What is so appealing about the benefits of the United States as an offshore financial haven to foreign clientele?
Tax Professional Answers
These exempt incomes consist, among others, of interest on United States bank deposits and United States sourced, non-real estate capital gains income. Therefore interest income and capital gains income on such capital assets as securities, if not deemed effectively connected to a United States trade of business, are exempt from income taxation for a nonresident alien.
An irrevocable foreign trust not deemed a grantor trust is taxed similarly to a nonresident alien. A nonresident alien beneficiary of a foreign trust that is deemed a nonresident alien is not subject to United States income tax of distributable net trust income (DNI) that is foreign sourced or exempt.
The exemption income provisions accorded a foreign trust by virtue of a nonresident alien status also exempts income for a foreign trust beneficiary receiving distributable net income (DNI) consisting of such exempt categories.
Contrary to the taxation concept that citizens and residents of the United States are subject to United States taxation with respect to their worldwide income, inbound taxation involves the concept of source of income. In the most general of terms, the taxation liability of nonresidents is premised on jurisdictional notions. Income of nonresident aliens determined to be from sources within the United States is subject to United States taxation, less and except the afore stated exempt income.
Two basic principles establish jurisdictional tax liability with regard to income deemed sourced from within the United States. Nonresident aliens become subject to taxing jurisdiction by having a presence in the United States through the active conduct of a trade or business or by United States statutory income source authority. Secondly, taxation requires in addition to being engaged in a trade or business, an income determined as effectively connected with the conduct of a trade or business.
The conduct of effectively connected is applicable to nonresident alien individuals engaged in a trade or business in the United States. When the characterization of effectively connected and engaged in trade or business are present, taxation is to be sourced in the United States. The applicable individual or entity rates determine the taxable amount.
The ability to guide a foreign based client to these extra-ordinary exemptions provided to nonresident aliens and foreign trusts that qualify as nonresident aliens affords superb financial planning opportunities. The economic policy of providing exemption of income tax to qualified nonresident aliens is designed to attract important capital inflows to the United States financial system. The deep financial markets of the United States, along with developed sovereign regulation, offers the foreign client extremely desirable opportunities.
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