Brief Overview of U.S. Tax Filing Requirement

As a law firm whose clientele are mainly foreign business entities and high net worth individuals who are looking to invest or conduct business in the United States, we are often consulted about the tax system and one’s tax obligations in the U.S., which has a complicated tax system different from that of most of the countries in the world. Moreover, the system is continually changing as a result of new legislation, judicial decisions and Internal Revenue Service guidance. Therefore, opinions issued by a professional experienced in cross-border tax advisory and familiar with relevant country’s tax treaties are highly valued and recommended.

The United States has what is known as a “worldwide” system of taxation that generally requires U.S. Citizens, U.S. residents and American businesses to pay federal income tax on income, whether such income is earned in the U.S. or abroad. U.S. persons include U.S. Entities (Corporations, Partnerships, Limited Liability Companies, Trusts and other business entities formed under U.S. laws and subject to the jurisdiction of the U.S.); U.S. Citizens (born in the U.S. or outside the U.S. if at least one parent is a U.S. citizen, or naturalized as a U.S. citizen); and U.S. “Tax Resident” either under lawful permanent resident (“Green Card”) test or Substantial Presence Test, a test based on number of days an individual present in the United States.  According to Substantial Presence Test, one is generally obligated to file U.S. tax returns if he or she is present in the U.S. for no less than 183 days over a weighted three-year period.

For individual clients, prior to relocating to the U.S. it is important for them to consult with both U.S. and Non-U.S. tax counsel about certain pre-immigration planning techniques to reduce their effective tax rate on their worldwide income. U.S. and foreign tax advice also should be obtained before returning to the home country for purposes of considering U.S. and foreign tax planning opportunities and other relevant issues that relate to the moves. Generally speaking, if an individual is not U.S. citizen or green card holder, the individual is not obligated if he or she does not meet the Substantial Presence Test.

For corporate clients that are considering doing business in the U.S., it is critical to obtain the advice of U.S. tax counsel prior to engaging in any U.S. business activities to ensure that the transactions the clients undertake and the entities they form to transact such business are structured in a tax efficient manner.