Tax Obligations of US Persons with Income in Poland
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Tax Obligations for US Persons with Income in Poland. Presentation delivered at the Consulate General of the Republic of Poland, June 10, 2013.
Tax Obligations of US Persons with Income in Poland
- 2. CYTOWSKI!LLC! Disclaimers$ ! Any&US&federal&tax&advice&contained&in&this&presentaAon&is¬&intended&to&be&used,& and& cannot& be& used,& to& avoid& penalAes& under& the& Internal& Revenue& Code& or& to& promote,&market&or&recommend&any&transacAon&or&maFer&addressed&herein.& ! This&material&is&for&informaAonal&purposes&only&and&do¬&consAtute&adverAsing,&a& solicitaAon,& or& legal& advice& and& should& not& be& construed& as& legal& advice& for& any& purpose&whatsoever.& & ! InformaAon&contained&herein&is¬&intended&to&create,&and&receipt&thereof&does& not&consAtute&formaAon&of,&an&aForneyHclient&relaAonship.& & & &
- 3. CYTOWSKI!LLC! Agenda' 1. Outbound*Transaction* 2. Tax*Obligations*of*US*Person*with*Foreign*Income**Overview* 3. US*Tax*Treaty**Avoidance*of*Double*Taxation* 4. US/Poland*Double*Taxation*Treaty*(1974)*K*Fiscal*Residency*&*Permanent*Establishment** 5. US/Poland*Double*Taxation*Treaty*(1974)**Exempt*Income! 6. How!does!the!IRS!know!about!Foreign!Income?! 7. Reporting*of*Foreign*Income*and*Assets** 8. US*Persons*K**Living*Abroad*(Expat)* 9. US*Persons*with*a*Foreign*Corporation* 10.Foreign*Controlled*Corporation*(CFC)** 11.CFC*K*Subpart*F*Income* 12.Foreign*Tax*Credit*(FTC)**Overview* 13.Q&A* ' ' ' ' $
- 4. CYTOWSKI!LLC! Outbound'Transaction' Outbound$ transac*on$ refers! to! US! ci=zens,! residents,! and! corpora=ons! (US! Persons)!doing!business!and!inves=ng!abroad.! ! For!example:!Doing!business!directly,!branch!or!foreign!subsidiary.!! ! ! John,!US!ci=zen,!rents$property$in!Poland!and!has!bank!account.! ! Mike,!US!ci=zen,!travels!to!Germany!and!sells$his$IT$service!to!German!company.! ! ! Weronika,!US!resident,!receives!royalty!from!movies!in!Poland.!! ! PolCo!Inc.,!has!subsidiary!company!in!Poland!(sp.!z!o.!o.)!and!receives!dividend!in! Poland.! ! ! US$ESTATE$&$GIFT$TAX!excluded!from!gross!income!of!donee,!but!taxed!at!donor! level.! ! ! !
- 5. CYTOWSKI!LLC! Tax'Obligations'of'US'Person'with'Foreign'Income'='Overview''''' ! Where'to'鍖nd'the'law'regarding'the'outbound'transaction?' ! ≒ IRS!Code!(IRC)!and!Tax!Treaty,!especially! ! " Foreign!Tax!Credit!!IRC!則則!901W908!! " Foreign!Controlled!Corpora=on!!則則!IRC!951W960! $ Tax$Obliga*ons$ ! ! In!general!pay!tax!on$worldwide$income$regardless!of!type!of!revenue!or! loca=on!(source).! ! ! Report!all!income!and!certain!foreign!鍖nancial!assets!and!transac=ons.!!! ! ! ! ! $
- 6. CYTOWSKI!LLC! Tax'Obligations'of'US'Person'with'Foreign'Income'='Overview''''' Extraterritorial$reach$of$US$tax$law$ $ ! Poten=al$double$taxa*on$of!US!persons!with!foreign!income.! ! ! Casual$nonIcompliance!with!US!tax!rules!leads!to!serious!penal=es.! Tools$for$minimalizing$double$taxa*on$ ! ! Exclusion ! ! ! !! ! Deduc=on! ! Foreign!Tax!Credit!! ! Tax!Treaty! ! Other:!Sourcing,!forming!鍖scally!transparent!en==es! ! ! $
- 7. CYTOWSKI!LLC! US'Tax'Treaty''Avoidance'of'Double'Taxation' Under$the$Treaty:$$ $ ! US!ci=zens,!are!taxed!at!reduced!rates!by!foreign!countries.! ! ! Exempts!from!US!income!taxes!income!received!by!foreigners!from!within!the! US.! ! Treaty!does!not!reduce!US!tax!of!US!Persons,!reduces!only!foreign!tax.! $ PolandIUSA$Tax$Treaty$(1974)$Withholding$Rates:$ $ ! Dividends!5%!and!15%!(Art.11)! ! ! Interest!0%!(Art.12)! ! ! Royalty!10%!(Art.!13)! $
- 8. CYTOWSKI!LLC! US/Poland'Double'Taxation'Treaty'(1974)''='Fiscal'Residency'&' Permanent'Establishment''' ! Fiscal$Residency$(Art.!4):! ≒ Permanent!home! ≒ Center!of!Vital!Interests! ≒ Habitual!Abode!! ≒ Ci=zenship! ! ! Permanent$Establishment$(Art.6)$ ≒ Branch! ≒ O鍖ce! ≒ Factory! ≒ Workshop! ≒ Mine,!quarry!or!other!place!of!extrac=on!of!natural!resources! ≒ Building! site! or! construc=on! or! assembly! project! which! exists! for! more! then! 18! months! ! ! Permanent$Establishment$=$Business$Pro鍖t!(Art.!8!(1))! ! ! Exclusion:!Storage,!maintenance,!processing/reprocessing,!r&d,!adver=sing,!broker/ agent!or!trade!show!!No!Permanent!Establishment!(Art.!(3)(4)(5)(6))! ! ! !
- 9. CYTOWSKI!LLC! US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'='Services' ! Personal$Service$(Art.$15)$ Income! that! residents! of! the! US! receive! for! performing! personal$ services$ as$ independent$ contractors$or$selfIemployed$individuals$(independent!personal!services)!in!Poland!is!exempt! from!Polish!income!tax!if!they!are!in!the!Poland!for!no!more!than!182$days$during$the$tax$ year.! ! ! Employment!(Art.$16)$ Income!that!residents!of!the!US!receive!for!labor!or!personal!services!performed!as!employees! (dependent!personal!services),!including!services!performed!by!an!o鍖cer!of!a!corpora=on!or! company,!in!Poland!during!the!tax!year!is!exempt!from!Polish!income!tax!if!the!residents!meet! three!requirements.! ≒ !They!are!in!the!Poland!for!no$more$than$182$days!during!the!tax!year.! ≒ Their!income!is!paid!by!or!on!behalf!of!an!employer$who$is$not$a$Polish$resident.! ≒ Their!income!is!not$borne$by$a$permanent$establishment$that$the$employer$has$in$the$ Poland.! ! ! Shipping$&$Transport$Services$(Art.$9)$ ≒ Pay! received! by! employees! who! are! members! of! the! regular! complement! of! a! ship$ or$ aircra!operated!by!a!resident!of!the!US!in!interna=onal!tra鍖c!is!exempt!from!Polish!tax.!$
- 10. CYTOWSKI!LLC! US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income''Academia/ Teachers' Teaching/Research$(Art.$17)$ & An! individual! who! is! a! resident! of! the! US! on! the! date! of! arrival! into! Poland! and! who! is! temporarily!in!the!Poland!at$the$invita*on$of$the$Polish$Government,$a$university,$or$other$ recognized$educa*onal$ins*tu*on$in$Poland$primarily$to$teach$or$engage$in$research,!or! both,!at!a!university!or!other!recognized!educa=onal!ins=tu=on!is!exempt!from!Polish!income! tax!on!income!for!the!teaching!or!research!for!a!maximum!of!2!years!from!the!date!of!arrival! in!Poland!.!! ! This! exemp=on! does! not! apply! to! income! from! research! carried! on! mainly! for! the! private! bene鍖t!of!any!person!rather!than!in!the!public!interest.!! & & & &
- 11. CYTOWSKI!LLC! US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income''Students' ! Student$(Art.$18)$ An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!Poland!and!who!is!temporarily!in!Poland! primarily$ to$ study$ at$ a$ university$ or$ other$ recognized$ educa*onal$ ins*tu*on$ in$ Poland,! obtain! professional! training,! or! study! or! do! research! as! a! recipient! of! a! grant,! allowance,! or! award! from! a! governmental,!religious,!charitable,!scien=鍖c,!literary,!or!educa=onal!organiza=on!is!exempt!from!Polish! income!tax!on!the!following!amounts.!! ≒ Gis!from!abroad!for!maintenance,!educa=on,!study,!research,!or!training.! ≒ The!grant,$allowance,$or$award.! ≒ Any$other$payments$received$from$US,$except$income$from$performing$personal$services.! ≒ Income!from!personal!services!performed!in!the!Poland!of!up!to!$2,000!each!tax!year.! An!individual!is!en=tled!to!the!bene鍖t!of!this!exemp=on!for!a!maximum!of!5!years.!! ! An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!in!Poland!and!who!is!temporarily!in!the! Poland!as!an!employee$of,$or$under$contract$with,$a$resident$of$the$US!is!exempt!from!Polish!income!tax! for!1!year!on!up!to!$5,000!received!for!personal!services!if!the!individual!is!in!Poland!primarily!to:!! ≒ Acquire!technical,!professional,!or!business!experience!from!a!person!other!than!that!resident!of! Poland!or!other!than!a!person!related!to!that!resident,!or!! ≒ Study!at!an!educa=onal!ins=tu=on.! ! An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!in!Poland!and!who!is!temporarily!in!the! Poland!for!not$longer$than$1$year$as$a$par*cipant$in$a$program$sponsored$by$the$Polish$Government$ primarily$to$train,$research,$or$study$is!exempt!from!Polish!income!tax!on!up!to!$10,000!of!income!received! for!personal!services!for!the!training,!research,!or!study.!! & & & &
- 13. CYTOWSKI!LLC! How$does$the$IRS$know$about$foreign$income?$ ! NonWVoluntary!Compliance! ≒ Whistleblowers$ ≒ Overseas$Voluntary$Disclosure$Program$(OVDP)$ ≒ FATCA$Intergovernmental$Agreement$(IGA)$ ≒ Foreign$Account$Tax$Compliance$Act$(FATCA)$ $ FATCA$key$obliga*on$of$Foreign$Financial$Ins*tu*ons$(FFI)$start$in$2014,$unless$ there$is$an$IGA.$ " Due$diligence$of$accounts$for$US$Indicia$ " Request$informa*on$from$clients$and$closing$of$bank$accounts$ " Coopera*on$and$compliance$of$FFI$with$IRS$ " Repor*ng$of$US$persons$to$the$IRS$ " Withholding$of$income$from$US$sources$(FDAP,$etc)$ $ ! Voluntary!Compliance! ≒ Withholding& ≒ ReporAng& $
- 14. CYTOWSKI!LLC! Reporting'of'Foreign'Income'and'Assets'(1)''' ! FBAR!(TD!F!90322.1)& $ ≒ Report:&direct&or&indirect&鍖nancial&interest&or&signatory$authority$over$鍖nancial$accounts$of& over!$10,000.& ≒ Penalty:&willful&nonH鍖ling&50%&of&the&value&of&the&account&and/or&$10,000&when&nonHwillful& nonH鍖ling.& & ! Form!8938&& $ ≒ Report:& foreign$ 鍖nancial$ assets& above& $50,000$ or$ $75,000$ (individual)& and& $100,000& or& $150,000&(married&couple&鍖ling&together).&Also&for&domesAc&corporaAon.& ≒ Penalty:&$10,000&per&return&plus&10,000&per&month,&but&no&more&then&$50,000.& ! ! Form!3520&& & ≒ Report:&transacAons&with&foreign$trusts$and&receipt&of&foreign$gis$of&above&$100,000&from& NRA&individual&or&estate&and/or&$13,258&from&foreign&corporaAons/partnerships& ≒ Penalty:&Gils:&5%&of&the&value&of&the&giW&per&month&up&to&25%&of&the&value&of&the&giW;&Trusts:& the&greater&of&$10,000&or&35%&of&the&gross&reportable&amount& % ! ! ! ! !
- 15. CYTOWSKI!LLC! Reporting'of'Foreign'Income'and'Assets'(2)''' ! ! ! ! ! ! ! Form%926%! & ≒ Report:&transfers$of$property$to$foreign$corpora*ons.& ≒ Penalty:& 10%& of& the& value& of& the& giW& and& up& to& a& maximum& penalty& of& $100,000& if& not& intenAonal.&If&intenAonal&failure&no&limit&on&maximum&penalty.& ! ! Form!5471! ! ≒ Report:!persons&who&are&o鍖cers,$directors,$or$shareholders$in$foreign$corpora*ons.& ≒ Penalty:&$10,000&with&addiAonal&penalty&of&$10,000&per&month,&but¬&more&then&$50,000.& ! ! Form!8865!& & ≒ Report:$interest$in$foreign$partnerships&and&transfer$of$property&to&foreign&partnerships& ≒ Penalty:&$10,000&with&addiAonal&penalty&of&$10,000&per&month,&but¬&more&then&$50,000& and10%&on&the&value&of&the&transferred&property,&subject&to&$100,000&cap.&& %
- 16. CYTOWSKI!LLC! US'Persons'=''Living'Abroad'(Expat)' ! Exclusion$of$foreign$income$up$to$$95,000$if!! ≒ bona!鍖de!resident!or!physical!presence!test!in!foreign!jurisdic=on!! ≒ for!the!taxable!year.!(IRC則!911(d)(1))!! ≒ Important!when!person!arrived!in!foreign!jurisdic=on!to!establish!presence!! ! Foreign$Housing$Expenses$! ≒ 16%!of!the!foreign!earned!income!exclusion!(IRC則!911!(c))! ! ! Special!rules!on!sourcing,!withholding!in!US!double!taxa*on$treaty$ ≒ New! Poland! and! US! tax! Treaty! executed! on! February! 13,! 2013! but! not! ra=鍖ed!and!not!in!force.!Not!clear!when!will!be!ra=鍖ed.! ! Need!to!鍖le!tax!return!by!June$15th!and!FBAR!on!June!30th.! ! $
- 17. CYTOWSKI!LLC! US'Persons'with'a'Foreign'Corporation' ! US*Persons*who*conduct*foreign*activity*through*a*foreign*corporation*generally* pay* no* tax* on* income* from* such* activity* until* the* corporation* repatriates* such* income*by*paying*a*dividend.* ! US* Tax* can* be* deferred* but* not' avoided,* because* dividends* from* foreign* corporations*trigger*US*tax*for*domestic*shareholders.* ! If* foreign* corporations* has* foreign* losses,* those* losses* generally* will* not* o鍖set* currently*and*of*the*income*of*the*US*shareholders.* ! If* US* Corporation* owns* 10%* of* more* of* a* foreign* corporation* US* domestic* corporation* may* be* able* to* use* the* foreign* taxes* to* o鍖set*US* income* tax* when* shareholder*receives*dividend*(indirect'credit).** ! Nonetheless,'US'shareholders'of'foreign'corporations'can'be'taxed'on'income' generated'by'foreign'corporations,'because'of'Subpart'F'of'IRC.'' ! ! !
- 18. CYTOWSKI!LLC! Foreign'Controlled'Corporation'(CFC)'' Subpart'F'則則'951=964'IRC' ! ! Income!generated!by!controlled!foreign!corporations!are!included!in!gross!income!by!US'shareholders! without!regard!to!actual!distributions.!! ! IRS'POSITION:'ALLOW'DEFFERAL'FOR'ACTIVE'FOREIGN'BUSINESS/DENY'DEFERAL!FOR'TAINTED' INCOME.' ! PLAIN'ENGLISH:'US'TAX'ON'INCOME'GENERATE'BY'CFC'if'' ' CONTROL' '+ 'US'SHAREHOLDER' '+ 'SUBPART'F'INCOME'' ! Controlled!! ! US!shareholder!owns!in!aggregate%directly'or'indirectly'50%'of!the!voting!or!value!of!equity!of!the!CFC!for! an!uninterrupted!30!days!or!more!during!the!taxable!year.!US!shareholders!must!include!their!pro!rata! share!of!Subpart!F!income! ! US'shareholder'! ! Any!shareholder!that!has!more!then!10%%of%the%equity%of%!the!CFC.! ! Subpart'F''Income'! ! Immediate! US! tax! if! income! is! tainted! or! lacks' any' economic' connection! to! foreign! jurisdiction! or! investments' in' US' property.! Structuring! by! establishing! substantial' presence' via! service,! o鍖ce,! bookkeeping,!employees!then!taxed!only!if!it!is!brought!back!to!the!US!and!cannot!! ' !
- 19. CYTOWSKI!LLC! CFC'='Subpart'F'Income' ! Foreign$base$company$sales$income$$ ≒ Income&from&the&sale&of&goods& ≒ Goods&are&purchased&from&or&sold&to&a&related&person& ≒ Goods&are&neither&manufactured&nor&sold&for&use&in&CFCs&country&of&incorporaAon& ! EXAMPLE:& Sale& of& product& from& US& Parent& to& Irish& Subsidiary.& Packaged& in& Ireland& and& resold& outside&of&Ireland.& & ! Foreign$base$company$services$income$ ≒ Fees&for&services&performed&outside&CFCs&country&of&incorporaAon&for&a&related&person& ! Foreign$personal$holding$company$income$ ≒ Passive&investment&income&such&as÷nds,&interest,&rents,&royalAes,&and&capital&gains& ! Foreign$base$company$oilIrelated$income$ & ! Insurance$income$ ≒ Income&from&insuring&risks&outside&the&CFCs&country&of&incorporaAon& ! ! !
- 20. CYTOWSKI!LLC! CFC'='Subpart'F'Income' ! Earnings$Invested$in$US$Property$(IRC$則956$)$ $ EXAMPLE:$ ≒ CFC&makes&loan&to&US&shareholders&(includes&guarantees)& ≒ CFC&purchases&stock&issued&by&US&corporaAons& ≒ CFC&purchases&tangible&property&located&in&US& ≒ CFC&purchases&right&to&use&certain&intangible&property&in&US& ≒ Certain&pledges&and&guarantees& $ & ! ! !
- 21. CYTOWSKI!LLC! Foreign'Tax'Credit'(FTC)''Overview' ! US!person!can!credit!or!deduct!foreign!tax! ! ! Cannot!decrease$tax$on$US$source$income! ! ! Direct!or!indirect!credit!(US!S/h!+10%!+!dividend!from!Foreign!sub)! ! ! Carryback!(one!year)!and!carryover!(ten!years)! ! ! Must!be$a$tax$(or!in!lieu!of!tax)! ! Must!be$paid$or!considered!paid! ! Must!be!based!on!net$gain$$realiza*on,$gross$receipts,$net$income$ ! Must!not!be!a!soakWup!tax!or!used!to!provide!a!subsidy! ! No!credit!allowed!for:! W!Interest ! ! ! ! !W!NonWcompulsory!payments! W!Penal=es!!!!!!!!!!!!!!!!!!!!! ! !W!Customs!du=es! W!Property!taxes! ! ! !W!VAT! W!Payment!for!speci鍖c!economic!bene鍖t! !
- 22. CYTOWSKI!LLC! FTC'other'Limitations' ! ! Income$Baskets$Limita*ons$ ! Country$Baskets$Limita*ons$ ! AMT$FTC$$ ! Who$can$claim$ ! Form$1116$ $ $