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Nexus Over Foreign Persons and Activities for U.S. Tax

Table of Contents

    U.S. Activities of Foreign Persons that Create Nexus.

    A foreign person may be subject to U.S. tax if sufficient nexus exists. Nexus, or connection to the United States sufficient for the U.S. to tax the activity, is created in any of four different types of manners:

    Presence – An individual’s continuing or repeated physical presence in the U.S. can create nexus through the classification of the individual as a resident or nonresident alien for income tax purposes. Even an individual who is clearly defined as a nonresident alien under U.S. law can still have U.S. tax liability solely upon the measurement of their presence in the United States. Presence in the United States for at least 183 days is generally sufficient to create U.S. Nexus over certain activities of a non resident alien.

    Operations – A foreign person is taxed by the United States via Nexus over business income where the foreign person is deemed to be engaged in the conduct of a trade or business within the United States. This most frequently occurs where a fixed place of business is established within the United States by a foreign person or entity. The activity of a U.S. trade or business can be attributed and taxed to a foreign person even without the foreign persons actual presence in the U.S.

    Source of Income – Foreign persons are generally taxed on income sourced to the U.S. Even foreign persons with no physical presence in the United States can be subject to U.S. taxation where income is deemed to arise from sources within the United States. The source rules in U.S. tax law vary type of income. Additionally foreign source income can be taxed to U.S. persons and entities under certain circumstances.

    Former U.S. Citizens or Long-Term Residents – Former Citizens and long-term residents of the United States are subject to tax on income from both U.S. and foreign sources for a period of ten years after the loss of citizenship or residency occurred.

    U.S. Activities of Foreign Corporations that Create Nexus.

    Foreign corporations are subject to U.S. tax only to the extent they have both U.S.-sourced income and ownership by U.S. persons. The U.S. generally has no Nexus and thus cannot tax foreign corporations that have solely non U.S.-sourced (overseas) income and operations or solely foreign ownership. These limitations on U.S. nexus over foreign corporations create the potential for indefinite deferral of U.S. tax on overseas income earned indirectly by U.S. persons through foreign corporations. The Internal Revenue Code effectively eliminates this deferral potential for investment income and business income with related parties. Foreign Corporations taxable similar to domestic S Corporations produce flow through income that is taxable by U.S. shareholders on an annual basis regardless of whether and when that income is actually distributed. Two “anti-deferral regimes” exists under “Subpart F” and the “passive foreign investment company” (” PFIC”) provisions.

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