US Tax Nexus
While the U.S. government taxes its citizens and tax residents on worldwide income, it taxes foreign persons, including nonresident aliens, in a more limited manner.
First, foreign persons are generally subject to tax on U.S.-source FDAP (“fixed, determinable, annual, or periodic”) income, which includes passive-type items, such as interest, rent, royalties, and dividends. This income is taxed on a gross basis at the rate of 30% (or lower treaty rate) by way of withholding at source by the U.S. payer, who has primary responsibility as the “withholding agent” to collect, deposit, and report the tax to the IRS.
Second, foreign persons who are considered to earn income “effectively connected” with a trade or business in the U.S. (in contrast to the passive-natured FDAP income) are subject to tax at graduated rates (the maximum rate is currently 37%) on a net basis, i.e., reduced by available deductions.
Third, under the so-called the Foreign Investment in Real Property Tax Act (“FIRPTA”) rules, the gain from the sale of a U.S. real estate property interest is treated as effectively connected income (ECI). The income can qualify for beneficial long-term capital gain rates (the maximum is currently 20%) if the property is sold by an individual after being held for more than one year.
Tax reporting for foreign persons is done via the Form 1040-NR, which is generally organized by taking into account the above categories.
Easing the Burden of US Tax Nexus
At Expat Tax Professionals, our experts can offer planning advice and strategies to ease the burden on the various tax and reporting obligations that are triggered when doing sufficient business in the United States to create tax nexus.
In terms of FDAP taxation, we offer planning and strategy advice that takes into account:
- Double taxation relief
- Withholding rate reduction via treaty provisions
- Exceptions to tax and reporting (e.g., portfolio interest exemption)
In terms of ECI taxation, we offer comprehensive advice on tax nexus issues:
- U.S. trade or business classification under domestic law
- Permanent establishment classification under treaty law
- Tax structuring recommendations
- Transfer pricing considerations
- Online sales into the United States (including sales via Amazon FBA)
- Protective tax return strategies
In terms of FATCA taxation, we cover the key issues to help you maximize your U.S. real estate investment:
- Net basis election to reduce taxation on rental income
- Withholding certificates to reduce withholding on U.S. real estate sales
- New Section 199A qualified business deduction
- Exit Strategies
How We Can Help
Yes, Expat Tax Professionals is the premier online tax firm for U.S. expats. But aided by our mastery of cross-border tax issues, we provide invaluable advice to help non-US persons navigate their entry and operations in the U.S. market.
Our diligence combined with confidence stemming from our deep understanding of the U.S. tax law guarantees that we find the best solutions to every challenge.