Decision Tree 1: Inbound Transactions
Analysis for Foreign Persons or Foreign Corporations
Step 1: Is there a Tax Treaty between the Foreign Person/Corporation?s jurisdiction and the U.S. If so, go to Step 4, if not, go to Step 2.
Step 2: If there is not a Tax Treaty in effect, determine if there is a U.S. Trade or Business. If there is no U.S. Trade/Business, go to Step 6. If there is a U.S. Trade/Business, go to Step 3.
Question 1: Are there Regular, Continuous & Considerable Business Activities in the U.S.? (Consider the presence of employees or a fixed place of business).
Question 2: Is there an Active Business or Mere Ownership?
Question 3: Is there an agent in the U.S.? (Consider exclusivity, risk of loss, approval requirements, extent of agent?s responsibility).
Question 4: Is there a Buy-Sell arrangement with parties in the U.S. or a Consignment arrangement?
Step 3: If there is a U.S. Trade or Business, determine if there is Effectively Connected Income. If there is U.S. source income that is not ECI, go to Step 6. If there is ECI go to Step 8.
Question 1: Is there U.S. source income that would not be considered FDAP? If so, it is likely that this income is ECI.
Question 2: If there is U.S. source income that would be considered FDAP, does it satisfy the Asset-Test or the Material Factor Test?
Question 3: Is there any Foreign source income that is ATTRIBUTABLE to an OFFICE OR FIXED PLACE OF BUSINESS in the U.S. and does that office MATERIALLY PARTICIPATE in the production of income?
– Sub Question A: Is there an Office or Fixed Place of Business? If not, do not include any Foreign Source income as ECI.
– Sub Question B: If there is an Office or Fixed Place of Business, does it provide significant contribution (essential factor) to earning the income? If not, do not include any of that Foreign Source income as ECI.
– Sub Question C: If the income is from the use, consumption or disposition of goods outside the U.S., does a Foreign Office also materially participate? If so, do not include that income as ECI.
Step 4: If there is a Tax Treaty in effect, determine if there is a Permanent Establishment in the U.S. and if there are Business Profits attributable to that Permanent Establishment? If there is U.S. source income and there is no Permanent Establishment, go to Step 7. If there are Business Profits attributable to a Permanent Establishment, go to Step 9.
Question 1: Is there a Fixed Place of Business (other than those that qualify as exceptions: purchasing, storing, displaying & delivering goods, collecting information or other auxiliary or ancillary task).
Question 2: If there is not a direct Fixed Place of Business, is there a Permanent Establishment through a Dependent Agent?
– Sub Question A: Does the agent habitually exercise the authority to make contracts on the principal?s behalf?
Step 5: If there is a Permanent Establishment, determine the Business Profits attributable to the Permanent Establishment (profits derived from the assets or activities of the Permanent Establishment).
Step 6: If there is not a U.S. Trade or Business, or if there is U.S. source income that is not ECI, determine if withholding tax applies to the U.S. source income.
Question 1: Is the income U.S. source Dividend, Interest, Royalty, Rental, Services Income or other FDAP Income that is not ECI? If so, determine if any exceptions apply and apply the withholding tax to the gross amount?
Question 2: Is there is U.S. source Capital Gain that is not ECI and is not from the sale of Real Property? If so, no tax applies.
Step 7: If there is not a Permanent Establishment but there is U.S. source income, determine if a withholding tax applies to the U.S. source income under the Treaty.
Question 1: Is the income U.S. source Dividend, Interest, Royalty, Rental, Services Income or other FDAP Income that is not ECI? If so, determine if these types of income are subject to tax under the Treaty and apply the appropriate withholding tax to the gross amount?
Question 2: Is the income U.S. source Capital Gain that is not ECI and is not from the sale of Real Property? If so, no tax applies.
Step 8: If there is ECI, include it as income on the U.S. tax return and deduct allocated expenses. Apply appropriate tax credits, including foreign tax credits, to reduce the tax liability. Apply the Branch Profits Tax withholding tax to any Effectively-Connected E&P adjusted by Changes in Net Assets.
Step 9: If there are Business Profits attributable to a Permanent Establishment, include it as income on the U.S. tax return and deduct allocated expenses. Apply appropriate tax credits, including foreign tax credits, to reduce the tax liability. Apply the Treaty-Prescribed Branch Profits withholding tax to any Effectively-Connected E&P adjusted by Changes in Net Assets.