Crossing Borders: Primer On International Taxation For Individuals - June, 2013

LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
SUITE 445
12100 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90025
www.GivnerKaye.com
www.MajorTaxProblems.com
BRUCE GIVNER
(bruce@GivnerKaye.com)
OWEN D. KAYE
(owen@GivnerKaye.com)
KATHLEEN GIVNER
(kathy@GivnerKaye.com)
NEDA BARKHORDAR
(neda@GivnerKaye.com)
PHONE (310) 207-8008
(818) 785-7579
FAX (310) 207-8708
(818) 785-3027
June 6, 2013
CROSSING BORDERS:
A PRIMER ON INTERNATIONAL TAXATION FOR INDIVIDUALS1
1. History of Foreign Tax Practice.
1.1. 1960s. Big firms, big clients.
1.2. 1980s. Japan, Europe, Asset Protection, Tax Evasion.
1.3. 2000s. Internet, China, small firms, small clients.
1.4. UBS, OVDI, FBARs, FATCA.
2. General Rules.
2.1. Overview.
2.1.1. RA roughly equal to citizen.
2.1.2. NRA generally taxed only on certain passive, non-business investment
type income or income attributable to US TorB.
2.2. Income Tax.
2.2.1. FDAP. 30%. Not ECI with U.S. TorB:2
(i) investment-type and compensation income, generally excluding
capital gains,3
but including, e.g., certain dividends,4
interest,5
1
The title and some of this material is adapted from “Crossing Borders: Light and Truth, A Primer on
International Taxation and Compliance For Individuals,” by Paul Sczudlo (then of Loeb & Loeb, now at
paul@sczudlolegal.com, 2008 USC Tax Institute.
2
§871(a)( and 881,
3
NRA in U.S. for 183 days or more (§7701(b) defines the person as a resident), subject to 30% tax on net U.S.
source capital gain. Also if gain is ECI. Also if from sale of certain timber, coal or domestic iron ore assets.
4
If the domestic corporation derives at least 80% of its income from an active foreign business, then the
percentage of the dividend that correlates to the percentage of the corporation’s foreign income to overall
income is not subject to the 30% tax. §871(i).
5
Tax exempt interest, §103, is exempt for NRAs also. Interest on bank deposits and portfolio loans is exempt.
§871(h). Portfolio loans are designed to be sold only to NRAs, payable outside the US, bear a prescribed
legend, does not apply to a 10% owner of the entity paying the interest.

LAW OFFICES
GIVNER & KAYE
Crossing Borders: A Primer On International Taxation For Individuals
January 19, 2013
Page 2 of 16
royalties, rents, salaries, wages, compensation,6
insurance
premiums, annuities, gambling winnings, alimony.
(ii) OID.
(iii) gains from the sale or exchange of patents, copyrights and other
IP to the extent realized from payments contingent on production,
use or disposition of the property.
(iv) 85% of U.S. Social Security benefits.7
2.2.2. ECI.
(i) NRA who is ETB pays tax at regular rates.8
(ii) U.S. TorB: no central definition. Providing personal services in
the U.S.; selling products in the U.S. directly or through an agent;
soliciting orders from the U.S. and then exporting merchandise
outside the U.S.; having a retail store or corporate office.
(iii) Partner will be ETB if the partnership is and a beneficiary will be
ETB if the trust is.
(iv) If deferred payment item, test for TorB in year transaction that
gave rise to payment was completed.9
NRA performs services in 2012 and is paid in 2013. Was 2013
payment ECI to 2012 services?
10 year lookback for sale of business property.10
Truck used in
business in 2005, business closes in 2006, and truck sold in 2013.
Deemed ECI to earlier business and subject to regular tax rates.
(v) Gains from sale of USRPI generally treated as ECI.11
2.2.3. Foreign corporations. Similar taxing of ECI and FDAP.12
6
In most cases compensation will be ECI, requiring a regular income tax return, subject to regular income tax
rates.
7
§871(a)(3).
8
§871(b) and 882.
9
§864(c)(6).
10
§864(c)(7).
11
§897.

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GIVNER & KAYE
January 19, 2013
Page 3 of 16
2.2.4. Withholding.
(i) FDAP.
(ii) Personal services income.13
(iii) Allocable share of partnership income due to U.S. TorB.
(iv) Disposition of USRPI.14
2.2.5. Treaties.
(i) Taxation of FDAB may be reduced or eliminated.15
(ii) Taxation of ECI is avoided until a permanent establishment or
fixed base is established.16
(iii) Exhibits list both income tax and transfer tax treaty partners.
2.3. FDAP.17
2.3.1. Tax Collected By Withholding.
(i) 30% is collected by withholding agent.18
(ii) Reporting is on Forms 1042 and 1042S.19
(iii) Claim treaty benefits by giving the withholding agent Form W-
8BEN.20
To claim treaty benefits other than on certain U.S.
source dividends, NRA must have a TIN.21
Use Form 8223 to
claim exemption from withholding on personal services.22
12
§§881, 882 and 884.
13
Limited rule exempts certain compensation of less than $3,000. §861(a)(3).
14
§§1441-1446.
15
See Articles 10 and 11 of the U.S. – U.K. Income Tax Treaty which reduces the tax of U.S. source dividends
received by U.K. individuals from 30% to 15% and generally eliminates the taxation of U.S. source income
received by U.K. residents.
16
See Article 7 of the U.S. – U.K. Treaty.
17
§864(c)(2).
18
§1441.
19
Reg. §1.1461-1(b).
20
Reg. §1.1441-7(b)(8)(ii)(A)(2).
21
Reg. §1.1441-6(b)(1).
22
Reg. §1.1441-4(b)(2)(ii).

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January 19, 2013
Page 4 of 16
2.3.2. Items of FDAP.
“The term [FDAP income] is merely descriptive of the character of a class
of income. If an item of income falls within the class of income
contemplated in the statute…it is immaterial whether payment of that
items is made in a series of payments or in a single lump sum. Further,
the income need note be paid annually if it is paid periodically; that is to
say, from time to time, whether or not at regular intervals. The fact that a
payment is not made annually or periodically does not, however, prevent
it from being [FDAP income] (e.g., a lump sum payment). In addition, the
fact that the length of time during which the payments are to be made
may be increased or diminished in accordance with someone’s will or
with the happening of an event does not disqualify the payment as
[FDAP income].”23
2.3.3. Exceptions.
(i) OID within 183 days or less from original issue.24
(ii) Portfolio interest.25
Generally registered form, non-contingent
interest to an unrelated domestic borrower.
(iii) Bank interest.26
(iv) Miscellaneous, e.g., gambling winnings.27
2.4. ECI.
2.4.1. Determining ECI.
(i) Items of U.S. source income that might otherwise constitute
FDAP, and capital gains and losses, are ECI only if:
(a) the income, gain or loss is derived from assets used in or
held for use in the conduct of the URA’s US TorB; or
(b) the activities of the NRA’s US TorB were a material factor
23
Reg. §1.1441-2(b)(1)(ii).
24
§871(g)(1)(B)(i).
25
§871(h).
26
§871(h).
27
§871(i).

LAW OFFICES
GIVNER & KAYE
January 19, 2013
Page 5 of 16
in the realization of the income, gain or loss.28
(ii) Income, gain or loss from foreign sources are treated as ECI if the
person has a fixed place of business within the U.S.29
2.4.2. Net Election For Real Estate Income.
(i) Triple net lease industrial warehouse should not give rise to ECI.
(ii) To avoid flat 30%, elect to treat as ECI a U.S. TorB.30
2.4.3. FIRPTA.31
An NRA’s gains or losses from the disposition of both direct and certain indirect
interests in USRPI are treated as ECI. USRPIs include interests in domestic
corporations that are predominantly invested in U.S. real estate, and indirect
ownership in U.S. real estate.32
2.4.4. Use of Entities.
To avoid direct tax, return filing obligations, estate tax, NRAs often acquire U.S.
assets through U.S.33
or foreign corporations. Must plan to avoid two tiers of
tax.34
Of course, use of a foreign corporation means that gains that qualify as
LTCG realized by the corporation will not qualify for favorable treatment.
2.4.5. ECI Withholding.
(i) W-8ECI provided to withholding agent before payment is made
avoids withholding on ECI other than personal services.35
Form
8223 is for the exemption under a treaty for independent
contractor services.
(ii) There are special procedures for FICA and SECA exemptions,
partnership withholding36
and FIRPTA withholding.37
28
§864(c)(2).
29
§864(c)(4).
30
§871(d).
31
§897.
32
§897(c).
33
Sometimes owned through foreign corporations.
34
The corporate income tax plus either the 30% withholding tax on the dividends paid to the foreign shareholder
or the 30% §884 branch profits tax imposed on foreign corporations.
35
Reg. §1.1441-4(a)(2).
36
§1446.

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January 19, 2013
Page 6 of 16
2.5. Return Filing And Compliance.
2.5.1. NRA and Foreign Corporation.
(i) If NRA is ETB, must file U.S. returns even if no income that is ECI
or all of it is exempt.38
1041NR or 1120-F.
(ii) If not ETB, no return required if tax liability satisfied by withholding
at source.39
(iii) If exempt due to treaty, must attach statement to 1040NR. Form
8333 reports a position that a treaty overrules or modifies the
federal tax treatment.40
2.5.2. Foreign Partnerships.
(i) Foreign partnership must file a U.S. return if it has U.S. source
gross income or ECI.41
(ii) No return required if no ECI, no U.S. partners and withholding
satisfies tax.42
2.5.3. Reporting Related-Party Transactions.
U.S. corporation at least 25% foreign owned must file form 5472.43
Gives IRS better access to information to enforce transfer-pricing
rules. $10,000 penalty. No SOL if not filed.
2.6. Transfer Tax.
2.6.1. NRA estate only includes defined U.S.-situs property. $60,000
exclusion.
2.6.2. For NRA donors, definition of taxable U.S. situs gifts44
is more limited
than definition of U.S. situs property. No unified credit. $143,000 annual
gift to non-citizen spouse.45
37
§1445.
38
To avoid being taxed on a gross basis in case it is later determined that it earned ECI.
39
Reg. §1.6012-1(b)(2)(i).
40
Reg. §301.6114-1(d)(1).
41
§6031(e).
42
Reg. §1.6031(a)-1(b)(3).
43
§6038A.
44
§2501(a)(2).
45
§2523(i).

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January 19, 2013
Page 7 of 16
2.6.3. QDOTs.46
Unlimited marital deduction to a U.S. citizen spouse.
3. Pre-Immigration Planning.
3.1. Accelerate assets out of estate before NRA establishes U.S. domicile.
3.2. Convert tangible personal property and U.S. real estate to intangible property
by contributing to a U.S. or foreign corporation and give the shares.47
Or,
encumber U.S. property and give loan proceeds before establishing U.S.
domicile.
3.3. Establish and fund foreign trust.48
3.4. Foreign Grantor Trusts. Established by non-immigrant settlor.49
Doesn’t work if
the settlor becomes a U.S. resident within 5 years.50
4. Tax Residency.
4.1. Income Tax.
Objective: Green Card Test or Substantial Presence Test.51
4.2. Estate and Gift Tax.
Domicile. Depends upon intention.52
California’s 13 factors.
5. Expatriation.
5.1. §877A – “Tax responsibilities of expatriation.
5.1.1. Average net income tax liability for 5 years of $124,000 and $2.0 or more
net worth.
5.1.2. Exceptions, e.g., dual citizens not resident in U.S. for more than 10 of 15.
5.1.3. §2801. Gift tax imposed on recipient.
5.2. Why? U.S. income tax and transfer taxes.
46
§2056A.
47
Since gifts by an NRA of those assets will give rise to gift tax liability.
48
Avoid §§2035 – 2038. Consider GSTT.
49
§672(f).
50
§679(a)(4).
51
§7701(b)(1)(A).
52
Reg. §20.0-1(b).

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January 19, 2013
Page 8 of 16
5.3. Mark to market. Form 8854.
5.4. Recognition of gain or loss.
5.5. $600,000 exclusion.
5.6. Election to defer the tax.
5.7. Special items: deferred compensation (pensions – 30% - W-8CE), nongrantor
trusts.
5.8. Reed Amendment. EXPATRIOT Proposal.
5.9. Planning. Separation agreements. Estate tax planning.
6. Inbound Real Estate.53
6.1. General.
6.1.1. NRAs (not otherwise filing returns).
6.1.2. ECI. Graduated rates.
6.1.3. ETB.
(i) nature of the U.S. activities.
(ii) level or extent of U.S. activities.
(iii) continuity of U.S. activities.
(iv) amount of time devoted to U.S. activities.
(v) amount of income derived from U.S. activities.54
6.1.4. Spectrum of Facts.
(i) Owning a single piece of U.S. real property triple net lease.
53
Much of this material adapted from State Bar Tax Section May 15, 2013 presentation “U.S. Tax Issues In
Planning For Foreign Investment In U.S. Real Property,” by Allen Walburn of Allen Matkins and J.P. Harbour
(San Francisco).
54
Caballero, Fees & Plowgian, 912-2d, T.M., U.S. Taxation of Foreign Investment in U.S. Real Estate, at A-5.

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January 19, 2013
Page 9 of 16
(ii) Several parcels with significant management required.
6.1.5. Treaties.
(i) Business profits tax on a net basis only if due to permanent
establishment.
(ii) If no PE, business profits (vs. passive) are exempt even if ECI.55
(iii) PE provisions require higher level of business activity before
subjecting NRA to net tax at graduated rates.
6.1.6. Net Election.
(i) If uncertain if it is a TorB, elect to treat as ECI.56
(ii) Otherwise, if it is determined to be a TorB, 30% withholding on the
gross rents (no deductions) by U.S. lessee.
(iii) Election is made at partner level if owned through a partnership.
6.2. Foreign Corporations.
6.2.1. If ETB, taxed on a net basis at regular rates.
6.2.2. Branch Level Taxes.
(i) Branch profits tax at 30%.57
(ii) Intent: treat foreign corporation’s U.S. TorB as if it were conducted
by a separate U.S. corporation.
(iii) Tax imposed on “dividend equivalent amount” whether the cash is
repatriated to the foreign country or not
(iv) U.S. real property is considered a branch of the foreign corpora-
tion, so its profits are considered dividends. Most try to avoid this
by not having a foreign corporation directly own U.S. real property.
55
Id at A-7.
56
§§871(d) and 882(d).
57
§884.

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January 19, 2013
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(v) The BPT does not apply to liquidation proceeds repatriated from
the U.S. branch to the foreign country.
(vi) Rate often reduced by treaty.
6.3. Return Filing Requirements.
6.3.1. NRAs would prefer not to file U.S. returns.
6.3.2. NRA ETB must file return even if:
(i) no ECI.
(ii) no U.S. source income.
(iii) income is exempt under a treaty or the Code.58
6.3.3. 1120-F and 1040NR.
6.3.4. Those with net election or with ECI under FIRPTA must also file return.59
6.3.5. Return due within 18 months after due date of previous return for
corporations and 16 months for individuals.
6.3.6. Protective returns with all zeros to claim right to deductions and credits.
6.4. Withholding.
6.4.1. Passive Income.
Rent, interest, dividends, royalties and other FDAP at 30%.60
U.S. partnership must withhold at same rate on gross income to foreign partner.
6.4.2. Treaties.
Withholding rate on real property rents is generally not reduced by treaty.
6.4.3. Partnership.
Must withhold at highest rate under §§1 or 11 (or LTCG for individual) on
58
Reg. §§1.6012-1(b)(1)(i) and 2(g)(1)(i).
59
Reg. §§1.6012-1(b)(2)(i) and 2(b)(1)(i).
60
§1441.

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January 19, 2013
Page 11 of 16
foreign partners’ allocable share of ECI.61
6.4.4. Required Even If No Cash.
6.4.5. Interactions.
Partnership might be required to withhold on foreign partner’s share of gain on
sale of real property under §1445 (USRPIs) and §1446 (partnerships).
6.4.6. Personal Liability.
For those who fail to pay.62
6.5. Income Tax – Interest and Dividends.
6.5.1. Interest.
U.S. source if debtor is a U.S. person.63
30% withholding.
Exceptions if not ECI: (i) OID; (ii) bank deposits; (iii) portfolio interest (generally
must be registered, non-contingent and unrelated – must be straight debt).
Many treaties reduce or eliminate tax. Need ITIN to claim on W-8BEN.
6.5.2. Dividends.
U.S. to foreign subject to 30%.64
Treaties typically reduce to 5% - 15%. Use W8-BEN.
6.5.3. Timing Of Documentation.
Must provide before the allocation or payment of the applicable U.S. source
income to the foreign person.
6.6. Income Tax – Gain on Sale.
6.6.1. FIRPTA.
Gain from sale of USRPI is taxed as if TorB and gain were ECI.
Does not affect character of the gain.
61
§1446.
62
Reg. §1.1461-1(a)(2). §6672.
63
§861(a)(1).
64
§§1441 and 1442.

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January 19, 2013
Page 12 of 16
Non-recognition provisions, e.g., 1031 and 351, do not apply unless seller
receives property that would be taxable under FIRPTA on a later sale or
exchange.
6.6.2. USRPI Defined.
Fee ownership of land, buildings, other improvements. Mineral deposits.
Crops. Leasehold. Time-share. Life estate. Remainder. Sharing in the
appreciation of real property, e.g., debt instrument whose rate of return is tied to
real estate inflation index.
Partnership interest if (i) 50% or more of the value of its gross assets consist of
USRPIs and (ii) 90% or more are USRPIs plus cash.65
Any interest in a USRPHC.
6.6.3. USRPHC.66
U.S. corporation holding one or more USRPIs equals or exceeds 50% of FMV
of (i) all corporation’s USRPIs; (ii) all non-U.S. real property; and (iii) all other
TorB assets. Excess cash not consider if held for future expansion.
5 year test period end on disposition of the interest. But not if on disposition (i)
no USRPIs and (ii) all were disposed of in taxable transactions.
Foreign corporation cannot be a USRPHC.
Avoid FIRPTA by owning U.S. real estate through a foreign corporation or a
U.S. corporation which has assets other than U.S. real estate.
6.7. FIRPTA Withholding.67
6.7.1. Required By Buyer.
Buyer of USRPI required to withhold 10% of gross. Form 8288 within 20 days
of the purchase. California is 3-1/3rd% (Form 593). Withheld taxes are
credited against the foreigner’s total tax liability.
6.7.2. Reduction or Elimination.
If buyer receives an affidavit certifying seller’s non-foreign status.
Affidavit issued by corporation that asset sold is not a USRPI of USRPHC.
65
Temp. Reg. §1.897-7T.
66
§897(c)(2).
67
§1445.

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January 19, 2013
Page 13 of 16
Seller’s actual liability is less than withholding. Form 8288-B.68
Sales price less than $300,000 for buyer’s residence.
Sold asset is publicly traded stock.
Where withholding required under partnership rules.
6.8. Gift Tax.
U.S. tangible and real property. U.S. borrower debt. Active business.
Not U.S. stock (big distinction from estate tax) and other intangibles.
Probably not partnership or LLC interests.
No lifetime exclusion.
Annual gift exclusion of $14,000.
6.9. Estate Tax.
U.S. situs assets, e.g., real property; U.S. corporate stock; cash at U.S. broker.
Not cash in U.S. banks.
Partnerships uncertain. If ETB or multi-member, then U.S. situs per IRS.
$60,000 lifetime exclusion.
$143,000 2013 spousal annual exclusion.
QDOT estate exclusion.
6.10 Non-Tax Considerations.
Creditor issues.
Contrast with home country, e.g., Pflichtteil.
68
Foreign seller must have EIN or ITIN to apply on Form 8288-B.

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January 19, 2013
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Privacy.
Locals.
6.11. Structuring U.S. Investments.
6.11.1. Direct Investment As Individual Or Through Passthrough Or
Disregarded Entity.
(i) Advantages.
Simple. KISS.
One level of tax.
LTCG on sale.
(ii) Disadvantages.
Must file U.S. and possibly state and local returns.
Estate tax.
6.11.2. Invest In U.S. Corporation69
Which Owns The U.S. Real
Property.
(i) Advantages.
Need not file U.S. return.70
No U.S. estate or gift tax if foreign corporation owns U.S. stock.71
No gift tax on gift by foreign individual of stock in U.S. corporation.
If multiple properties, probably use multiple SMLLCs for liability
protection.
(ii) Disadvantages.
Estate tax if individual holds stock in U.S. corporation.
69
Will be a “C”, since NRA can’t own stock in an “S”.
70
ETB requires filing a return; stock ownership does not. Corporation must file Form 5472 if foreign
shareholders own at least 25%.
71
Also no BPT as long as the foreign corporation does not sell the stock of the U.S. corporation.

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Two levels of tax: state and federal corporate level and 30% on
dividends to foreign shareholder.72
Sale of stock in USRPHC subject to FIRPTA tax and 10%
withholding.
No LTCG for “C” corporation that sells assets.
(iii) Planning.
Plan: capitalize with part debt which may be structured as portfolio
interest, which is exempt from withholding. If foreigner owns 10%
or more of the voting stock, portfolio interest rules inapplicable.
So issue less than 10% voting and balance non-voting? Some
treaties eliminate withholding on interest payments.
6.11.3. Foreign Corporation Owns The U.S. Real Property.
(i) Advantages.
Liability protection.
No U.S. income tax or filing requirement for foreign shareholder
on-going or on disposition of stock.
Dividends not subject to U.S. withholding.
Refinancing distributions tax free (but U.S. profits and gains from
property subject to BPT).
Stock not subject to U.S. transfer tax.
(ii) Disadvantages.
Two levels of income tax (regular plus BPT).
Must file U.S. return for ECI and gain on sale of US. real estate.
6.11.4. Foreign Person Invests In REIT.73
72
Reduced to 5% - 15% by treaty. Exceptions from withholding if corporation reasonably estimates it has no
current or accumulated E&P and for liquidating distributions to foreign shareholders.
73
§856.

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January 19, 2013
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(i) Advantages.
Sale of stock in domestically controlled REIT by foreign
shareholder is not subject to FIRPTA, though distributions from
sale of property are.
NRA need not file U.S. return unless gain from stock sale or
distribution from sale of property.
NRA gets LTCG rates.
(ii) Disadvantages.
Subject to U.S. estate tax.
Cost and complexity, e.g., 100 shareholder requirement.

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Crossing Borders: Primer On International Taxation For Individuals - June, 2013