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Cross Border Corporate and Individual Tax Planning

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Peter and Harriet were invited to speak at an event hosted by Dentons law firm for Belgium investors interested in expanding their business on U.S. soil.

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Cross Border Corporate and Individual Tax Planning

  1. 1. Cross Border CorporateCross Border Corporate and Individual Tax Planningand Individual Tax Planning Rowbotham & c o m p a n y l l p October 30, 2014October 30, 2014 Peter Trieu, J.D., LLMPeter Trieu, J.D., LLM Rowbotham and CompanyRowbotham and Company ptrieu@rowbotham.comptrieu@rowbotham.com 415-433-1177415-433-1177
  2. 2. Rowbotham & c o m p a n y l l p Doing Business in the U.S.Doing Business in the U.S.  Physical presence in the U.S.Physical presence in the U.S.  Directly or Through Partnership / LLCDirectly or Through Partnership / LLC  SimpleSimple  Potentially no tax if treaty applicablePotentially no tax if treaty applicable  May require filing U.S. tax returnMay require filing U.S. tax return  Exposure to Branch Profits taxExposure to Branch Profits tax  Exposure to State income taxExposure to State income tax  Using a U.S. corporationUsing a U.S. corporation  No Branch Profits taxNo Branch Profits tax  No State income taxNo State income tax 22
  3. 3. 33 Foreign Branch Employees and U.S. Activities • Federal Tax Rates • State Tax Rates • Potential Branch Profits Tax (1) Business Activities Taxed in U.S (2) Branch Profits Tax (3) Complicated Allocations of Income and Expense • §864 – Activities that Create U.S. Tax Nexus • Income Tax Treaty – Article 4 • Residency • Permanent Establishment Foreign Corporation
  4. 4. 44 1. Foreign Parent Objective: Avoid “PE” status 2. EXAMPLE: excerpt from U.S.-Belgium Income Tax Treaty Article 5 – Permanent Establishment The term “permanent establishment” includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f ) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; Foreign Corporation – Permanent Establishment
  5. 5. 55 Limited Liability Company Foreign Corporation U.S. Activities • Federal Tax Rates • State Tax Rates • Potential Branch Profits Tax (1) Business Activities Taxed in U.S (2) Branch Profits Tax (3) Complicated Allocations of Income and Expense • §864 – Activities that Create U.S. Tax Nexus • Income Tax Treaty – Article 4 • Residency • Permanent Establishment LLC
  6. 6. 66 Partnership U.S. Activities (1) Foreign Owner Considerations (2) Impact of Partnership (3) Withholding Taxes at Source: §1446 • Presence in U.S. – §864 • Tax Treaty Considerations – Same as Before (Permanent Establishment) • Does It Create U.S. Permanent Establishment? Partnership Foreign or U.S. OwnersForeign Owner
  7. 7. 77 Hybrid Structure Foreign Owner LLC or Foreign Company (1) Basis Step-Up (2) Foreign Owner Considerations (3) Impact of Partnership (4) Withholding Taxes at Source: §1446 • Presence in U.S. – §864 • Tax Treaty Considerations – Same as Before (Permanent Establishment) • Does It Create U.S. Permanent Establishment?
  8. 8. California Unitary Tax Operating in CA (1) Doing Business through Foreign Company U.S. Operation (2) Doing Business through U.S. Inc. Outcome Calculate Worldwide Income Calculate CA Tax Pro-Rate CA / Worldwide Factors • Sales • Wages • Property [Water Edge Election] Calculate U.S. Taxable Income Calculate U.S. Tax Pro-Rate CA / U.S. Inc. Factors • Sales • Wages • Property Foreign Owner U.S. Inc. Foreign Owner Branch
  9. 9. Cost to Incorporate Legal or Cost Accounting (1) Form Delaware Corporation - Online process $500 $1-2,000 - Can do same day (2) Obtain a federal tax identification number - Form SS-4 -0- $150 - www.irs.gov (3) With (1) and (2), open a U.S. bank account. Know your customer [KYC] -0- -0- rules can take several weeks. (4) California – apply to Secretary of State to Qualify Delaware company to conduct business in California - Takes two to four weeks $1,000 $3,000 - Accelerated approval $2,000 Doing business in California Delaware Inc.
  10. 10. For regular income tax purposes, a system of graduated marginal tax rates is applied to all taxable income, including capital gains Federal Corporate Tax Rates Taxable Income ($) Tax Rate 0 to 50,000 15% 50,000 to 75,000 $7,500 + 25% Of the amount over 50,000 75,000 to 100,000 $13,750 + 34% Of the amount over 75,000 100,000 to 335,000 $22,250 + 39% Of the amount over 100,000 335,000 to 10,000,000 $113,900 + 34% Of the amount over 335,000 10,000,000 to 15,000,000 $3,400,000 + 35% Of the amount over 10,000,000 15,000,000 to 18,333,333 $5,150,000 + 38% Of the amount over 15,000,000 18,333,333 and up 35% This rate structure produces a flat 34% tax rate on incomes from $335,000 to $10,000,000, gradually increasing to a flat rate of 35% on incomes above $18,333,333.
  11. 11. Corporate Taxation - Federal Tax Second Level Taxation Dividends - 30% Lower Treaty Rate Net Profits First Level Taxation Federal Tax Rates - 35% Foreign Owner U.S. Inc.
  12. 12. Rowbotham & c o m p a n y l l p Income SourcingIncome Sourcing  Federal- tFederal- the source  of income  rules are largely codified by income category  Interest income- generally is an individual debtor's place of residence and a corporate debtor's place of incorporation. IRC §§861(a)(1) and862(a)(1).  Dividend income- generally is the place of the paying corporation's incorporation. IRC §§861(a)(2)(A)  and 862(a)(2).  Income from personal services- generally is the place where services are performed. IRC §§861(a)(3)  and 862(a)(3).  Rentals and royalties- sourced either to the geographic location of the property or the place of permitted use of the property. IRC §§861(a)(4) and 862(a)(4).  Income from a disposition of a U.S. real property interest- determined according to the situs of the property. IRC §§861(a)(5) and 862(a)(5)  Income from the sale of inventory is sourced to the place of sale. IRC §§861(a)(6) and 862(a)(6).  Income from the sale of other property- generally sourced by the residence of the seller. IRC §865(a)  California-California- Income from sources within CA includes income from real or tangible personal property located in CA;  income from a business, trade, or profession carried on within CA; compensation for personal services performed within CA; and income from stocks, bonds, notes, bank deposits and other intangible personal property having a business or taxable situs in CA; and rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property having a taxable or business situs in CA. CCR 17951-2  Intangible personal property has a business situs in CA if it is employed as capital in this State or the possession and control of the property has been localized in connection with a business, trade or profession in CA. 1212
  13. 13. 13 U.S. Taxation of Residents
  14. 14. 1414 • The Substantial presence test met if taxpayer is: - Present in the U.S. at least 31 days in the current year; and - Present in the U.S. for 183 days according to a formula: Year days multiplier 2014 120 1 120 2013 120 1/3 40 2012 120 1/6 20 180 • Exceptions: - Taxpayer has a closer connection to a foreign country - Treaty tie breaker test Substantial Presence • Treaty does not exempt person from foreign reporting requirements
  15. 15. Estate & Gift Taxation: Domicile • Residents are Subject to Tax on Worldwide Assets • Nonresidents for Gift/Estate Tax Purposes are Subject to Tax on Only U.S. Assets • For Gift/Estate Tax Purposes, Residents are Defined by One’s Domicile - Gift Tax – §2501, Reg. §25.2501-1 - Estate Tax – §2101, Reg. §20.0-1 - Facts and Circumstances - Permanent Home - Intent Examples: • U.S. Citizen Living Abroad – Domicile = U.S., Subject on Worldwide Assets • Green Card Holders Living in U.S. – Domicile = U.S. • Green Card Holder Living Outside U.S. – Domicile = Uncertain. Possibly Non-Domiciled in U.S. • Visa Holders Living in U.S. – Domicile = Uncertain. Likely Non-Domiciled in U.S.
  16. 16. Rowbotham & c o m p a n y l l p 1616 Reporting RequirementsReporting Requirements  Non-U.S. Trust & GiftNon-U.S. Trust & Gift 35203520 35% of distribution35% of distribution  Non-U.S. TrustNon-U.S. Trust 3520A 5% per month up to 25%3520A 5% per month up to 25%  Non-U.S. PartnershipNon-U.S. Partnership 88658865 $10,000/ year per entity$10,000/ year per entity  Non-U.S. Disregarded EntityNon-U.S. Disregarded Entity 8858 $10,000/ year per entity8858 $10,000/ year per entity  Non-U.S. CorporationNon-U.S. Corporation 54715471 $10,000 / year per company$10,000 / year per company  Transf. to a non-U.S. corp.Transf. to a non-U.S. corp. 926926 25% of value up to $10,00025% of value up to $10,000  Non-U.S. Financial AssetNon-U.S. Financial Asset 89388938 $10,000/year up to $50,000$10,000/year up to $50,000  Non-U.S. Bank AccountNon-U.S. Bank Account FinCEN 114 50% of highest balance/yearFinCEN 114 50% of highest balance/year Potential PenaltiesPotential Penalties IRS FormIRS Form for Non-compliancefor Non-compliance
  17. 17. Rowbotham & c o m p a n y l l p 1717 Peter Trieu, Tax PartnerPeter Trieu, Tax Partner Peter Trieu is the Tax Partner at Rowbotham & Company.  His practice focuses on advising clients regarding domestic and international tax planning and compliance.  He also assists clients with their estate plans. His clients include entrepreneurs, multi- national families, high net-worth individuals and businesses.  Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney. Mr. Trieu has been a guest lecturer at the Haas Business School at the University of California, Berkeley, and has been a speaker for several U.S. and international tax planning organizations.  He has also written numerous articles including some published in CalCPA magazine.  Mr. Trieu  is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in Business-Economics with a minor in Accounting from University of California, Los Angeles.  He graduated cum laude from University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University.
  18. 18. Rowbotham & c o m p a n y l l p 1818 Harriet Leung, Audit PartnerHarriet Leung, Audit Partner Harriet Leung, Partner of Advisory Services at Rowbotham & Company, heads the firm’s substantial Asia practice of high net worth individuals and works with many technology startup companies in multi-media gaming and social media. Ms. Leung also advisesMs. Leung also advises companies in the financial due diligences, audit and business advisory areas. She hascompanies in the financial due diligences, audit and business advisory areas. She has substantial experience servicing companies that were seeking listings on both foreignsubstantial experience servicing companies that were seeking listings on both foreign and U.S. stock exchange markets. She has successfully represented and worked withand U.S. stock exchange markets. She has successfully represented and worked with companies in Asia completing reverse mergers into the U.S. public companies.companies in Asia completing reverse mergers into the U.S. public companies. Ms. Leung has spoken at various tax and financial conferences in China, Hong Kong, Thailand and the U.S. Ms. Leung serves on the Board of Directors for the Hong Kong Association of Northern California where she recently organized and chaired a highly successful event on tax and immigration planning  Ms. Leung is originally from Hong Kong, and moved to the U.S. in 1991. She has a Bachelor’s degree in Accounting and an MBA in Finance with honors from Golden Gate University, and is a Certified Public Accountant in California.
  19. 19. Rowbotham & c o m p a n y l l p 1919 ROWBOTHAM & C o m p a n yAccountants and International Tax Consultants www.rowbotham.com

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