income tax bracket (i.e., 39.6%). As with income tax bracket during the year of sale nonresident alien individuals—regardless of resident aliens, losses can be offset against or disposition. Short-term capital gains whether they engaged in a trade or business gains only if the property was actually used are subject to tax at graduated rates. The or elected to treat real property income in a business or income-producing property; portion of the gain related to depreciation is as effectively connected with a trade or personal-use property does not generate a taxed at a special rate of 25%. (Special rules business—will be treated alike when taxed deductible loss. apply, however, to the sale of a principal on gains from sales of real property. residence; see p.35.) Losses on the sale Upon purchasing a USRPI from a of property used in a trade or business Real property for this purpose can consist nonresident alien, the purchaser may be are capital losses and, with restrictions, of—but is not exclusively limited to— required to withhold 10% of the proceeds, may be deductible, but losses on the sale undeveloped land, buildings, residential to be applied against the seller’s tax on the of a personal residence or property not dwellings, options on land, and real estate gain. The IRS may agree to lower the rate held for the production of income are partnerships. Taxable US real property of withholding if the expected tax would not deductible. interests, however, also include stock be less than the otherwise required 10%. and other equity interests in certain US Withholding does not apply if the sale or corporations that own real property. exchange falls within a few narrowly defined tax-free exchanges (although reporting may be required) or if the purchaser acquires the property for use as his or her residence and the purchase price does not exceed $300,000. 26 Taxation of foreign nationals by the US—2016

A nonresident alien disposing of his or Tax treaties her US real estate investment should As previously indicated, tax treaties may consider a number of other special rules. provide a more attractive result than For example, if the property is sold on an domestic laws for some kinds of real installment basis, the IRS will not generally property income. Although no treaties refund any portion of the 10% tax withheld completely eliminate taxation of gains on a until the gain is reported in full. Also, if the USRPI, they may nonresident alien holds the US real estate •• Provide elections to treat real property in a US partnership, the purchaser will not rent as effectively connected income be required to withhold the 10% tax on •• Provide rules for allocation of expenses the disposition. However, the managing partner of the partnership will be required to withhold 20% of the gain allocable to the nonresident alien partner, regardless of whether any cash is distributed from the partnership.

27 Taxation of foreign nationals by the US—2016

Chapter 5: Other taxes

Net investment income tax An individual’s Net Investment Income State and local income taxes For tax years beginning after December 31, includes three general categories of income: Almost all of the fifty states, the District of 2012, certain US taxpayers may be subject (1) gross income from interest, dividends, Columbia, and even some cities levy some to an additional net investment income tax annuities, rents and royalties; (2) income form of personal income tax that is separate (NII). The tax is in addition to regular federal derived from a passive activity or a trade or and distinct from the income tax imposed income tax and intended to reach certain business of trading financial instruments or by the federal government. The tax base higher income taxpayers unearned income. commodities; and (3) net gain recognized on may be broader or narrower than that used Nonresident aliens, including those who dispositions of property. by the federal government. California’s assert nonresident US tax status under an “unitary” tax is a well-known example of income tax treaty are not subject to NII. Dual The rules regarding the NII are detailed and a broad tax base. On the other hand, the status resident taxpayers are subject to complex. A taxpayer should consult with states of New Hampshire and Tennessee NII only with respect to the portion of their a qualified tax adviser if his/her income is have personal income taxes but apply them residency period of the dual status tax-year. higher than the above thresholds and the only to passive investment income (that is, taxpayer would like to discuss planning interest, dividends, and capital gains). For individuals subject to tax on NII, tax is opportunities regarding this tax. imposed at 3.8% on the lesser of: State income taxes are independent of Affordable Care Act •• the individual’s net investment income for each other as well as of the federal tax. As part of the Patient Protection and the tax year, or This can lead to double or even multiple Affordable Care Act (ACA), beginning •• the excess of the individual’s Modified state taxation of the same income. Double with tax-year 2014 individuals and their Adjusted Gross Income over the threshold taxation is usually prevented by a credit, dependents are required to maintain amount (the MAGI threshold amount which is allowed on the tax return of the minimum essential healthcare coverage is $250,000 for individuals filing a joint state of residence for taxes paid to the state throughout the year. Failure to maintain return, $125,000 for married taxpayers that is the source of income. coverage will result in a penalty known as filing a separate return and $200,000 for a shared responsibility payment, which State income taxes are generally levied on all other individuals). is calculated on the individual income the worldwide taxable income of residents As discussed in Chapter 1, special elections tax return. Medical insurance provided of the state. For nonresidents, they are are available for a US citizen or resident through a US employer will generally levied on income from sources within the who is married to a nonresident alien to qualify as minimum essential coverage. In state. (See Example 5.1.) The states use allow them to file a joint tax return. Special addition, there are specific exceptions from various rules for apportioning income to rules apply for couples who have made this requirement for individuals residing the state, including a proration of worldwide this election with respect to the NII and outside of the US or for gaps in the period income. This apportionment can affect the the thresholds that apply. Consideration of of coverage of less than three months. A tax rate applied as well as the amount of the potential impact of the NII should be taxpayer should consult with a qualified tax income subject to tax. An individual who included when deciding on these elections. adviser for further details regarding the ACA moves into a state and becomes a resident healthcare requirements and exceptions. will usually be taxable as a nonresident for the period before the move (on income from sources within the state) and as a resident for the period after the move (on income from all sources).

Example 5.1:

Many individuals who work in New York City commute from their homes in New Jersey. Since they maintain their residences in New Jersey, they are liable for New Jersey tax on their worldwide income, including compensation earned in New York. However, since their compensation was earned in New York, it is subject to taxation by New York State as New York—source income. New Jersey will grant a credit against its tax for tax paid to New York, but only to the extent of the tax that otherwise would be due on that income.

28 Taxation of foreign nationals by the US—2016

As discussed at the beginning of this The method of taxation and the rates An additional Medicare tax of 0.9% is chapter, specific rules exist regarding when imposed by each of the states varies imposed on employment wages for certain to file a tax return. For each state, separate widely. States that impose a tax based on higher-income taxpayers (income of more filing deadlines and rules regarding timely personal income generally follow federal than $250,000 for married couples filing filing of the tax return may apply, depending law in computing taxable income. The jointly or surviving spouse, $125,000 on the state. Taxpayers should consult with extent of state conformity to federal law is for married couples filing separately, a tax adviser regarding specific state filing wide-ranging and includes many deviations and $200,000 for all other taxpayers). requirements. from the federal computation of taxable Employers have an obligation to withhold income. Some states directly piggyback this additional tax for any employee whose State residency rules. Residency for on the federal income tax. For example, wages exceed $200,000, regardless of the state tax purposes may not be defined some states impose its income tax as a filing status of that individual. This additional in the same manner as residency for percentage of the federal income tax of tax is reconciled on the actual tax return federal income tax purposes. In dealing residents and nonresidents, including if the individual is subject to additional with a particular state, it will therefore be estates and trusts. Other states adopt Medicare withholding in excess of the important to review the residency rules. federal taxable income as the starting point correct threshold confirmed by the actual For example, California defines the term for computing state taxable income. tax return filing status. For example, if too resident as a person domiciled in the state much additional Medicare tax was withheld or physically present in the state other than While adopting the federal definition of from the employee during the year, the for a temporary or transitory purpose. An taxable income, most states provide for excess is credited back to the individual on individual who is present in California for various adjustments in determining state their tax return. Conversely, if a deficiency more than nine months in the tax year is taxable income. Some common variances exists, an additional payment is charged on presumed to be a resident. New York, on from federal taxable income include the the tax return to account for any shortfall. the other hand, defines resident as a person taxation of state pension income, Social who is domiciled in the state or who (1) Security income, and interest on state and Additional Medicare applies only to the maintains a permanent place of abode in local bond interest. In addition to providing employee, not to the employer. However, the state and (2) spends more than 183 days variances from federal taxable income in the as noted, the employer has an obligation of the tax year in the state. computation of state taxable income, states to withhold amounts of excess Medicare also provide different itemized and standard tax from the employee’s wages. This tax Most states use a combination of three tests deductions than what is allowed for federal applies for any employee who is otherwise to determine residency: purposes. subject to US social security tax, including 1. Domicile nonresident aliens covered by the US social 2. Whether a permanent place of abode is Social security tax security program. Employees on assignment maintained within the state Compensation for services performed in the United States who are exempt from 3. The number of days physically present within the United States as an employee is US social security tax due to a totalization within the state subject to US social security tax, regardless agreement between the United States of the citizenship or residency of either the and their home country are also exempt These apply equally to both US citizens employer or employee (see Appendix A for from this additional Medicare tax if a valid and foreign nationals. For example, a a summary of the rates and current year certificate of coverage is in place with the Japanese executive who is transferred income limitations). The employer pays a tax employer (see next section for further from Tokyo to Los Angeles on a temporary of equal amount. Self-employed individuals details). business assignment is subject to the are subject to a social security tax as well. same California residence tests as the Nonresident aliens are exempt from social American executive who is transferred from security on self-employment income. New York to Los Angeles on a temporary business assignment.

Treaties that the United States have with foreign countries generally have no direct control over state taxation.

29 Taxation of foreign nationals by the US—2016

Totalization agreements taxes owed by the employee. These include Income tax treaties do not cover social federal, state, and local income taxes security taxes, so even if a nonresident alien and the employee portion of the social is exempt from US income tax under an security tax. Second, employers must applicable treaty, any US-source earnings pay their separate payroll tax obligations, will still be subject to social security tax. As including the employer portion of the social a practical matter, however, the IRS does security tax as well as federal and state not normally enforce the social security unemployment taxes. In addition to making tax provisions in cases in which the foreign the tax deposits, employers must meet national is exempt from income tax. separate quarterly and annual reporting requirements. These deposit and reporting The United States has entered into social rules apply to many allowances and noncash security totalization agreements with several fringe benefits, including unsubstantiated countries that may eliminate duplicate business expenses. Failure to comply can coverage (taxes) and provide for “totalized” result in the imposition of severe penalties. benefits for individuals who cannot qualify for full social security benefits in one Estate and gift taxes country or the other. See Appendix C for Residence for transfer tax purposes does a list of totalization agreements which are not have the same meaning as it does currently in effect. for income tax purposes. Residence for purposes of the US transfer tax means To qualify for the coverage provisions of domicile. To be domiciled in the United such an agreement, an employee must be States, a foreign national must reside here transferred by his or her employer from and intend to continue doing so indefinitely. one country to the other. Direct hires in the The IRS will consider several factors in host location do not qualify. The employer determining one’s domicile, including must apply for a certificate of coverage duration of stay in the United States, from the home country to avoid the tax in location of family and friends, location of the host country. Self-employed individuals business interests and social affiliations, must move an existing business from one and any declarations of intent in such country to the other to qualify. Totalization documents as visa applications, wills, deeds agreements will provide for an exemption of gift, or trust instruments. Many foreign from the host country’s social security nationals temporarily assigned to the United taxes for employees for at least five years, States will be considered nonresident aliens although certain agreements may provide for US transfer tax purposes. for a longer period or allow for an extension; the exemption for self-employed individuals The United States imposes a transfer tax may apply for only two years. on all gifts and all property included in the estates of US citizens and residents. In the Employer payroll tax obligations case of nonresident aliens, the estate tax The US tax system also imposes payroll tax generally applies only to US situs property, obligations with respect to US employment. including tangible and intangible property These apply to all US-source employment located in the United States and stock income, regardless of whether the employer or debt issued by US persons. Gift tax is US or foreign (subject to applicable generally applies to nonresident aliens only income tax treaties). These obligations on tangible property located in the US Not take two basic forms. First, employers are all of the situs rules are self-evident, and required to withhold and deposit certain careful planning may be required to avoid

30 Taxation of foreign nationals by the US—2016

unanticipated results. The fair market value the deduction for indebtedness must be of the assets at the time of the transfer or allocated as described above. However, if date of death (or the alternate valuation the nonresident alien decedent was not date) is the basis for the tax for citizens, personally liable for a particular mortgage, residents, and nonresidents alike. only the value of the property subject to the mortgage, reduced by the amount of the The taxable estate is derived by reducing mortgage, is included in the taxable estate. the gross estate by allowable deductions. Thus, in effect, a deduction for the entire These deductions include expenses amount of the mortgage is permitted. incurred in administering the estate, certain taxes, certain indebtedness, and Estate and gift tax rates currently range charitable contributions. Most deductions up to 40%. The rates are the same for for the estate of a nonresident alien must US citizens, US domiciliaries and Non-US be prorated between the US situs assets domiciliaries. The estate and gift tax bases and the foreign situs assets. One of the for resident and nonresident aliens are most significant exceptions to this rule illustrated in Figure 5.1. applies to non-recourse debt. Generally,

Figure 5.1

Comparison of resident and nonresident alien

Estate and gift tax bases

US citizen/Resident alien transfer tax base Nonresident alien transfer tax base US real estate US real estate Foreign real estate Stocks of US corporations Stocks of US corporations* Stocks of foreign corporations Deposits with all investment companies Deposits with US investment companies Deposits in US commercial banks or savings All deposits in US commercial banks or and loans connected with a US trade or savings and loans business All debt obligations US-based debt obligations Proceeds of insurance policies

* For US estate tax only. For gift tax purposes, stock of a US corporation is an intangible asset and is therefore not subject to US gift tax.

31 Taxation of foreign nationals by the US—2016

Nonresident aliens with US assets over With respect to estates, property passing $60,000 in value may be subject to to a US citizen spouse is eligible for an substantial US taxes on their estates unlimited marital deduction and thus because the exclusions and deductions exempt from estate tax. Property passing permitted are not as favorable as those to a surviving non-citizen spouse does not permitted to citizens and residents. Credits qualify for the marital deduction, unless or treaty provisions may reduce this liability, the bequest is to a qualified domestic depending on the status and terms of any trust. These trusts must meet a number existing treaty with the country of domicile. of requirements, the effect of which is to See Appendix C for a list of estate tax enforce the transfer tax at the time property treaties or estate and gift tax treaties which is distributed from the trust or at the are currently in effect. death of the nonresident surviving spouse, whichever occurs first. Gifts made to a spouse who is a US citizen are exempt from gift tax due to an unlimited A foreign national whose estate will be marital deduction. Gifts made to a non- exposed to US tax should consult with citizen spouse, however, do not qualify for tax advisers to quantify the exposure and this marital deduction. An increased annual discuss planning opportunities. exclusion for gifts of a “present interest” is available for transfers to a Non-US citizen spouse. Gifts in excess of certain amounts are subject to US transfer tax (see Appendix A for the inflation-adjusted amounts).

32 Taxation of foreign nationals by the US—2016

Chapter 6: Tax planning

The need for tax planning an individual moves to the United States or Managing one’s US presence either to cause Various actions that resident and establishes a US business or investment or to avoid residency in the United States nonresident aliens take can affect the presence, the individual seek personal tax may therefore be beneficial. amount of tax they will pay in the United advice from a source that is competent States. Tax planning, therefore, is essential to consider both the US and the foreign Timing of income recognition for foreign nationals who are or will become country tax regimes. Foreign nationals are subject to normal US subject to taxation by the United States. accounting rules. They recognize income in Residency the amounts and at the times prescribed This chapter presents several planning As explained, resident aliens and in US tax law, even though this income ideas. Whether an idea applies depends nonresident aliens are taxed according may pertain to activity that had no US on variables previously discussed, such to different rules, and each status has its connection. For example, income earned as taxation status, assignment timing, advantages. Resident aliens can file tax by a cash-basis taxpayer before becoming income level, and country of citizenship returns under the married-filing-jointly a resident but received by him/her after and residency. Note that the planning ideas status and can use foreign tax credits. becoming a resident will be subject to US covered in this chapter are aimed at reducing Nonresident aliens pay tax principally on income tax in the year received. See Example US tax payable. In some circumstances, the income from a US source and only on limited 6.1. strategies used might result in increases of non-US income. Which status would be more foreign tax, possibly even in excess of US tax beneficial for a particular foreign national savings. It is therefore essential that, before depends on that individual’s circumstances.

Example 6.1:

Mr. A, a citizen and resident of Germany, purchased 100 shares of ABC Company stock for Euro 10,000 in September 20X1. He enters the United States on a two-year assignment in January 20X8 and sells the ABC Company stock in July 20X8 for Euro 9,600. Fair market value of the ABC Company stock was Euro 9,000 in December 20X7.

Mr. A’s basis in the stock for US tax purposes is Euro 10,000, translated at the September 20X1 exchange rate of approximately 1.125 to equal $11,125. His sales price is translated at the July 20X8 rate of approximately 1.355 to equal $13,008, resulting in a gain for US tax purposes of $1,883. Had he sold the original ABC Company stock in December 20X7 and repurchased it prior to entry in the United States, Mr. A would have had a Euro 1,000 loss in Germany and would have entered the United States with a $12,330 basis (Euro 9,000 translated at the December 20X7 rate of approximately 1.37). This strategy would have reduced his US gain on the stock sale from a gain of $1,883 to a gain of only $678.

Some possible ways to plan the timing of income recognition include •• Exercising stock options before US residency begins •• Accelerating receipt of bonuses or other deferred compensation to a point before—or deferring it until after—the period of US residency •• Deferring recognition of losses until the period when US residency begins, and paying deductible expenses when a US resident •• Accelerating recognition of income so as to receive it as a nonresident, before US residency begins •• Obtaining a step-up in basis before US residency begins by selling and reacquiring appreciated assets •• Selling a foreign residence before US residency begins, to avoid US tax on any gain

33 Taxation of foreign nationals by the US—2016

Timing and length of assignment •• Certain married dual-status aliens may The length of an employment assignment, elect to be treated as resident aliens as well as the timing of its beginning and for the entire year if electing that status ending, can significantly affect the US tax results in a lower tax liability (see p. 14). liability. Some planning ideas are as follows: •• Foreign nationals who maintain non-US domiciles may be able to deduct away- •• Residents of a treaty country who remain from-home living expenses, such as on a foreign payroll and whose presence housing, food, laundry, and transportation in the United States in any year is fewer costs, for assignments not expected to than 183 days may not have a US income last more than one year. tax liability (see Example 6.2). •• When a foreign national has been present in the United States as a resident for part Example 6.2: or all of three consecutive years, with each Ms. B, an India resident, enters year including at least 183 days in the US, the United States for a two-year and subsequently becomes a nonresident, assignment on 20 June 20X1. Her he/she should consider delaying returning salary is borne by an India company to the United States as a resident until throughout the assignment. Since she three intervening calendar years have is present in the United States for more elapsed. If the reentry is not delayed, than 183 days in 20X1, she will be taxed the foreign national will be subject to as a US resident starting on 20 June. If complicated rules which generally tax the she had waited until 3 July to enter the individual’s US-source income as if they country, she would have been present were a US resident during the intervening in the United States for 182 days and nonresident years. The total tax owed, could have been treaty-exempt from when applicable, is limited to tax on US federal income tax for 20X1. income effectively connected with the conduct of a US trade or business within the US for such period (see Example 6.3). This planning must consider the specific treaty provisions in effect between the two countries, as some treaties are based Example 6.3: on 183 days in a calendar year (e.g., the US-India treaty, per the above example), Mr. A, a citizen of Mexico, entered the United States on 1 May 20X1 as a lawful whereas some treaties consider 183 days in permanent resident. On 31 December 20X3, he surrenders his green card and any consecutive 12 month period (e.g., the terminates his US residency. He has met the initial residency period requirement US-UK treaty), in which case this planning because he was a resident of the United States for part of three consecutive years would not have worked in the above (20X1, 20X2, and 20X3). He returns to the United States on 5 October 20X6, as a lawful example, as Ms. B would have been in the permanent resident. US for more than 183 days in the 12 month period from 3 July 20X1 through 2 July 20X2. Because Mr. A established his residency in the United States before the close of the third calendar year (20X6) following his initial period of US residency (20X1 to 20X3), he •• Foreign nationals for whom it is would be subject to US federal taxation as a resident for US-source income for the years advantageous to be taxed as a resident 20X4, 20X5, and 20X6, even though he did not live or work in the United States. The US but who do not meet the 183-day federal taxation only applies to his US-sourced income. substantial presence test may make the first-year election (see p. 11), which would allow them to be taxed as a US resident.

34 Taxation of foreign nationals by the US—2016

Tax treaties or other unforeseen circumstances. If, Additionally, gain attributable to a period Some of the more commonly used treaty for example, a taxpayer is transferred by of nonqualified use by a taxpayer is not benefits are an employer and must sell a house that excludable from gross income. The amount •• Tax exemption for compensation earned has been occupied for only one year, the of gain allocated to a period of nonqualified under certain dollar limits or during limited taxpayer will be entitled to one-half the use is the total amount of the gain multiplied periods of time maximum exclusion (i.e., to $125,000, or by a fraction, the numerator of which is the •• Lower rates of withholding for interest and to $250,000 if the taxpayer is married and total period of nonqualified use during the dividend income files jointly). For purposes of the exemption, entire period the property was owned, and it is not important whether the taxpayer is the denominator of which is the total period •• Exemption from social security a resident alien or a nonresident alien at the property was owned. withholding (under social security the time of sale. However, a recoverable totalization agreements) withholding tax may be applied if the seller A period of nonqualified use is defined as •• Preferential treatment for capital gains is nonresident, so that a nonresident seller any period (not including any period prior to and pension income might wish to seek a withholding tax waiver. 1 January 2009) during which the property is not used by the taxpayer, the taxpayer’s Under many treaties, the foreign national Complications can arise in several different spouse or former spouse as a principal must receive his or her compensation from circumstances (e.g., where the residence residence. Three exceptions apply to this a foreign employer in order to receive treaty has been rented for a period or where definition: exemptions. Therefore, tax planning must gain from the sale of a previous residence •• Any period of the five-year period after the involve consideration of the employee’s has been deferred). We urge readers to last day the property is used as a principal payroll arrangement. seek competent professional advice about residence of the taxpayer or spouse proposed home sales. Disposition of principal residence •• Any period, up to 10 years, during which the taxpayer or spouse is on extended Rules enacted in 1997 appear to place At least two other considerations deserve duty with the military, Foreign Service, or nonresident aliens on the same footing as specific mention in connection with the the intelligence community, and resident aliens and citizens with respect sale of a personal residence. The first is the to the disposition of a principal residence. effect of the potential exchange gain or loss. •• Any period, up to two years, during In general, up to $250,000 ($500,000 for As seen in Example 6.1, which illustrates which the taxpayer is temporarily absent taxpayers who are married and file joint the sale of securities, the taxpayer’s basis by reason of change of employment, returns) of gain from the sale of a principal in the residence is determined at the time health conditions or other unforeseen residence can be entirely excluded from of purchase, while the sales proceeds are circumstances income, provided that the home in question determined by using the exchange rate at has been owned and used as a principal the date of sale. The second consideration residence for at least two of the five years is the effect of the exchange rate in paying preceding the sale. A pro-rata portion of off the mortgage. There may be an exchange the exclusion is available for taxpayers gain on the mortgage that cannot be offset who fail to meet the two-year use test by by a loss on the sale of the residence. reason of a change in employment, health,

35 Taxation of foreign nationals by the US—2016

See Examples 6.4 and 6.5 for application of these rules.

Example 6.4: Example 6.5:

Mr. Brown buys a principal residence Ms. Smith buys a principal residence on 1 May 20X1, and moves out of his on 1 May 20X1 and is sent abroad by principal residence on 1 August 20X3 her employer on 1 May 20X3, leaving to work abroad. While living abroad, the property vacant. She returns to live Mr. Brown rents out his home. Mr. in the residence on 1 May 20X6, and Brown does not reoccupy this home sells the property on 1 May 20X8, for and he sells the property on 1 June a gain of $200,000. Smith meets the 20X4 for a gain of $100,000. Mr. Brown two-of-five year test so she is eligible owned and used the property as his to exclude a full $250,000 of the gain. principal residence for at least two However, a portion of this gain is of the last five years (1 June 20X1 related to a period of nonqualified use through 31 July 20X3), so he meets so the exclusion is limited, as follows: the two-of-five year test, and even •• 1 May 20X1–30 April 20X3—2 years though he rented the property, he still in which the property was used by meets the first exception above, in Smith that the rental period is considered a •• 1 May 20X3–30 April 20X6—3 years period after the last day the property property was not used. However, was used as his principal residence. per the third exception above, she Therefore, this period is not considered is entitled to a 2-year absence by a period of nonqualified use. Mr. reason of change of employment. Brown is therefore entitled to the full Therefore, only one year is exclusion of $250,000, subject to the considered nonqualified use. depreciation from the rental period •• 1 May 20X6–30 April 20X8—2 years being taxable. in which the property was used by Smith

Accordingly, one out of her seven years of ownership is considered a period of nonqualified use. Therefore, one seventh of the gain is not eligible for the exclusion, or $28,571 ($200,000 gain * 1/7), and is included in gross income in the year of sale. The remaining gain of $171,429 is less than the $250,000 exclusion so it is fully excluded from gross income.

36 Taxation of foreign nationals by the US—2016

Foreign investments funds paying dividends automatically taxpayer. It also enables the nonresident Foreign investors should have their reinvested are considered a distribution alien to take better advantage of certain investments carefully reviewed as part of and subject to tax under the PFIC regime, treaty and Internal Revenue Code the tax-planning process before the start regardless of the right to receive cash in lieu provisions. of a US assignment. Some ideas to consider of the automatic reinvest. A sale of a PFIC •• Basing estimated tax payments on the are as follows: fund during US residency, in most instances, prior-year liability. Foreign nationals in is deemed an excess distribution and also the United States for their first full year •• Foreign trusts, of which the nonresident subject to tax and interest under the PFIC are allowed to base their estimated tax alien is a beneficiary, may choose to excess distribution regime. Additional prepayments on 100% of their prior- distribute current and (especially) considerations outside the US tax cost year tax liability (110% for high-income accumulated income before the associated with holding PFICs also merit taxpayers), regardless of whether the prior beneficiary becomes a resident alien. (The attention. Of note is the administrative year was a nonresident or dual-status United States imposes a disadvantageous burden of gathering the necessary tax year, provided that they filed US tax tax regime on distributions of accumulated information for US compliance reporting. returns in the prior year. The Internal income from foreign trusts.) Note, the non-US financial institution or Revenue Code requires only that there be •• Foreign corporations controlled by a entity where the PFIC is maintained may a tax liability on a return covering twelve nonresident alien may choose to pay not provide readily available access to the months in the prior year. out dividends before the nonresident specific fund information on a calendar- •• Considering visa status. Foreign establishes US residency. Dividends paid year basis. This burden is amplified when nationals present in the United States as out while the individual is considered multiple funds are maintained in a single teachers, trainees, or students (that is, a nonresident are not subject to US account because each require separate on F or J visas) will generally be taxed as taxation. In addition, the corporation will disclosure on the US return irrespective of nonresidents. have reduced its accumulated earnings whether tax may be assessed. •• Withholding on interest payments. and profits, which could favorably affect Resident aliens who make interest later income tax treatment. Some additional tax-saving steps to be considered include payments to a foreign lender (such as mortgage interest on the resident alien’s Miscellaneous considerations •• Establishing individual retirement home in the foreign country) must A foreign national who owns stock in a accounts. Foreign nationals may make withhold and deposit with the IRS 30% of company classified as a passive foreign contributions to individual retirement the interest paid. The 30% may be reduced investment company (PFIC) may be accounts. Their contributions and by an applicable income tax treaty. subject to an interest charge on “excess” withdrawals are subject to the same rules distributions from the company. In general, as are those of US citizens, except in those •• Electing out of installment sales. a foreign company is a PFIC if 75% or more instances in which a treaty has overriding Foreign nationals who sell property on of its income consists of passive income beneficial provisions. an installment basis are subject to US tax on the gain relating to payments received or 50% or more of its assets produce •• Possibly electing the foreign-earned after becoming a US resident, even if the passive income. An excess distribution income exclusion. Foreign nationals sale was made before US residency was is, in general, the amount of deemed who are lawful permanent residents of established. The foreign national can distributions occurring during the US the United States (green card holders) make an election on his or her first US reporting period (generally the calendar- but who are considered foreign residents income tax return out of the installment year) that exceeds 125% of the average under an income tax treaty may, in certain sale method and thereby avoid US tax on amount of deemed distributions on that circumstances, be able to elect the the gain. stock in the preceding three calendar years. foreign-earned income exclusion. It may be advantageous to make a special •• Selecting a fiscal year. In some cases, election to report the shareholder’s current use of a fiscal-year accounting period share of earnings to avoid the interest may result in tax savings. The primary charge and complexity associated with advantage of selecting a fiscal-year period excess distributions. Further, distributions is that it enables the resident alien to occurring within the fund need not be paid shorten the period during which he or she or received to be taxable. Foreign mutual is considered a nonresident or dual-status 37 Taxation of foreign nationals by the US—2016

•• Making treaty disclosures. Resident Form 8938, Statement of Specified Foreign The table below summarizes the Form aliens taking advantage of provisions of Financial Assets to the tax return. The due 8938 reporting threshold for each type of US income tax treaties must disclose date to file Form 8938 is the same as the tax individual classified as a specified person certain positions in their US income return and may be extended by a timely and and is based on the aggregate total value (in tax returns, including the application valid extension request of time to file the US dollars) of all specified foreign financial of any nondiscrimination provisions. individual’s income tax return. assets held on either the last day of the tax Provisions that do not generally need to year, or at any time during the tax year: be disclosed include reduced withholding Form 8938 applies to specified individuals tax rates, determination of residency, holding an interest in specified foreign When required, all accounts and financial and modification of the tax on items such financial asset(s) over the applicable Form assets located outside the US require as pensions and annuities. Disclosure is 8938 reporting threshold for the underlying disclosure on Form 8938. If an individual is usually made by completing Form 8833, tax-year. a “specified person” for less than the entire Treaty-Based Return Position Disclosure year, e.g., a dual-status alien, the individual “Specified individuals” generally include Under Section 6114 or 7701(b). is only required to report on the period of US citizens and green card holders, as well the year that the individual is a “specified Foreign bank accounts and specified as US alien individuals filing a resident US person”, e.g., a tax resident. Otherwise foreign financial assets income tax return. These individuals must the reporting period for individuals is the Foreign Bank Account Reporting (FBAR). attach Form 8938 to their US tax return complete tax year. The Department of the Treasury requires when they hold an interest in specified that every US citizen or resident alien with foreign financial assets in excess of the The recent move towards global tax an interest in or signature authority over applicable reporting threshold. compliance merits sufficient due diligence foreign bank accounts, securities, or other be exercised when Form 8938 or FBAR “Specified foreign financial assets” financial accounts that exceed $10,000 disclosure filing is required. Items and may include: in aggregate value at any time during the amounts should be fully disclosed in an • any depository, custodial, or other financial calendar year must report that relationship • accurate and reliable manner to safeguard account maintained by a foreign (non-US) no later than 30 June of the following year. against substantial penalties. The US and financial institution, Beginning with 2016 filings, the deadline will many foreign countries have formal Tax align with that of the individual income tax •• any stock, security, financial instrument Information Exchange Agreements (TIEAs) return (that is, 15 April) and also include a or contract issued by a person other than which provide mechanics for sharing of possible six-month extension. Nonresident a US person held outside of a financial global financial tax information. Additionally, aliens are not required to report these institution, and, following the enactment of the Foreign accounts. A tax adviser should be consulted •• any separate interest in a foreign entity Account Tax Compliance Act (FATCA), on to determine whether a foreign national has not held in a US institutional account January 12th, 2015 the IRS announced the to file this separate report. launch of its information exchange Web In determining the value for Form 8938 program. The FATCA web program opened The report is made electronically on Form reporting threshold and disclosures, the enrollment to more than 145,000 financial 114, Report of Foreign Bank and Financial total value of specified foreign financial institutions and 110 foreign tax authorities. Accounts (FBAR), filed online and separately assets also include non-US estates, pension Collectively and with regard to individual US from the income tax return through the plans and deferred compensation plans. taxpayers, TIEAs and FATCA agreements are BSA E-Filing System website (http:// aimed to mitigate cross-border tax evasion bsaefiling.fincen.treas.gov/main.html). through global information sharing amongst Failure to file Form 114 may result in the taxing jurisdictions. imposition of civil and criminal penalties. Not living abroad Living abroad Specified foreign financial asset Not filing Not Filing reporting. Beginning with 2011 income tax jointly Filing jointly jointly Filing jointly returns, additional reporting of specified foreign financial assets may also be required Last day of tax year $50,000 $100,000 $200,000 $400,000 as part of the individual’s tax return. Where Any time during tax year $75,000 $150,000 $300,000 $600,000 required, disclosure is made by attaching

38 Taxation of foreign nationals by the US—2016

Chapter 7: Immigration, visa, and nationality considerations

Foreign nationals entering the Nonimmigrants The TN is preferable by CBP over the H-1B united states Nonimmigrant visa requirements. A for issuance purposes. Citizens of Canada, Perhaps the immigrant history of the nonimmigrant must obtain a visa abroad Mexico, Chile, Singapore and Australia may United States accounts for the presumption at a US Consulate or Embassy and then come in one of the visa categories created in US immigration law that any foreign be admitted to the United States by a US by trade agreements between the US and national, or alien under US law, intending Customs and Border Protection ("CBP") those countries. See Appendix D for a chart to enter the United States is doing so on a official. Some nonimmigrant categories of the various nonimmigrant visa categories permanent basis. This legal presumption require that the individual prove that he or and the maximum length of stay for the requires a foreign national seeking entry she is maintaining a permanent residence respective classifications. Those countries either to qualify to enter the United abroad and has no intention of abandoning with which the US has a treaty allowing States as an immigrant or to prove that such residence for the proposed period for the nonimmigrant Treaty Trader (E-1) he or she is temporarily entering as a of stay in the United States and intends to or Treaty Investor (E-2) status are listed nonimmigrant for business, for pleasure, return to the un-relinquished residence in Appendix E. for work, for training, or for study for a upon completion of the proposed stay. specific period. The immigration laws place This is not the case for individuals in some Certain nonimmigrant categories, such as a quota on the number of immigrants nonimmigrant visa classifications, such those involving local employment in the and certain temporary workers entering as the H-1 temporary worker or the L-1 United States, require that a petition be filed the United States each year. As a reader intra-company transferee. Under the “dual with and approved by the US Citizenship of the Deloitte manual, you are likely a intent” provision these individuals do not and Immigration Services ("USCIS") in the prospective expatriate to the US or a need to demonstrate an intent to return United States before a visa application may family member of one and so are planning to an un-relinquished residence upon be submitted to a US Consulate or Embassy to enter with a temporary work-related completion of the proposed period of stay abroad. The visa issued by the US Consulate visa or with a dependent visa. This in the United States. Thus, H-1 or L-1 status or Embassy will be valid for a specific chapter will first address some relevant may be granted or extended even when a period of time and for a specified number nonimmigrant categories and general entry US employer has initiated the process of of entries, often multiple entries, to the as a nonimmigrant, discuss obtaining and employment-based immigration. United States. The number of entries and maintaining immigrant status, and end with period of validity of the visa are based on a word or two about US citizenship. The visa categories used most frequently whatever reciprocal visa arrangements are for transfers of expatriates to the United accorded US citizens by the country of the States are the L-1, TN, E-1, E-2 and H-1B. applicant’s nationality.

Deloitte Tax LLP expresses its appreciation to Carly Ross, of the law firm Guberman, Garson Segal LLP, an independent global immigration law firm allied with Deloitte LLP, a Canadian Limited Liability Partnership, for preparing this chapter, including appendices D-H. 39 Taxation of foreign nationals by the US—2016

Each entrant must meet certain qualitative Visa application. Most visa applicants are Nonimmigrant visa applicants seeking to requirements at the time of the visa required to appear for a personal interview work or study in certain sensitive scientific application and when seeking admission. at a US Consulate or Embassy abroad. and technological fields identified on the There are certain restrictions, or grounds of Consular officers are authorized to waive DOS Technology Alert List ("TAL") have been inadmissibility, that are broad and bar the personal appearances in certain limited subject to additional security procedures entry of certain individuals based on health, circumstances, such as where the applicant known as Visas Mantis clearances, which criminal, security, or even foreign policy- is under 14 or over 79. This is due to the seek to prevent the transfer of technology related grounds. In addition, those who US Department of State's (DOS) Biometric to individuals who violate prohibitions on have made a material misrepresentation Visa Program, which requires US Consulates the export of goods, technology or sensitive to an immigration official to obtain a visa or and Embassies to issue visas that contain information from the US Visas Mantis entry to the United States are barred from biometric identifiers. Visa applicants are clearances often cause significant delays entry. An individual may be barred from also photographed during the appearance. in the visa issuance process, as foreign entry for criminality if he or she admits to Biometric information captured during the nationals subject to the clearances typically having committed the essential elements visa application process is later coordinated wait for a month or more to obtain visas. of a controlled substances violation or what with fingerprints and photographs taken Additionally, the “deemed export” rules of would be a crime involving moral turpitude during the US-VISIT arrival process at the US the US export trade control regimes require in the United States, regardless of whether port of entry. a US person not to disclose information to there had been an arrest, a conviction, or a foreign national which disclosure must a pardon and regardless of whether the Most consular posts require applicants to be licensed as an export under either the activity was committed abroad, where it may make an appointment for a visa interview Export Administration Regulations (EAR) or not have been deemed to be in violation and biometrics collection. Because of the International Traffic on Arms Regulation of the foreign jurisdiction’s laws. Finally, the dramatic workload at consular posts, (ITAR) if such person is not a permanent those who remain in the United States visa applicants may experience lengthy resident or an “intending citizen.” beyond a permitted period may be barred waits of up to four to six weeks or longer from reentry for up to ten years. Some for visa appointments. Appointments are Temporary workers in the H visa category grounds of inadmissibility may be waived now generally scheduled on-line or by and exchange visitors in the J visa category upon application for temporary entries telephone with information available at are eligible to receive Visas Mantis after passage of time. In immigrant matters, the particular US consulate’s web site. See clearances that are valid for the duration of waivers can be sought where the individual generally https://travel.state.gov/content/ their approved activity, up to a maximum of has an immediate family member who is visas/en.html for links to US Consular and two years; however, the clearance will cease a US citizen or permanent resident and Embassy web sites around the world. Each to be valid and a new Visas Mantis clearance removal of that individual would cause the Consulate or Embassy has its own policies will be required if the nature of the foreign US citizen or immigrant extreme hardship. and local procedures so that reference to national’s activity in the United States the particular consulate’s web site is critical changes. Business and tourist visitors in the If a foreign national is in the United States for accurate information. B-1 and B-2 visa categories are eligible to and violates the terms of status or if, at receive Visas Mantis clearances valid for one the time of entry, one of the inadmissibility year, provided that the original purpose of grounds applies, the individual may be their travel, as stated in the visa application, removed, that is, ordered to leave the United has not changed on subsequent trips. It States. If the individual is deported rather is important to note that consular officers than removed by summary proceedings, have the discretion to request a Visas Mantis the period of bar from re-entry can be clearance for any visa application. more severe.

40 Taxation of foreign nationals by the US—2016

There are two important exceptions to country supporting terrorism (i.e. Sudan will be able to depart the United States at the requirement of obtaining a visa. First, or Iran) or any other country or area of the end of his or her stay and proceed to his Canadian citizens are exempt from needing concern designated by the Secretary of or her home country or another country. a visa for any nonimmigrant category for Homeland Security (i.e. Libya, Somalia or There are some exceptions to this rule. entry (except for the E treaty and K fiancé Yemen) or (2) are a national of Iraq, Syria, Under international treaties, many countries categories) and usually apply directly to a Iran or Sudan, are restricted from using the have an agreement with the US whereby a port-of-entry. Second, nationals of certain VWP and must apply for a nonimmigrant passport is deemed valid for an additional countries may be admitted as tourists visa at a US Consulate or Embassy abroad. six months past its expiration date so that or business visitors under a special visa Limited exceptions are available for the passport holder can return to his or her waiver program. See Appendix F for a travelers who have previously traveled to country of citizenship. list of “visa waiver” countries. Visa Waiver or been physically present in one of the Program ("VWP") entrants are strictly above-mentioned countries if the travel was Previously, citizens of the United States, limited to a ninety-day period of entry pursuant to official military orders or official Canada, Mexico and Bermuda benefited and may not change their status to that of government business. from certain waivers of the requirement another nonimmigrant category or, with few to present a passport when entering the exceptions, to permanent residence within Further, the Secretary of Homeland United States from within the Western the United States. For example, if a VWP Security may waive these restrictions if Hemisphere. However, these passport entrant were to become the beneficiary he determines that a waiver is in the law waivers have now ceased. The rules in of an employment petition, such as for an enforcement or national security interests of place currently state that all US citizens H-1 or L-1 job, the entrant must depart the US Categories of travelers who may be and affected nonimmigrants, such as those the United States, obtain the visa in the eligible for a waiver include: listed above, who are entering the United new category, and reenter to obtain status 1. Individuals who traveled to Iran, Iraq, States by land or air from any part of the and be eligible to begin employment. To Sudan or Syria on behalf of international Western Hemisphere must present either reiterate, the VWP applies only to visitor organizations, regional organizations, (1) a valid passport; (2) a NEXUS Card or (3) entries and not to entry in any other and sub-national governments on official a Merchant Mariner Document ("MMD"). nonimmigrant visa category. Finally, under duty; The NEXUS Card is issued pursuant to the provisions of the North American Free 2. Individuals who traveled to Iran, the NEXUS Program, a border clearance Trade Agreement ("NAFTA"), Canadian or Iraq, Sudan or Syria on behalf of a project that allows pre-screened, low-risk Mexican nationals may be exempt from humanitarian NGO on official duty; travelers to be processed quickly by US certain petitioning or visa requirements for 3. Individuals who traveled to Iran, Iraq, and Canadian border officials. Note that business-related entries. The VWP program Sudan or Syria as a journalist for the NEXUS card will be accepted only if is now supplanted or supported by the reporting purposes; presented at a participating NEXUS port. Electronic System for Travel Authorization 4. Individuals who traveled to Iran for The MMD, also known as the “z-card,” is (ESTA) as detailed below. legitimate business-related purposes issued by the United States Coast Guard following the conclusion of the Joint to merchant mariners and can be used as Changes to the VWP. In December 2015, Comprehensive Plan of Action (July 14, a travel document only when presented the United States passed the Visa Waiver 2015); and in the course of official maritime business. Program Improvement and Terrorist Travel 5. Individuals who have traveled to Iraq for Members of the United States military, when Prevention Act of 2015 (the “Act”) which legitimate business-related purposes. traveling on official orders, may continue restricts visa-free travel for certain VWP to present their military ID and orders for travelers who are dual nationals or who have Waivers will be considered on a case by case entry into the US Travelers entering from US traveled to countries of concern. basis as part of the ESTA process. territories, including Puerto Rico and the US Virgin Islands, are not required to present a Passport requirements. In general, Under the Act, VWP travelers who (1) have passport to enter the United States. traveled, in the last five years (on or after passports must be valid for at least six March 1, 2011) to Iraq, Syria, a country months beyond the expiration of the foreign designated by the Secretary of State as a national’s period of admission to the United States, to ensure that the foreign national

41 Taxation of foreign nationals by the US—2016

Over the past several years, passport glued or laminated to the travel document. revoked, for up to two years or until the requirements have evolved and may differ Most VWP countries are in compliance traveler’s passport expires and is valid for depending upon the date that a foreign with the digital photograph requirement. multiple entries. national’s passport was issued. If a foreign •• E-passport requirement: As of April Effective 8 September 2010, all ESTA national is planning to enter the United 1, 2016, all VWP travelers must have an registration applications or renewals will States as a visitor for business or pleasure e-passport to use the VWP. An e-passport, require a USD$14.00 fee. This fee should be under the Visa Waiver Program, there are denoted by the e-passport symbol on paid by credit or debit card. important passport requirements that the front cover, is an enhanced secure apply. A foreign national whose passport is passport containing biographic data and Please note that the above MRP, digital not in compliance with applicable passport a biometric identifier, such as a digitized photograph, and E-passport requirements standards cannot enter the US under the photograph. E-passports must be issued apply only to travelers entering the United VWP, but must instead obtain a visa from a by the proper passport issuing authority States under the VWP. Nonimmigrant US consular office abroad to enter the US: and must meet international standards visa holders are not subject to these for securing and storing information requirements. •• Machine-readable requirement: corresponding to the passport and bearer. Foreign nationals traveling under the Visa If a VWP traveler does not possess an Period of entry and extensions or Waiver Program are required to possess e-passport, he or she must obtain a visa changes of status. A US Customs and machine-readable passports (“MRPs”), at a US Consulate or Embassy before Border Protection officer at a port-of-entry which contain two lines of text (including applying for entry to the United States as a will determine the period and visa status of letters, numbers and chevrons) at the pleasure or business visitor. an individual and will note such information bottom of the passport’s biographic page. •• Electronic system for travel on the traveler’s travel document with a When scanned through a passport reader, authorization: As of January 12, 2009, all CBP admission stamp. Previously, travelers the machine-readable text electronically travelers entering the US under the VWP were issued a paper DHS Arrival/Departure communicates the biographic information are required by DHS to make an online Record (Form I-94) which recorded the contained in the passport. Foreign Electronic System for Travel Authorization traveler’s status and departure date. In May nationals planning to travel under the VWP (“ESTA”) application prior to traveling to the 2013, CBP automated the Form I-94 and should ascertain whether their passports United States. ESTA is a fully automated, paper copies are no longer stapled to a are machine-readable. Questions about electronic system for screening traveler’s travel document. CBP will continue the machine-readability of a particular passengers before they begin travel to to create an I-94 record for all travelers passport should be addressed to the the United States under the VWP. ESTA who require one, but the paper form will passport-issuing authority in the traveler’s applications may be submitted at any time not be provided to most travelers. CBP will country of citizenship. prior to travel to the U.S via the website create an electronic Form I-94 which can be •• Individuals who are planning to travel at https://esta.cbp.dhs.gov. VWP travelers obtained from www.cbp.gov/I94. under the VWP and who do not possess are encouraged to apply for authorization machine-readable passports should as soon as they begin to plan a trip to the It is important to note that the period of consider applying for the MRP. Families United States. validity of the visa does not determine the or groups should obtain an individual period of stay in the United States. The Form MRP for each traveler, including infants. On 20 January 2010, DHS transitioned to I-94, sometimes in conjunction with other Machine-readable passports typically have an enforced compliance system for VWP entry documents, determines the period of biographic data for only one traveler, and travelers. As such, air carriers are required the authorized stay. families may be denied visa-free entry to request proof of ESTA compliance into the US if biographic data for only one for eligible travelers before allowing Nonimmigrants are generally admitted for traveler is machine-readable. foreign nationals en route to the US to a specific period of time or for a particular purpose. Once the period of time passes •• Digital photograph requirement: board the aircraft. After an applicant has or the purpose is achieved, departure is VWP travelers are required to possess completed the online registration, he or required. Should a nonimmigrant overstay passports that are both machine-readable she will receive three possible responses in the period of authorized stay, or any and contain a digital photograph of the seconds: authorization approved, travel not extension thereof authorized by USCIS, passport holder. A digital photograph is authorized or authorization pending. The even by one day, the visa used for entry printed on the passport page, rather than approved ESTA authorization is valid, unless 42 Taxation of foreign nationals by the US—2016

is deemed void. In the case of departure, IDENT is a database which stores biographic Exit procedures were also initially the individual would have to return to his information and biometric identifiers from introduced to ensure that the visitor had or her home country to obtain a new visa certain foreign nationals entering the United complied with the terms of his or her to reenter the United States. Periods of States. OBIM will use the information to entry. USCIS’ departure pilot program overstay 180 days or longer may bar an determine whether an individual is eligible tested various methods of collecting individual from reentering the United States to enter the United States or should be this information, including self-service for 3 or 10 years, depending on the length of prohibited from entering because of security departure kiosks, where travelers were able the overstay. Note, a 10 year bar attaches to risks such as past visa or criminal violations to scan their travel documents and submit persons who overstay 365 or more days. or terrorist connections. to biometrics collection, and hand-held scanners operated by DHS officials. In May A foreign national who enters with a valid Currently, the program is applicable to 2009, DHS began collecting biometrics visa may, in many cases, extend status or nonimmigrant visa holders between the from non-US citizens departing the US change status to another nonimmigrant ages of 14 and 79 who are traveling to or at Hartsfield-Jackson Atlanta Airport and category, such as from a visitor to a from the United States through a port Detroit Metropolitan Wayne County airport temporary worker, without the need to in which the program is in operation. as part of a new pilot program. Other non- depart. However, one who seeks a change Certain other classes of travelers, including US citizens departing the US from any other of category shortly after entry may be Canadian citizens seeking short-term port of entry are still required to return the deemed by USCIS to have misrepresented admission as tourists for business or US Customs and Border Protection (“CBP”) his or her intent at the time of entry, and the pleasure are not subject to the program. Form I-94, Arrival-Departure Record if it was application to change status will be denied. Travelers subject to the program are not physically issued upon arrival, to an airline required to enter through a port where the or ship representative when departing the Entering the United States. To enter as a program is in operation, but if their chosen United States. Program entry procedures nonimmigrant, the individual must generally port of entry or departure is a port in which and I-94 relinquishment procedures apply satisfy both a US consular officer abroad the program is in operation, compliance each time a nonimmigrant enters or departs when obtaining the visa and a CBP officer with the procedures is obligatory. Failure the United States. at the port-of-entry that his or her intent to comply where required may result in a is to enter only temporarily. At the time of foreign national being deemed inadmissible entry, the foreign national presents the valid to the United States, in violation of the terms passport with the visa issued into it by the of his or her status, or ineligible for future US Consulate or Embassy. The inspecting immigration benefits. CBP officer will review the passport and visa and ask questions about the purpose All foreign visitors who are subject to and expected duration of entry. CBP will the program and who are entering at a then check the foreign nationals’ biometric port where the program is implemented identifiers with IDENT, an automated will be required to provide fingerprints biometric identification system. This check and photographs. The fingerprint and is performed by the Office of Biometric photographic data, along with information Identity Management (OBIM), formally in the visitor’s travel documents, are used known as US-VISIT. The CBP officer has to verify the visitor’s identity and will be authority to revoke a visa if information scanned against law enforcement and surfaces that it was improperly obtained national security lookout lists. Based on such as through false representation. the verification results, the visitor will be admitted to the United States or asked to undergo further verification. If data in the verification process indicate possible national security or law enforcement concerns, the visitor will be referred for additional screening.

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Immigrants immigrants who become dependent on their nonimmigrant status to permanent Over the years, immigrants have been government assistance within five years of resident status through a USCIS office in referred to as resident aliens, permanent establishing permanent residence continue the United States. See Appendices D and residents, or green card holders. The last to be subject to removal proceedings. E for a summary of the family-based and term is based on the color of the laminated employment-based immigration categories. resident alien card given to past immigrants A resident alien may not vote or hold as evidence of their status. Although the most public offices and may be excluded Maintaining permanent residence card has not been green since 1964, the from certain types of federal or state Should permanent residence be term persists. Under the Green Card employment. Often, employment in the maintained? Immigrants who expect Replacement Program, the US Citizenship public sector, such as teaching in a public to spend significant periods of time and Immigration Service has replaced all school, may require an individual to be a abroad should first consider whether the green cards issued before 1978 with more citizen or intending citizen. A resident alien maintenance of permanent resident status secure versions. Any immigrant whose may achieve intending citizen status by is necessary or desirable. A resident alien card predates 1978 should contact his or filing a form with the USCIS declaring that, who abandons residence may no longer be her local USCIS office to replace it. These as soon as he or she meets the residence subject to US income tax. US social security old cards are no longer deemed valid for and physical presence requirements, coverage may not be available if residence reentry or to verify eligibility to work in the naturalization will be sought. Furthermore, is abandoned, so retirement planning may United States. immigrant status may also be revoked also be complicated. If the resident alien through the commission of certain crimes is married to a US citizen or resident, an Immigration to the United States may and on other bases or may be deemed analysis of abandonment of residence be based on certain qualifying family to have been abandoned if the individual and asset ownership planning may be relationships with US citizens or resident resides abroad for too long a period necessary for both spouses. Long-term aliens, certain skills desired by or without maintaining significant ties to the permanent residents who abandon their employment with a US employer, a prior United States. status may also be treated as residents for grant of refugee or asylum status, or a tax purposes, similar to individuals who provision intended to diversify the base The process required to gain permanent renounce US citizenship. The surrender of of US immigration. The last, known as the resident status customarily involves the lawful permanent resident (LPR) status or diversity program, involves an annual visa individual first filing an employment-based US citizenship can cause an acceleration of lottery for persons born within countries or family-based petition with USCIS. For US tax liabilities if done without regard to tax deemed to be underrepresented through example, a petition can be filed for an alien consequences and the LPR card has been other forms of US immigration. Individuals of extraordinary ability, a multi-national held more than seven years out of the past who have at least the equivalent of a executive or manager, an outstanding 15 years. high school diploma and are at least professor or researcher, a professional eighteen years of age can apply to the with an advanced degree, a professional If the period of relocation abroad is relatively lottery program. or skilled worker, or the spouse or child short and the individual intends to return, of a US citizen or resident alien. Once the abandoning residence is likely to be of little Immigrants are those persons who, USCIS determines that the beneficiary of the or no benefit. If the period of assignment declared permanent resident intent to be petition qualifies for a specific immigrant abroad is to be long term or indefinite, the domiciled in the US and, thus, are allowed to category, the beneficiary files an application cost savings from the standpoint of taxes reside and be employed in the United States at a US consular office abroad, at which and maintenance of permanent residence indefinitely. Although foreign nationals may time it is determined whether grounds of may prompt the abandoning of residence. gain immigrant status on varying bases, inadmissibility apply. The individual usually Abandonment is accomplished through filing the status of all such individuals is identical. must enter the United States within six an application to renounce one’s permanent Immigrants enjoy most of the rights and months of the visa being issued to establish residence with a US port-of-entry official or privileges of US citizens. However, the permanent residence. Alternatively, US consul abroad. Abandoning permanent Welfare Reform Act of 1966 has restricted qualifying foreign nationals who are in resident alien status does not prejudice immigrants’ rights to receive social security the United States as nonimmigrants, and later efforts to regain nonimmigrant or benefits and Medicaid or Medicare benefits. who have maintained their status, may be permanent residence status. If the individual Government funding, such as school permitted to change/adjust to immigrant intends to return to the United States to financial aid, has been limited. Also, those status by applying for adjustment of work, train, or study, the individual may 44 Taxation of foreign nationals by the US—2016

again seek a nonimmigrant visa classification one year as abandonment of residency. of validity. Since such stamps are valid for subject to certain limitations and eligibility Abandonment of residence really depends six to twelve months, the individual must be requirements. The individual may also be on the individual’s intent. Let’s look at what certain to return before the stamp expires. eligible again to seek employment-based a resident alien faces when reentering the or family-based permanent residence. United States, and at what ought to be done The third most commonly used document Regaining residence may not be difficult if to prepare for absences. is a reentry permit, which generally allows the individual will be serving in a managerial for a two-year period within which reentry or executive capacity with an affiliate of a When seeking reentry, a returning resident may be sought. The reentry permit must be company and will later join the company in alien must satisfy the CBP official at the US applied for in the US before departure. In the United States in a managerial capacity. A port-of-entry (or preflight inspection facility addition, the reentry permit also requires petition based on a marriage to a US citizen such as in London or Toronto) that (1) he or a biometrics appointment which also must would also simplify regaining residence. she is in possession of a document valid for be completed in the US prior to departure. entry as a returning resident and (2) while Only under exceptional circumstances may Is US citizenship an option? If abandoning abroad, he or she had a continuing intention a special immigrant visa be issued by a US residence is not desired, the individual to maintain his or her permanent residence Consulate or Embassy outside the United may consider seeking US citizenship. This in the United States. States to an alien whose other documents option is increasingly acceptable to foreign have expired. nationals in light of the ability to now Documents required for reentry. Several maintain a foreign passport subsequent to types of documents are valid for reentry, There is also the “no-document document,” naturalization. An important consideration depending on the nature of the document that is, the documentary waiver that can is that a resident alien is not entitled and the period of absence. The green card be applied for, and approved within the to the unlimited estate tax deduction is valid as a document for reentry after an discretion of a CBP supervisor at a port- accorded US citizens on the death of a absence of less than a year. Keep in mind, of-entry. The officer must be satisfied that spouse. The difficulty in later losing US though, that since the late 1980s, green the resident did maintain the proper intent citizenship and the accompanying income cards issued have been valid for ten years and that the document was lost, stolen, or tax consequences should be carefully only. The expiration date on newer cards misplaced or somehow the national interest considered, though. It is also important to does not mean that the permanent resident or circumstances warrant the favorable determine the effect of acquisition of US status expires in ten years, but only that the exercise of such discretion. Working for a citizenship on the foreign national’s ability to individual must apply for a replacement card US employer overseas is not necessarily maintain his or her foreign nationality and if, within the ten-year period, he or she has deemed in the national interest for waiver hold property, invest, inherit, and be taxed not become a US citizen. Therefore, resident purposes. If the reentry document has under his or her home country’s laws. aliens must ensure that their green cards been lost for a while, it is advisable for the have not exceeded the ten-year expiration resident to visit a US Consulate or Embassy What is required of a returning resident date, much as US citizens must keep an to arrange for a waiver at the expected US alien? Those permanent residents who eye on the expiration date of their ten-year port-of-entry. In some cases, US Consulates are ineligible for or who do not wish to passports. and Embassies will even issue a special gain US citizenship should take certain “travel” letter confirming the resident status precautionary measures to ensure Another document valid for reentry is of the foreign national. that USCIS will not deem them to have the permanent residence I-551 ink stamp presumptively abandoned permanent placed in the passport of a newly admitted residence while abroad. The need for these permanent resident or one who has applied precautions is interesting in that it appears for a lost, stolen, or invalidated green card. to contradict the basic presumption in Despite the Form I-94 automation, CBP US immigration law that any alien seeking continues to issue the temporary I-551 entry to the United States is assumed to stamps on I-94’s for applicable individuals. be an intending immigrant. However, DHS The stamp is a valid document as long as deems a continuous absence of more than the individual seeks reentry within its dates

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Intent to maintain permanent residence Generally, when absences of six months or as a strong factor and presumption of loss in the United States. This second prong more are contemplated, it is advisable for of immigrant intent and should be done of the reentry test requires that USCIS the resident to obtain a reentry permit. If only after careful review with compliance official be satisfied that the alien maintained the applicant is out of the US more than 12 of all other factors in consultation with an sufficient ties to the United States while months, the reentry permit should be used. experienced immigration advisor. abroad to demonstrate an intent to The reentry permit must be applied for maintain his or her permanent residence while the resident is physically present in the Conditional residents are individuals who in the United States in spite of the absence. United States. In approving an application became permanent residents based on Remember, this is the practical reentry test, for a reentry permit, USCIS considers the marriage to a US citizen or resident alien but which, if met, will alleviate the need for an same type of information and documents who had been married less than two years immigration court hearing to determine that a port-of-entry official would review when permanent residence was granted the admissibility of the returning resident concerning a returning resident. This is or based on an LPR petition as an alien alien and whether he or she has abandoned not to say that the usual inadmissibility entrepreneur making a qualified investment his or her permanent residence. In such grounds do not apply, such as criminal in the US for the start of a commercial a hearing, once the alien establishes that activity abroad, and do not form a basis for enterprise. These persons are granted he or she is a returning resident alien, the denial of entry. The reentry permit, during a two-year permanent residence with a burden shifts to the government to show by the period of validity, may satisfy both the condition that could extend it indefinitely. clear, unequivocal, and convincing evidence document and intent issues, but it does not The condition is that at the end of the two- that the individual lost his or her residence. guarantee reentry. year period of residence or investment, the However, from a practical standpoint, resident must, with his or her spouse, jointly the burden at the port-of-entry is on the Factors in determining resident intent. petition or petition as an investor to USCIS returning resident to satisfy the CBP official. The filing of resident status income tax showing that the marriage or the investment The statements made by a returning returns is crucial. A resident alien is deemed remains bona fide or a qualified investment. resident alien are crucial to the decision at a resident for US tax purposes, that is, There are provisions to waive this the port on the issue of intent. his or her worldwide income is subject to requirement in event of a divorce or death of US taxation. Failure to file returns when the spouse or if spousal abuse has occurred A few general principles concerning required or filing as a nonresident (even in the interim. This two-year conditional absences are borrowed from the citizenship if a tax treaty may appear to allow this) residence also applies to aliens who gain eligibility context and applied to returning creates a problem when maintenance of their permanent residence through an residents. Generally, an absence of less residence is being determined. Maintenance investment in the United States. Conditional than six months allows for a presumption of a home, condominium, or apartment residents must be careful not to stay outside that the proper intent has been maintained. as a residence in the United States is also the United States beyond the initial two-year Hence, the usual vacation, business trip, or important. Evidence of other US assets— period of validity of their green cards, unless other relatively short-term absence, does bank accounts, US stocks and bonds, they file an application to continue resident not present difficulties. One of the eligibility significant personal property, US credit status within the three months before the rules for US citizenship provides that an cards and accounts, and a valid state driver’s expiration of conditional resident status. The absence of six months but less than a year license—are relevant. Although having a petition may be filed from abroad, and the creates a rebuttable presumption that the US citizen or resident spouse or children individual’s status as a permanent resident five-year period of “continuous residence” may also seem relevant, this factor is given may be extended by one year to permit has been broken. This canon is often a little weight by entry officials in determining USCIS to process the petition. In order to rule of thumb used by CBP port officials in whether an alien maintained the requisite reenter the United States, the individual determining whether the intent to maintain intent. The reason for the absence, such as should have the expired green card, along permanent residence has been preserved. an assignment abroad by a US employer, with the petition receipt notice, which The statements of the individual seeking is relevant but not the only deciding factor. extends permanent residence for one year. entry and documentation of intent can be Such assignments are frequently indefinite An additional complication is that USCIS may crucial factors in the official’s determination. and may therefore actually be a negative require the resident’s presence, along with An absence of a year or more leads to the factor. The filing of a non-resident tax return the spouse’s, at a USCIS office in the United conclusion that the proper intent has not by an LPR while absent from the US is States for an interview before rendering a been maintained. treated by the US immigration authorities decision on the petition. Finally, a reentry 46 Taxation of foreign nationals by the US—2016

permit for a conditional resident may be US Citizenship Once US citizenship is obtained, it is difficult granted for no longer than the period of With few exceptions, persons may gain US to shed. The US citizen may submit a conditional residence. citizenship in one of three ways: (1) birth in formal renunciation of US citizenship to a the United States and its possessions, (2) US Consulate or Embassy abroad, which Maintaining citizenship eligibility. A birth abroad to US citizen parent(s), or (3) will accept it only after careful review resident alien who is abroad and who through an application process referred and assurance that the individual fully wants to maintain eligibility for citizenship to as naturalization. Deriving citizenship appreciates the consequences of his or her must normally return to the United States through US citizen parents depends on act. This appreciation will include signing at least once a year (preferably every six whether both parents were citizens or, if a statement that the renunciation is not months) to prevent breaking the continuity there is only one US citizen parent, when the for the purposes of tax avoidance and that of residence required for naturalization person was born, how long the parent lived certain taxes may accrue as a result of the purposes. A resident who is working abroad in the United States, and when the parent abandonment. A naturalized citizen may lose with an affiliate of a US company and who is gained citizenship. To be naturalized, a citizenship if he or she is naturalized in or promoting the trade and commerce of the person normally must maintain permanent takes an oath of allegiance to a foreign state United States may apply to USCIS to have resident status for five years (three years provided the act is accompanied by the this entry requirement removed. Individuals for the spouse of a US citizen), be physically requisite intent to abandon US citizenship working with certain research institutions present for at least half of that period within as a consequence of the act. Certain other abroad may also qualify for this benefit. the United States, maintain continuous acts, such as committing an act of treason However, the applicant must have been residence status during that time, and or voting in foreign elections, may also physically present in the United States for not have any continuous absences of six be deemed to be expatriation. However, an uninterrupted period of at least one year months or more. The applicant must also obtaining or renewing a foreign passport since becoming a permanent resident. be deemed of good moral character and specifically intending to lose US citizenship is demonstrate knowledge of the English no longer deemed to be an act whereby US The time spent abroad on assignment may language and US government and history. citizenship is lost. If information concerning preclude meeting the requirement of being expatriating acts comes to the attention physically present in the United States for A current US passport is customarily of the DOS or USCIS, proceedings may be half of the qualifying period. Approval of required for entry of a US citizen, although instituted to denaturalize the US citizen. an application to preserve residence for this requirement may be waived by a CBP Denaturalization occurs relatively rarely, naturalization purposes excuses the need to official at a port-of-entry under certain and most denaturalization proceedings are return once a year but, in almost all cases, circumstances. As mentioned above, entries based on misrepresentations of eligibility does not excuse the physical presence to the US from contiguous territories made by the applicant in obtaining US requirement. The continuous residence and or adjacent islands by air now require a citizenship. physical presence requirements may be passport and that land and sea entries eliminated altogether for the resident alien from these territories may require use of a Keep in mind that loss of US citizenship spouse of a US citizen working abroad for an passport. A citizen may obtain a US passport does not necessarily mean exemption affiliate of a US company. from a US Department of State Passport from US resident taxation. Rather, one Office within the United States or, in very who affirmatively renounces his or her limited circumstances, from a US embassy citizenship may be presumed to have done or consulate abroad. Many US Postal Service so for tax purposes and deemed still subject offices are authorized to accept passport to US resident taxation for a period of ten applications. years following the loss of citizenship. Also, renunciation of citizenship for tax purposes may serve to bar permanently an individual from reentering the United States.

This document contains general information only and Deloitte is not, by means of this document, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this document. 47 Taxation of foreign nationals by the US—2016

Appendix A: Key figures

1. Standard deduction

Filing Status 2015 2016 Single $6,300 $6,300 Married filing jointly 12,600 12,600 Married filing separately 6,300 6,300 Head of household 9,250 9,300

2. Personal exemption In 2015, each personal exemption deduction is $4,000 and for 2016 each deduction will be $4,050.

3. Expatriation Net Income Tax Test—For the five-year period before expatriation, the individual had an average annual US income tax liability in excess of at least $160,000 in 2015 and $161,000 in 2016.

4. Private Delivery Services The following private delivery services are currently designated by the IRS, as of this publication: •• Federal Express (FedEx): FedEx First Overnight, FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International First Next Flight Out, FedEx International Priority, and FedEx International First, FedEx International Economy; and •• United Parcel Service (UPS): UPS Next Day Air Early AM, UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express. •• DHL: DHL Express 9:00, DHL Express 10:30, DHL Express 12:00, DHL Express Worldwide, DHL Express Envelope, DHL Import Express 10:30, DHL Import Express 12:00, and DHL Import Express Worldwide

5. Estimated Tax Payments Payment dates for 2016 are 18 April, 15 June, 15 September 2016 and 17 January 2017.

6. Social Security Limits Employed: 7.65% on earnings up to $118,500 for 2016, with an additional tax of 1.45% on the remainder

Self-employed: 15.3% on the first $118,500 for 2016 and 2.9% on the remainder

7. Annual gift tax exclusion for transfers to a non-citizen spouse Gifts in excess of $147,000 in 2015 ($148,000 in 2016) are subject to US transfer tax

48 Taxation of foreign nationals by the US—2016

Appendix B: US Federal tax rates

2015

Single

From To Amount Excess $0 $9,225 $0.00 10.00% 9,225 37,450 922.50 15.00% 37,450 90,750 5,156.25 25.00% 90,750 189,300 18,481.25 28.00% 189,300 411,500 46,075.25 33.00% 411,500 413,200 119,401.25 35.00% 413,200 119,996.25 39.60%

Head of household

$0 $13,150 $0.00 10.00% 13,150 50,200 1,315.00 15.00% 50,200 129,600 6,872.50 25.00% 129,600 209,850 26,722.50 28.00% 209,850 411,500 49,192.50 33.00% 411,500 439,000 115,737.00 35.00% 439,000 125,362.00 39.60%

Married filing joint

$0 $18,450 $0.00 10.00% 18,450 74,900 1,845.00 15.00% 74,900 151,200 10,312.50 25.00% 151,200 230,450 29,387.50 28.00% 230,450 411,500 51,577.50 33.00% 411,500 464,850 111,324.00 35.00% 464,850 129,996.50 39.60%

Married filing separate

$0 $9,225 $0 10.00% 9,225 37,450 922.50 15.00% 37,450 75,600 5,156.25 25.00% 75,600 115,225 14,693.75 28.00% 115,225 205,750 25,788.75 33.00% 205,750 232,425 55,662.00 35.00% 232,425 64,998.25 39.60%

49 Taxation of foreign nationals by the US—2016

2016

Single

From To Amount Excess $0 $9,275 $0 10.00% 9,275 37,650 927.50 15.00% 37,650 91,150 5,183.75 25.00% 91,150 190,150 18,558.75 28.00% 190,150 413,350 46,278.75 33.00% 413,350 415,050 119,934.75 35.00% 415,050 120,529.75 39.60%

Head of household

$0 $13,250 $0 10.00% 13,250 50,400 1,325.00 15.00% 50,400 130,150 6,897.50 25.00% 130,150 210,800 26,835.00 28.00% 210,800 413,350 49,417.00 33.00% 413,350 441,000 116,258.50 35.00% 441,000 125,936.00 39.60%

Married filing joint

$0 18,550 $0 10.00% 18,550 75,300 1,855.00 15.00% 75,300 151,900 10,367.50 25.00% 151,900 231,450 29,517.50 28.00% 231,450 413,350 51,791.50 33.00% 413,350 466,950 111,818.50 35.00% 466,950 130,578.50 39.60%

Married filing separate

$0 $9,275 $0 10.00% 9,275 37,650 927.50 15.00% 37,650 75,950 5,183.75 25.00% 75,950 115,725 14,758.75 28.00% 115,725 206,675 25,895.75 33.00% 206,675 233,475 55,909.25 35.00% 233,475 65,289.25 39.60%

50 Taxation of foreign nationals by the US—2016

Appendix C: United States income tax treaties

Figure 1.4

Tax Treaty Countries

Armenia1 Iceland Philippines Australia India Poland Austria Indonesia Portugal Azerbaijan1 Ireland Romania Bangladesh Israel Russia Barbados Italy Slovak Republic Belarus1 Jamaica Slovenia Belgium Japan South Africa Bulgaria Kazakhstan Spain Canada Korea (Republic of) Sri Lanka China (People’s Republic of) Kyrgyzstan1 Sweden Cyprus Latvia Switzerland Czech Republic Lithuania Tajikistan1 Denmark Luxembourg Thailand Egypt Malta Trinidad and Tobago Estonia Mexico Tunisia Finland Moldova1 Turkey France Morocco Turkmenistan1 Georgia1 Netherlands Ukraine Germany New Zealand United Kingdom Greece Norway Uzbekistan1 Hungary Pakistan Venezuela

1.The Department of the Treasury announced that the income tax treaty with the Soviet Union will continue in effect for these countries until separate agreements are concluded and come into effect.

51 Taxation of foreign nationals by the US—2016

Table 5.1 US Totalization Agreements

Country Latest effective date Australia October 1, 2002 Austria November 1, 1991 Belgium July 1, 1984 Brazil (Not yet effective)1 Canada August 1, 1984 Chile December 1, 2001 Czech Republic January 1, 2009 Denmark October 1, 2008 Finland November 1, 1992 France July 1, 1988 Germany December 1, 1979 Greece September 1, 1994 Hungary September 1, 2016 Ireland September 1, 1993 Italy November 1, 1978 Japan October 1, 2005 Korea (Republic of) April 1, 2001 Luxembourg November 1, 1993 Netherlands November 1, 1990 Norway September 1, 2003 Poland March 1, 2009 Portugal August 1, 1989 Slovakia May 1, 2014 Spain April 1, 1988 Sweden January 1, 1987 Switzerland August 1, 2014 United Kingdom January 1, 1985

1. An agreement on Social Security was signed with Brazil on June 30, 2015, but this agreement is not yet effective as of this publication date.

52 Taxation of foreign nationals by the US—2016

Table 5.2 Estate and Gift Tax Treaties

Country Type of treaty Australia Separate estate and gift Austria Combined estate and gift Canadaa Estate only Denmark Combined estate and gift Finland Estate only France Combined estate and gift Germany Combined estate and gift Greece Estate only Ireland Estate only Italy Estate only Japan Combined estate and gift Netherlands Estate only Norway Estate only South Africa Estate only Switzerland Estate only United Kingdom Combined estate and gift a. Although the United States and Canada do not have a separate estate tax treaty, taxes upon death are covered within the provisions of the US – Canada income tax treaty.

53 Taxation of foreign nationals by the US—2016

Appendix D: Family-based immigration categories

Preference Category Basic Criteria Non-preference Immediate relatives of US citizens: spouse, parents of US citizens provided that the citizen is 21 or older, unmarried birth children and adopted children under 21, and stepchildren under 21 in cases in which the marriage creating the stepchild relationship took place before the child reached 18. Not subject to numerical limitation. In some circumstances, spouses of deceased US citizens qualify. FB-1 (First preference) Unmarried sons or daughters (21 or older) of US citizens. FB-2 (Second preference) Spouses and children (under 21) of lawful permanent residents. Unmarried sons and daughters (21 or older) of lawful permanent residents. FB-3 (Third preference) Married sons or daughters of US citizens and their unmarried children under 21. FB-4 (Fourth preference) Brothers or sisters of US citizens, provided that the citizen is 21 or older and their unmarried children are under 21.

54 Taxation of foreign nationals by the US—2016

Appendix E: Employment-based immigration categories

Preference Category Basic Criteria EB-1 (Priority workers) Extraordinary Ability: Those with extraordinary ability in the arts, sciences, education, business, or athletics (individuals must demonstrate sustained national or international acclaim). No offer of employment required; may be “self-petitioned”.

Outstanding Professors and Researchers: National or international recognition as outstanding within the academic field. Requires three years of professional research or teaching experience and an offer of employment in full-time professor or research based position.

Multinational Managers/Executives: Managers and executives with 1-year prior employment in a similar capacity within the immediately preceding 3 years with a foreign affiliate of the US company.

No recruiting of US workers necessary. Excludes persons of specialized knowledge. EB-2 (Advanced degree Must be a professional position. Individual must have at least professionals and those a master’s degree or be able to document exceptional ability with exceptional ability) (a lesser standard than for priority workers). A bachelor’s degree plus 5 years of progressively responsible professional experience will suffice. Labor certification is required before the petition for permanent residency may be filed.

National Interest Waiver: Alien’s work in the US will substantially benefit the national interests. Does not require offer of employment; may be “self-petitioned”. Labor certification waived. Standard of proof for “national interest” is very high. EB-3 (Skilled workers, Professionals need a bachelor’s degree. Skilled workers need basic degree 2 or more years of training. There is a substantial backlog of professionals, and unskilled workers because of high demand. Labor certification unskilled workers) is required. EB-4 (Special immigrants) Religious workers, returning lawful permanent residents, and certain special immigrants. EB-5 (Employment Must make an investment of at least $500,000 to $1 million, creation—immigrant depending on the geographical area where investment is made, investors) and employ the equivalent of at least 10 full-time workers other than members of the investor’s immediate family. Permanent residency is conditional. Venture must still qualify 2.5 years from date petition is filed.

55 Taxation of foreign nationals by the US—2016

Appendix F: Countries whose citizens may be eligible for the Visa Waiver Program

Andorra Latvia Australia Liechtenstein Austria Lithuania Belgium Luxembourg Brunei Malta Chile Monaco Czech Republic The Netherlands Denmark New Zealand Estonia Norway Finland Portugal France San Marino Germany Singapore Greece Slovakia Hungary Slovenia Iceland Spain Ireland Sweden Italy Switzerland Japan *Taiwan Korea, Republic of (South Korea) United Kingdom

*With respect to all reference to “country” or “countries” on this page, it should be noted that the Taiwan Relations Act of 1979, Pub. L. No. 96-8, Section 4(b)(1), provides that “(w) henever the laws of the United States refer or relate to foreign countries, nations, states, governments, or similar entities, such terms shall include and such laws shall apply with respect to Taiwan.” 22 USC. § 3303(b)(1). Accordingly, all references to “country” or “countries” in the Visa Waiver Program authorization legislations, Section 217 of the Immigration and Nationality Act, 8 USC. 1187, are read to include Taiwan.

** With respect to the United Kingdom, British citizens must have the unrestricted right of permanent abode in England, Scotland, Wales, Northern Ireland, the Channel Islands, and the Isle of Man.

56 Taxation of foreign nationals by the US—2016

Appendix G: Nonimmigrant (temporary) visa categories

Visa type Criteria Maximum length of stay A-1,2,3 Ambassadors and consuls, other foreign Servants: 1 year; others: no government employees, and their immediate maximum. Renewable. families and servants. Dependents may seek work authorization. B-1 Temporary visitor for business. Must be Up to 6 months initially; varies employed and paid by a foreign company. depending on purpose of US business activities must be necessary visit. Renewable in 6 month incidents to international trade investment. increments. Note, 12 months No US payroll or local employment is maximum on first term of permitted. Reimbursement for travel stay. expenses allowed from US source. B-2 Temporary visitor for pleasure. No Same as B-1. employment is permitted. VWP Visa waiver program. Waiver of B-1 or B-2 Maximum 90 days. visa requirement for nationals of certain countries. No visa is necessary; present passport for entry. Same rules as those for B-1 and B-2. Cannot change or extend visa status. Machine readable passports (MRP) now required for nationals of Andorra, Belgium, Brunei, Liechtenstein, and Slovenia; required effective 10/26/04 for all visa waiver countries. Biometric passports to be required in the future. C-1, 2 , 3 Diplomats and others in transit through the 29 days. United States. D-1, D-2 Airline and vessel crewmembers. E-1 Treaty trader. Must be a national of a country Initial admission for 2 years; having a treaty of friendship, commerce, visa renewable without and navigation with the United States. limitation as long as trade Substantial trade primarily between the with treaty country continues country and the United States must take at required level. place; this can include trade in services. Apply directly to a US consular post abroad or for a change of status if in the United States. E-1 spouses may apply for work authorization. See Appendix H for a list of countries with E visa treaties. E-2 Treaty investor. Same rules as those for Initial admission for 2 E-1, but requires substantial investment years; visa renewable rather than trade by the national. Foreign without limitation as long as national must develop and direct a viable investment continues enterprise. E-2 spouses may apply for work authorization. See Appendix H for a list of countries with E visa treaties.

57 Taxation of foreign nationals by the US—2016

Visa type Criteria Maximum length of stay E-3 Treaty aliens in specialty occupations. Initial admission for 2 years; Currently limited to Australian nationals visa renewable without only. Must be a professional position. limitation Employee (college graduate or equivalent) must render services for a limited time. Employee must receive the same wages and working conditions as US workers and must not replace striking US workers. Entity not required to be majority owned by Australian nationals. E-3 spouses may apply for work authorization. F-1,2 Alien students and their immediate families. Duration of full-time course(s) Limited US tax liability. Limited employment of study, plus up to 1 year authorization available. Dependents may not of practical training, plus 60 be employed. days. G-1,2,3,4,5 Representatives to and employees of Servants: 3 years; others: international organizations (and their staffs, duration of the status. immediate families, and servants). Renewable. Appendix D: Nonimmigrant (temporary) visa categories (Continued) Visa type Criteria Maximum length of stay H-1B Specialty occupations. Must be a Initially 1-3 years; renewable professional position. Employee (college to 6 years maximum. graduate or equivalent) must render services Additional extensions may be for a limited time. Employee must receive available pursuant to pending the same wages and working conditions as permanent residence US workers and must not replace striking US application. workers. “Immigrant” intent permitted. H-1B1 Specialty occupations. Must be a Initial visa granted for 1 year. professional position. Employee (college Extensions not limited. graduate or equivalent) must render services for a limited time. Employee must receive the same wages and working conditions as US workers and must not replace striking US workers. Must maintain residency abroad; “immigrant” intent not permitted. Available to nationals/citizens of Chile and Singapore only. H-2 Temporary agricultural (H-2A) and 1 year; renewable only in nonagricultural (H-2B) workers. Generally extraordinary circumstances, seasonal, peak, or intermittent unskilled for a 3-year maximum workers. Employer’s need must be for 1 year exceeding a term of 18 or less. US workers must be unavailable. months can foreclose change of status to different NIV classification.

58 Taxation of foreign nationals by the US—2016

Visa type Criteria Maximum length of stay H-3 Trainees. A training program with little or Admitted for length of no productive work consisting of classroom training program, up to 1 instruction and close supervision. No US year; may be extended up to workers may be displaced. Training must be 2 years maximum. unavailable in the national’s country. H-4 Family members of H-1,2,3. No employment Same as H-1,2,3. allowed. I Representatives of foreign information Duration of status. Unlimited media (newspaper, radio, and television renewals. correspondents). J-1,2 Exchange visitors and their families. Limited Up to 7 years, depending on US tax liability. A 2-year foreign residency the type of exchange visitor requirement may apply but may be waivable. program activity, plus 30 Dependents may be authorized for days. employment. K-1 Fiancé or fiancée of US citizen seeking to 90 days. enter solely to conclude marriage within 90 days after entry. (Minor children of K-1 enter as K-2.) Authorized for employment. K-3 Spouse of US citizen seeking to enter US 2 years; extensions in 2 to await approval of immediate relative year intervals available immigrant petition filed by the US citizen while awaiting approval spouse. (Minor children of K-3 enter as K-4.) of permanent residence Authorized for employment. application. L-1,2 Intracompany transferees. Managers, 1–3 years. Renewable for executives, and employees with specialized up to 7 years maximum for knowledge. Must have prior 1-year managers and executives employment within the 3 years preceding and a 5 years maximum for entry in a similar position with a foreign employees with specialized affiliate of the US company. L-2 spouses knowledge. may apply for employment authorization. Transferor must continue to operate after transfer. M-1,2 Vocational students and dependents. Duration of full time course of study, up to 1 year initially, plus 30 days. May be extended. NATO Officials with the North Atlantic Treaty Varies. Organization and their dependents.

59 Taxation of foreign nationals by the US—2016

Visa type Criteria Maximum length of stay O-1,2,3 Extraordinary aliens. Must have Varies depending on the extraordinary ability in the sciences, duration of the project or arts, education, business, or athletics or assignment. Up to 3 years extraordinary achievements in the motion initially; renewable in 1 year picture or television industry. Documented increments. by sustained national or international acclaim. Category includes those who assist artists and athletes (O-2) and family members of O-1 (O-3). Dependents may not work. Usually requires “no objection” letter from relevant guild or union. Appendix D: Nonimmigrant (temporary) visa categories (Continued) P-1,2,3 Performing entertainers and athletes. Athletes up to 5 years with Internationally recognized or culturally one extension up to 5 years. unique entertainment groups and athletes Entertainers admitted for who do not meet O criteria. Categories duration of event up to 1 year include their family members. Individual with extensions as necessary. entertainers not covered. TN-1 Canadian and Mexican professionals. Must Up to three years; may be be a Canadian or Mexican citizen with a renewed. bachelor’s degree or alternative professional credential allowed under North American Free Trade Agreement. Only occupations listed in NAFTA qualify. Canadians process at US port-of-entry. Mexicans process at US consular office. Must maintain residency abroad; “immigrant” intent not permitted. Q Cultural exchange visitors. A structured 15 months. cultural exchange program. R Religious workers, including ministers, Up to 5 years. workers in religious occupations, and professionals with 501(c)(3) organizations. S-5, S-6 Alien in possession of critical, reliable 3 years maximum with no information concerning a criminal (S-1) extension permitted. organization or enterprise who is willing to supply or have supplied such information to federal or state court and whose presence in the US is essential to an authorized criminal investigation or prosecution. S-2 for alien in possession of critical, reliable information concerning a terrorist organization or enterprise who is willing to supply or have supplied such information to federal authorities, will be placed or is in danger and is eligible for an award. Dependents enter as S-7. No change or extension of status. 60 Taxation of foreign nationals by the US—2016

Visa type Criteria Maximum length of stay T Aliens who are or have been victims of a 3 years maximum; no severe form of trafficking (sex trafficking, extension. involuntary servitude, peonage, debt bondage, or slavery). Alien agrees to assist in investigation or prosecution of such trafficking, or are less than 15 years old, and would suffer severe hardship. Applies also to spouses, children, and parents (if alien is under 15) when there is a possibility of infliction of severe harm on their behalf or if their presence is necessary for successful prosecution. Employment authorization available. May adjust to permanent residence. U Alien who has suffered substantial physical Varies. However, USCIS/ or mental abuse as a result of having ICE officers instructed to been a victim of rape, torture, trafficking, use all existing authority incest, domestic violence, sexual assault, and mechanisms to prevent abusive sexual contact, prostitution, sexual removal of possible U victims. exploitation, female genital mutilation, being held hostage, peonage, involuntary servitude, slave trade, kidnapping, abduction, unlawful criminal restraint, false imprisonment, blackmail, extortion, manslaughter, murder, felonious assault, witness tampering, obstruction of justice, perjury, or the attempt, conspiracy, or solicitation to commit any of these or similar crimes. Employment authorized. May adjust to permanent resident. V-1, V-2, V-3 Spouses (V-1) or children (V-2) of permanent 2 years; extensions available residents or dependent children of the in some circumstances. spouses (V-3) who are beneficiaries of an immigrant visa petition filed before 12/21/00 and pending for more than 3 years; or approved but more than 3 years have elapsed and immigrant visa number is not available; or immigrant visa number is available but immigrant visa application is still pending. Employment authorized.

61 Taxation of foreign nationals by the US—2016

Appendix H: Countries whose citizens may be eligible for E Treaty Trader (E-1) or Treaty Investor (E-2) visas

Country Categories allowed Albania E-2 Argentina E-1 and E-2 Armenia E-2 Australia E-1 and E-2 Austria E-1 and E-2 Azerbaijan E-2 Bangladesh E-2 Bahrain E-2 Belgium E-1 and E-2 Bolivia E-1 and E-2 Bosnia and Herzegovina E-1 and E-2 Brunei E-1 Bulgaria E-2 Cameroon E-2 Canada E-1 and E-2 Chile E-1 and E-2 China (Taiwan) E-1 and E-2 Colombia E-1 and E-2 Congo, Democratic Republic of E-2 (formerly Zaire) (Brazzaville) Congo, Republic of (Kinshasa) E-2 Costa Rica E-1 and E-2 Croatia E-1 and E-2 Czech Republic E-2 Denmark E-1 and E-2 Ecuador E-2 Egypt E-2 Estonia E-1 and E-2 Ethiopia E-1 and E-2 Finland E-1 and E-2 France E-1 and E-2 Georgia E-2 Germany E-1 and E-2 Greece E-1 Grenada E-2

62 Taxation of foreign nationals by the US—2016

Country Categories allowed Honduras E-1 and E-2 Iran E-1 and E-2 Ireland E-1 and E-2 Israel E-1 Italy E-1 and E-2 Jamaica E-2 Japan E-1 and E-2 Jordan E-1 and E-2 Kazakhstan E-2 Korea (South) E-1 and E-2 Kosovo E-1 and E-2 Kyrgyzstan E-2 Latvia E-1 and E-2 Liberia E-1 and E-2 Lithuania E-2 Luxembourg E-1 and E-2 Macedonia E-1 and E-2 Mexico E-1 and E-2 Moldova E-2 Mongolia E-2 Montenegro E-1 and E-2 Morocco E-2 Netherlands E-1 and E-2 Norway E-1 and E-2 Oman E-1 and E-2 Pakistan E-1 and E-2 Panama E-2 Paraguay E-1 and E-2 Philippines E-1 and E-2 Poland E-1 and E-2 Romania E-2 Senegal E-2 Serbia E-1 and E-2 Singapore E-1 and E-2 Slovak Republic E-2

63 Taxation of foreign nationals by the US—2016

Country Categories allowed Slovenia E-1 and E-2 Spain E-1 and E-2 Sri Lanka E-2 Suriname E-1 and E-2 Sweden E-1 and E-2 Switzerland E-1 and E-2 Thailand E-1 and E-2 Togo E-1 and E-2 Trinidad and Tobago E-2 Tunisia E-2 Turkey E-1 and E-2 Ukraine E-2 United Kingdom E-1 and E-2 Yugoslavia E-1 and E-2

64 Taxation of foreign nationals by the US—2016

Appendix I: IRS forms and statements location information

The current versions of all forms can be obtained from the IRS Web site: http://www.irs.gov

65 Taxation of foreign nationals by the US—2016

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