Tax Obligations of US Persons with Income in Poland

June%10,%2013%

Tax$Obliga*ons$of$US$Persons$with$Foreign$Income$!

Tytus&Cytowski,&Esq.&

New&York,&NY&

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Disclaimers$

!  Any&US&federal&tax&advice&contained&in&this&presentaAon&is&not&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&not&consAtute&adverAsing,&a&

solicitaAon,& or& legal& advice& and& should& not& be& construed& as& legal& advice& for& any&

purpose&whatsoever.&

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!  InformaAon&contained&herein& is&not& intended& to&create,&and& receipt& thereof&does&

not&consAtute&formaAon&of,&an&aForneyHclient&relaAonship.&

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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*''''$'''''''

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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.!!

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!  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.!

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!  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.!

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US$ESTATE$&$GIFT$TAX–!excluded!from!gross!income!of!donee,!but!taxed!at!donor!

level.!

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Tax'Obligations'of'US'Person'with'Foreign'Income'='Overview'''''

!  Where'to'find'the'law'regarding'the'outbound'transaction?'!

•  IRS!Code!(“IRC”)!and!Tax!Treaty,!especially!

!

"  Foreign!Tax!Credit!–!IRC!§§!901W908!!

"  Foreign!Controlled!Corpora=on!–!§§!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!financial!assets!and!transac=ons.!!!

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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!fiscally!transparent!en==es!

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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)!$

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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!

•  Office!

•  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$Establishment$=$Business$Profit!(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))!

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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!officer!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!traffic!is!exempt!from!Polish!tax.!$

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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!

benefit!of!any!person!rather!than!in!the!public!interest.!!

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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=fic,! literary,! or! educa=onal! organiza=on! is!exempt! from!Polish!

income!tax!on!the!following!amounts.!!

•  Gi\s!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!benefit!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.!!

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US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'–'Wages$and$Pensions$Paid$by$a$Foreign$Government'

!  Government$$(Art.!19)!

Wages,!salaries,!and!similar!income,!including!pensions,!annui=es,!and!similar!benefits,!paid!

from!public$funds$of$Poland$to$a$ci*zen$of$Poland$(other!than!a!U.S.!ci=zen!or!one!admiked!

to!the!United!States!for!permanent!residence)!for$labor$or$personal$services$performed$as$an$employee$of$the$na*onal$Government$of$Poland$in$the$discharge$of$governmental$func*ons$are$exempt$from$U.S.$income$tax.!&

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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&

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Reporting'of'Foreign'Income'and'Assets'(1)'''

!  FBAR!(TD!F!90322.1)&$•  Report:&direct&or&indirect&financial&interest&or&signatory$authority$over$financial$accounts$of&

over!$10,000.&•  Penalty:&willful&nonHfiling&50%&of& the&value&of& the&account&and/or&$10,000&when&nonHwillful&

nonHfiling.&

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!  Form!8938&&$•  Report:& foreign$ financial$ assets& above& $50,000$ or$ $75,000$ (individual)& and& $100,000& or&

$150,000&(married&couple&filing&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$gi\s$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&%!!!

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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&officers,$directors,$or$shareholders$in$foreign$corpora*ons.&•  Penalty:&$10,000&with&addiAonal&penalty&of&$10,000&per&month,&but&not&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& not&more& then& $50,000&

and10%&on&the&value&of&the&transferred&property,&subject&to&$100,000&cap.&&

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US'Persons'=''Living'Abroad'(Expat)'

!  Exclusion$of$foreign$income$up$to$$95,000$if!!•  bona!fide!resident!or!physical!presence!test!in!foreign!jurisdic=on!!

•  for!the!taxable!year.!(IRC§!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§!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=fied!and!not!in!force.!Not!clear!when!will!be!ra=fied.!

!  Need!to!file!tax!return!by!June$15th!and!FBAR!on!June!30th.!

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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* offset*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* offset*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.''

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Foreign'Controlled'Corporation'(CFC)''

Subpart'F'§§'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,! office,!bookkeeping,!employees!then!taxed!only!if!it!is!brought!back!to!the!US!and!cannot!!

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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&CFC’s&country&of&incorporaAon&

!EXAMPLE:& Sale& of& product& from&US& Parent& to& Irish& Subsidiary.& Packaged& in& Ireland& and& resold&

outside&of&Ireland.&

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!  Foreign$base$company$services$income$•  Fees&for&services&performed&outside&CFC’s&country&of&incorporaAon&for&a&related&person&

!  Foreign$personal$holding$company$income$•  Passive&investment&income&such&as&dividends,&interest,&rents,&royalAes,&and&capital&gains&

!  Foreign$base$company$oilIrelated$income$&

!  Insurance$income$•  Income&from&insuring&risks&outside&the&CFC’s&country&of&incorporaAon&

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CFC'='Subpart'F'Income'

!  Earnings$Invested$in$US$Property$(IRC$§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&

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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!specific!economic!benefit!

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FTC'other'Limitations'

!!  Income$Baskets$Limita*ons$

!  Country$Baskets$Limita*ons$

!  AMT$FTC$$

!  Who$can$claim$

!  Form$1116$$$

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Q&A'

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!  THANK!YOU!!$