Overview of U.S. Taxation of International Investment and Business Transactions
U.S. taxation of international corporate business transactions can be broken into two categories:
1. Taxation of income earned by domestic corporations, and
2. Taxation of income earned by foreign corporations.
Domestic corporations are taxed in the United States on their worldwide income. Double taxation is eliminated by allowing a foreign tax credit for taxes paid to foreign jurisdictions on income earned outside of the United States. Foreign corporations are taxed in the United States to the extent that they earn income from U.S. sources or from U.S. business activities. Therefore, the first step in understanding the U.S. tax consequence of business transactions is to determine if the company earning the income is a domestic corporation or a foreign corporation.
In order to determine the classification of a corporation as domestic or foreign, U.S. tax laws look to the jurisdiction of incorporation. If the corporation was incorporated under the laws of a U.S. state, it is classified as a domestic corporation. If it was incorporated under the laws of a foreign jurisdiction, it is classified as a foreign corporation. This scheme of determining corporate domicile based on place of incorporation is different than many of our trading partners, which often determine corporate domicile based on where the corporation is managed or controlled. Therefore, it is possible for a corporation to be classified as a resident of more than one country. U.S. income tax treaties generally contain tie-breaker provisions that will cause both countries to determine domicile based on place of incorporation when it becomes relevant to determine the tax consequences of transactions between the two countries.
1. Taxation of income earned by domestic corporations, and
2. Taxation of income earned by foreign corporations.
Domestic corporations are taxed in the United States on their worldwide income. Double taxation is eliminated by allowing a foreign tax credit for taxes paid to foreign jurisdictions on income earned outside of the United States. Foreign corporations are taxed in the United States to the extent that they earn income from U.S. sources or from U.S. business activities. Therefore, the first step in understanding the U.S. tax consequence of business transactions is to determine if the company earning the income is a domestic corporation or a foreign corporation.
In order to determine the classification of a corporation as domestic or foreign, U.S. tax laws look to the jurisdiction of incorporation. If the corporation was incorporated under the laws of a U.S. state, it is classified as a domestic corporation. If it was incorporated under the laws of a foreign jurisdiction, it is classified as a foreign corporation. This scheme of determining corporate domicile based on place of incorporation is different than many of our trading partners, which often determine corporate domicile based on where the corporation is managed or controlled. Therefore, it is possible for a corporation to be classified as a resident of more than one country. U.S. income tax treaties generally contain tie-breaker provisions that will cause both countries to determine domicile based on place of incorporation when it becomes relevant to determine the tax consequences of transactions between the two countries.