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U.S. Taxation for Non-Resident Aliens

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U.S. Taxation for Non-Resident Aliens

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  1. U.S. Taxation For Non-ResidentAliens PRESENTEDBY: VivekShah US Tax Expert Managing Partner @SmartAccountants MansiShah US Expat Tax Expert Sr. Tax Manager @SmartAccountants

  2. Overview: Forms in Detail: Corporation U.S. Tax Treaties U.S. Tax - Foreign Students Gift tax and Estate tax Buying Property in USA Definition The Source Of Income Forms in Detail: Individual TaxtreatmentforN.R.Alien Forms inDetail: Partnership

  3. Definition: AnalienisanyindividualwhoisnotaU.S.citizenorU.S.national.Anonresidentalien isanalienwhohasnotpassedtheGreenCardTestorSubstantialPresenceTest. • Green CardTest: • Thetestfordeterminingaperson’slawfulpermanentresidencyintheUnitedStatesatanytime duringthecalendaryearisknownasthe“GreenCardTest”. • Substantial PresenceTest: • Tomeetthistest,apersonmustbephysicallypresentintheUnitedStatesonatleast: • 31 days during the current year,and‘ • 183daysduringthe3-yearperiodthatincludesthecurrentyearandthe2years immediately before that,considering: • All the days a person was present in the current year, and • One-Third (1/3) of the days a person was present in the first year before the current year, and • One – Sixth (1/6) of the days a person in the second year before the current year.

  4. QUESTION 1. Mr. X travelled to USA on H-1 B visa and spent 154 days during 2021 with no prior years travel history. He will be considered as : US Tax resident reporting Global Income US Non resident reporting only US source income US resident reporting only US source income US non resident reporting Global Income

  5. There are two types of Sources ofIncome: The Source OfIncome:

  6. Continue… Summary Of Source Rules for Income of Non-Resident Aliens

  7. Continue…

  8. QUESTION 2. Foreign resident/US Non resident alien performing personal services from foreign country to US employer(Located in US). This will be considered as: a. U.S Source of Income b. Foreign source of Income c. Both d. None of the above

  9. There are different types of Forms for Non Resident Individuals and Entities which are as follows: U.S. Source OfIncome:

  10. Now, here we explain all above forms indetail: INDIVIDUAL FORM- 1040 NR (ForIndividual) • A Non-resident Alien who is engaged in a trade or business in the United States or represented a deceased person or represented an estate or trust had to file Form 1040-NR. There are different Due date for filing 1040 NR:

  11. Continue… Schedule NEC( Form 1040- NR) - Tax on Income Not Effectively Connected With a U.S. Trade or Business: • Include income only to the extent it is a U.S. source and not effectively connected with the conduct of a trade or business in the United States. • Tax must be withheld at the source of income not effectively connected with a U.S. trade or business that is paid to non-resident aliens. The withholding is generally at a 30 % rate. • The following list gives only a general idea of the types of income to include on Schedule NEC: • Income that is fixed or periodic, such as interest, dividends, rents, salaries, wages, premiums, annuities, other compensation, or certain alimony received. Other items of income,suchasroyalties,mayalsobesubjecttothe30 %tax. • Gains, other than capital gains, from the sale or exchange of patents, copyrights, and other intangibleproperty • Originalissuediscount(OID) • CapitalgainsinexcessofcapitallossesfromU.S.sourcesduring2021.Includethesegains onlyifyouwereintheUnitedStatesatleast183daysduring2021. • Prizes, awards, and certain gambling winnings, Proceeds from lotteries, raffles, etc., are gambling winnings. A person must report the full amount of his winnings unless he isa resident ofCanada.

  12. Continue… FORM- 8804 & 8805(For Individual) • Purpose of Form • Use Forms 8804, 8805, and 8813 to pay and report section 1446 withholding tax based on effectively connected taxable income (ECTI) allocable to foreign partners (as defined in section 1446(e)) • Use Form 8805 to show the amount of ECTI and the total tax credit allocable to the foreign partner for the partnership's tax year. • Foreign partners must attach Form 8805 to their U.S. income tax returns to claim a withholding credit for their shares of the section 1446 tax withheld by the partnership • Section 1446 • A partnership (foreign or domestic) that has income effectively connected with a U.S. trade or business (or income treated as effectively connected) must pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. • In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. • Currently, the withholding tax rate for effectively connected income allocable to non-corporate foreign partners is 37%, and 21% for corporate foreign partners. • Any portion of such income is allocable under section 704 to a foreign partner

  13. Meaning:Non-residentaliensaresubjecttoU.S.incometaxonlyontheirU.S.sourceincome.Theydonot havetopaytaxonforeign–earnedincome. • Non- residents are subject to two different tax rates: • Effectively Connected Income (ECI) • Fixed or Determinable, annual or periodic (FDAP) Income TaxTreatment:Non-ResidentAlien

  14. PARTNERSHIP FORM-8865–ReturnofU.SPersonsWithRespecttoCertainForeignPartnership • Meaning: • U.S. person who controlled the foreign partnership at any time during the partnership's tax year. • There are four major categories of tax filers to complete the form and the requirements are different for each group.

  15. Continue… FORM-1065–U.SReturnofPartnershipIncome • Income from U.S. Sources may require a foreign partnership to file a Form 1065 in a tax yearwhere: • ThepartnershiphasgrossincomederivedfromsourceswithintheUnitedStates, • OR • GrossincomeconnectedwithatradeorbusinessconductedintheU.S.Partnerships that are organized outside of the U.S. but have passive U.S. investments and are, therefore,requiredtofileaForm1065andissue K-1s totheU.S.partners.

  16. CORPORATION Form1120–F(U.SIncomeTaxReturnofaForeignCorporation) • Meaning: - Foreign Companies Doing Business in the UnitedStates: • A foreign corporation may establish a branch or Subsidiary company within the US to conduct its business activities even though most foreign corporations choose to form subsidiarycompaniesfortaxandnontaxreasons. • Most countries have the ability to subject foreign corporations to domestic taxation if they form a branch, open an office, employ staff, maintain inventory or fixed assets or otherwise conduct business activities in the U.S. which enables the Federal and state taxing administration to assess the foreign corporation as though it had a deemed permanent establishment. • Doing business in the USA by foreign companies so, they have to fill Form-1120Fi.e. U.S IncometaxReturnofaForeignCorporation.

  17. Continue… • Who MustFile? • WhowasengagedinatradeorbusinessintheUnitedStates,whetherornotithadU.S. source income from that trade or business, and whether or not income from suchtrade orbusinessisexemptfromU.S.taxunderataxtreaty.

  18. QUESTION 3. What is Branch Profit Tax Rate ? 21% 30% 37% 15%

  19. Withholding Of Foreign Person • After the withholding occurs, foreign investors generally do not incur further U.S. tax obligations. • Withholding is necessary because it is the only way to guarantee tax collection from foreign persons. • A payee is subject to withholding only if it is a foreign person. A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a QI. • So, the gross income and withheld taxes must be reported on Form 1042-S (Foreign Persons U.S. Source Income Subject to Withholding) to the IRS. • The payor must also submit Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) by March 15

  20. United States Tax Treaties With Various Countries • The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reducedrateorareexemptfromU.S.taxesoncertainitemsofincometheyreceive fromsourceswithintheUnitedStates. • So, we have to claim benefits of treaties we have to file Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) PersonalServicesofaNonresidentAlienIndividual)

  21. ThenameofcountrieswithwhichtheUnitedStateshastaxtreatiesareasfollows:ThenameofcountrieswithwhichtheUnitedStateshastaxtreatiesareasfollows:

  22. Treaty Position form for claiming Exemption for Non- ResidentAliens:

  23. QUESTION 4. Which Form is used to claim treaty-based Exemption? a. Form 1042 b. Form 8233 c. Form W-8 BEN d. Form W-8 BEN E

  24. U.S TAXATION ON FOREIGN STUDENTS • AllforeignstudentsarerequiredtofileareturnwiththeInternalRevenueService(IRS)eachyear theyareintheUnitedStates. • Thefederalandstatetaxreturnsarerequiredforthosewhoearnincomeandthenon-employed federalformforthosewhodidnotearnincome. • But,aspertheUSInternalRevenueService(IRS),aforeignstudenttemporarilypresentintheUS under an “F," “J," “M," or “Q" visawho substantially complies with the requirements of the visa is consideredasan“Exemptindividual"forUStaxpurposes. • Generally IRS regulations require that 14 percent of non-qualified scholarship and fellowship paymentspaidtoF,J,Q,orMvisa holdersbewithheldasfederalincometaxunlessapersonisa residentofacountrywithwhichtheUnitedStateshasanapplicableincometaxtreaty. • Receipt of fellowship/scholarship grant is considered as income effectively connected with the conductoftradeorbusinessinthe USandmaybetaxableatthenormalgraduatedtaxratesas applicabletotheUScitizens. • Itis importanttonotethatthepaymentaforeignstudentreceives asascholarshiporfellowship grant will be taxable or not would depend on whether the grant is US-source or foreign-source income.

  25. QUESTION 5. Foreign Student living full year in USA and Earning U.S Income require to file U.S. return? Yes , Form 1040 Yes, Form 1040 – NR Yes, 1040 or 1040-NR based on election No filing requirements as students are exempt

  26. Gift Tax & Estate Tax Applicable To Non-Resident Aliens • Donors who are nonresidents not citizens of the United States are subject to gift taxes for gifts made of real and tangible property situated in the United States. However, gifts of U.S. situated intangiblepropertyarenotsubjecttothegifttax. • Fornonresident,Non-U.S.citizens(nonresidentaliens),theestateandgifttaxappliesata minimum to property that exists within the U.S. This includes all tangible and intangible assets thatphysicallyexistwithintheU.S.oris“effectivelyconnected”withatradeorbusinessintheU.S. • Nonresident aliens are entitled to the $15,000 annual gift tax exclusion available to U.S. citizens andresidents. • The annual gift tax exclusion for gifts made to a non-U.S. citizen spouseincreased to $100,000. Since2002,thisannualexclusionhasincreasedeachyearandin2021theexclusionis$159,000. • Nonresidentaliensreceiveonlya$60,000exemptionfromU.S.estatetax,whichisequivalenttoa$13,000unifiedcreditandthiscreditcanbeset-offagainstEstateTaxonly.

  27. Non-Resident Aliens Buying Property In U.S.A • Non-US citizens can buy property since there is no citizenship requirement forreal estatesales. • The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 was enacted by Congresstoimposeataxonforeignpersonswhentheysellorreceiveincomefrom aUSrealpropertyinterest. • In general, income from real property located in the USthat is owned by a nonresident alien is taxed at a 30% (or lower treaty) rate if it is not effectively connectedwithaUStradeorbusiness.

  28. Do You Have Any Questions? An Informative SessionOn: "U.S. Taxation For Non-ResidentAliens" DO LET US KNOWYOUR QUERIES:) Email: info@smartaccts.com Site: www.smartaccts.com

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