Foreign Income Portfolios: U.S. Income Taxation of Foreign Corporations

Tax Management Portfolio No. 908, U.S. Taxation of Foreign Corporations, describes the Internal Revenue Code provisions applicable to foreign corporations. The United States asserts jurisdiction to tax foreign corporations only if they are engaged in business in the United States or receive income from sources within the United States. Foreign corporations that are engaged in a trade or business in the United States are subject to net-basis income tax under sec. 882 on any of their income that is "effectively connected" with that business. Such corporations also may be subject to the branch taxation regime of sec. 884, which is described in 909 T.M., Branch Profits Tax. In addition, all foreign corporations, whether or not engaged in a business in the United States, are subject to gross-basis tax under sec. 881 on certain types of U.S. source income – primarily investment income, such as interest and dividends – that are not "effectively connected" with a U.S. business.

This Portfolio also addresses the impact of the U.S. income tax treaty network on U.S. taxation of foreign corporations. The provisions of a bilateral U.S. income tax treaty may modify the U.S. tax treatment of foreign corporations entitled to the benefits of the treaty. For example, foreign corporations entitled to treaty benefits are taxable under sec. 882 only on income that is "attributable to" a "permanent establishment" in the United States. Treaty provisions may also reduce (or eliminate) the tax imposed on U.S. source income under sec. 881.

This portfolio may be cited as Katz and Plambeck, 908 T.M., U.S. Taxation of Foreign Corporations.

For a copy of the complete portfolio, please contact Jessica Katz at 202-862-5027 or jlk@capdale.com.