Non U.S. individuals and foreign owned businesses with U.S. source income face many challenges when it comes to complying with U.S. income tax. Aliens with income from U.S. sources file differently depending on the type of the income, if the are non-residents, residents, working on temporary assignment or permanent or part year residents and whether their income or status is covered by a tax treaty. Also, if a U.S. business is owned by non U.S. persons, special reporting is required. When faced with these situations one needs to ask, do I file Form 1040NR, Form 1040 or a combination of both and which would be the primary return and which the attachment. Other possibilities are if the person is married to a U.S. person and their filing status. If filing as Married Filing Jointly an International Tax Identification number is required and of course in order to be employed in the U.S., a Social Security number is required.
Beside tax cost, incorrect filing can affect their visa renewals of pathways to citizenship as not only is income tax return filing required if receiving U.S. source income, but filing the correct tax return is vital.
The same is true for foreign businesses with U.S. source income, particularly when that income is effectively connected with a business located in the U.S. U.S. taxpayers who own an interest in foreign businesses need also be tax compliant. Now while there are no U.S. income tax consequences for a foreign business selling to U.S. customers by independent sales agents and where title exchanges outside the U.S., Steps need to be taken to determine if that foreign business is deemed to have a permanent establishment in the U.S. Things like exercising control over the U.S. sales agent can be interpreted as having sufficient nexus in the U.S. thus requiring the filing of Form 1120-S which in itself can be an extremely difficult tax return.
A word about FIRPTA. In addition to paying U.S. income tax on income generated from rental income property located in the U.S., a foreign national who makes an investment in or purchases real property that is located in the U.S. is subject to special tax withholding rules under the Foreign Investment in Real Property Tax Act when they dispose of that interest. Pursuant to FIRPTA, any person who acquires an interest in U.S> property from a foreign national (individual or business entity) is required to withhold and remit the tax to IRS at a rate of 15%.
In summary, the rules pertaining to foreign national with U.S. sourced income are far more complex than those applicable to a U.S. person who earns compensation for services performed outside the U.S.
FOREIGN BANK and SECURITY ACCOUNTS AND OTHER FOREIGN FINANCIAL ASSETS. In closing, I would like to make reference to ownership on foreign bank or security accounts and other foreign assets. Although a foreign national who is not deemed a U.S. resident for tax purposes is NOT required to annually file Form 114a, commonly referred to as the FBAR report (the Foreign Bank Account Reporting Act), even if a joint tax return is filed with a U.S. person, those persons ARE responsible for complying with the requirements of the Foreign Account Tax Compliance Act (FATCA) if they are filing a joint return with a U.S. person and the reporting exemption threshold is exceeded. Note, however, that if a U.S. person has joint ownership of a foreign bank account with their NRA spouse (or other person), the details regarding the name and address of the foreign spouse (or other person) are required to be reported.
Andrew Powers of Powers & Company, as a U.S. international tax specialist, has extensive experience helping clients with these very issues mentioned above. If you require assistance, he can be contacted by email at firstname.lastname@example.org.