As a general rule, foreign companies and individuals are only subject to U.S. federal income tax on income which is either (i) effectively connected with a U.S. trade or business ("ECI"), or (ii) certain passive income, such as interest, dividends, rents, royalties which is commonly referred to a FDAP income, from U.S. sources, that is not ECI.
Foreign persons with ECI are subject to U.S. federal income tax on a net basis (i.e., income, less deductions) at regular graduated rates. Foreign persons with U.S. source FDAP income that is not ECI are subject to a gross 30% tax on such income unless some exception applies (e.g., the application of a tax treaty). This 30% gross tax is collected by withholding (but under certain circumstances a U.S. tax return must also be submitted by the foreign corporation subject to such withholding).
Special rules known as FIRPTA apply when the investment in the U.S. is in real property or entities, which own real property interests.
We can assist you in selecting the ideal entity structure for U.S. investments (e.g., branch, U.S. corporation, or LLC or partnership) and provide guidance on the various issues related to the taxation of income under the ECI, FDAP and FIRPTA regimes.
Certain unique issues can arise in the inbound context such as "earnings stripping rules" that may limit the ability of U.S. companies with foreign owners to deduct interest expenses as well as the imposition of "branch taxes." We can assist you with the computations due annually to complete your U.S. tax filings in accordance with these rules.