Foreign persons: source basis taxation –Taxed on income that has economic connection to US— US “source”. Gross passive income taxed at flat 30% rate (unless reduced by treaty); Net business income taxed at graduated rates. US persons: residence basis taxation –Worldwide income taxed at graduated rates with credit for foreign taxes on foreign source income. International Tax: Residence

Individuals: US Citizens and Resident Aliens –US citizenship determined under immigration and nationalization laws; U.S. tax residence under § 7701(b) –Both subject to residence basis taxation (Cook v. Tait) regardless of actual residence or additional nationalities (Rev. Rul ) –Renunciation of citizenship is generally effective for tax purposes, but if loss tax-motivated, former citizen taxed like citizen on US source income for 10 years following expatriation under section 877 –Long-term resident resident aliens who abandon their US tax residency are also subject to § 877 International Tax: Residence

Retroactive Restoration of Citizenship –How should a person whose citizenship has been restored retroactively be taxed? –Felix and Lucienne de Benitez Rexach cases: Why was Felix retroactively dunned for taxes but Lucienne was not? –Rev. Rul International Tax: Residence

Exception to Residence Basis Taxation: § 911 Citizen and RA with foreign “tax home” and who is either (1) a US citizen and bona fide resident of foreign country or (2) a US citizen or RA and physically present for at least 330 days during 12 month period can elect to exclude up to $78,000 of foreign “earned income” and certain portion of housing cost allowance International Tax: Residence

Treaties and US Persons: Savings Clause US treaties generally contain a “savings clause,” which prevents US citizens and residents from using the treaty to lower their US taxes. Article I, ¶3 of the Luxembourg treaty reads: Notwithstanding any provision of the Convention except paragraph 4 of this Article, the US may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. International Tax: Residence

Resident Aliens: § 7701(b) Residency determined by either immigration status or actual time spent in the US Lawfully admitted for permanent residence Substantial Presence Test First-Year Election (Why would anyone make this election?) International Tax: Residence

Substantial Presence Test: §7701(b)(3) Independent of immigration status Present in US for 31 days or more during current calendar year, and Present in US for 183 days or more during the current year and previous two years. Each current year day counts as one; each day during the first preceding year counts as 1/3; and each day during the second preceding year counts as 1/6. Example Marie, a citizen of Luxembourg, is present in the US for 90 days in ‘96, 150 in 97, and 120 in ’98. Is she a resident in 1998? Yes: = 185 International Tax: Residence

Closer Connection Exception: § 7701(b)(3)(B) Present fewer than 183 days during current year; Foreign tax home; and Closer connection to foreign country Days of Physical Presence Includes all 50 states, DC, and continental and coastal water over which the US has exclusive rights Exceptions for persons with medical condition, in transit, and commuting day (Mexicans and Canadians) International Tax: Residence

Exempt Individual: § 7701(b)(5) Days of presence not counted for: Foreign government-related individual Teacher or trainee Student Athlete competing in charitable sports event International Tax: Residence

Disclosure requirements for person claiming exempt status or closer connection Sailing permits (§ 6851) Pre-immigration tax planning International Tax: Residence

Dual Resident Alien Resident in both US and another country If the alien is treated as a resident pursuant to a treaty, he can elect to be treated as nonresident (Reg. § (b)-7) Filing requirements (§§ 6114 and 6712) International Tax: Residence

Juridical Entities Corporations and Partnerships: US persons if incorporated in the US under federal or state law (§§ 7701(a)(30) and 7701(a)(4)) Residence of Partnerships: If PS engaged in a US trade or business, it is a US resident. If not engaged in a US trade or business, foreign resident (Reg. § ) Trusts: US person if: (1) US court able to supervise trust administration; and (2) one or more US persons control all substantial decisions of trust (§ 7701(a)(30)(E) Estates: Rev. Rul International Tax: Residence

Classification of Business Entities: Check-the-Box Rules Business entities not classified as corporation can choose their tax status, i.e., partnership or corporation Per se corporations cannot elect tax status Eligible entities (“EE”) can elect status: –EE with two or more members is either association or PS –EE with one member (“SME”) is either association or disregarded entity (sole proprietorship, branch, division) International Tax: Residence

Classification of Business Entities: Check-the-Box Rules Default rules (no specific election necessary): –Domestic EE: PS if two or more members or disregarded if single owner –Foreign EE: PS if two or more members and at least one member doesn’t have limited liability Association if all members have limited liability Disregarded if single owner who does not have limited liability Liability determined under foreign law or organizational documents International Tax: Residence

Classification of Business Entities: Check-the-Box Rules Hybrid Entity: An entity treated as a corporation for US purposes but a PS for foreign purposes (or vice versa) International Tax: Residence US FC1 FC2 Interest payment