International investors, classified as U.S. income tax residents, may enter voluntary disclosure agreements. International investors may be classified as U.S. income tax residents for each tax year that:
1. They have a U.S. green card; i.e., Lawful Permanent Resident (“The Green Card Test”);
2. They are in the U.S. as a tax resident under the substantial presence test (“Day Counting Test”); they are in the U.S. for 183 days in any tax year or they are in the U.S. for 122 days per year for a 3-year period (the tax year being tested, for which they are in the U.S. for at least 31 days, and the 2 prior years).
For the “3-year” “substantial presence test”, days are presumed as following each day in the year being tested= 1 day, each day in preceding year= 1/3 day, each day in second preceding year= 1/6 day.
For example, if the international investor is in the U.S. for two days per year for 3 years, they ‘fail’ the “Substantial Presence Test”.
Year #1 – 120 days
Year #2 – 40 days (1/3 of 120)
Year #3 – 20 days (1/6 of 120)
TOTAL – 180 days [less than 183 days]
For international investors there is a closer connection exception to the substantial presence test:
1. They are in the U.S. for less than 183 days in the year being tested;
2. Their tax home is in a foreign country for the entire year; i.e., regular or principal place of abode, or regular place of abode in a real and substantial sense;
3. “Closer Connection” to a foreign country:
– Location of permanent home, family and belongings;
– Whether alien taxed as a resident in such country;
– Membership in social, political, religious organizations;
– Driver’s license, voting, banking activities;
– Where alien conducts business activities;
– Country of residence stated by alien on forms.
Under the Substantial Presence Test, the residence starting date is generally the first day of physical presence in the U.S.
However, up to 10 days may be disregarded if the international investor has a tax home in, and closer connection to, a foreign country. For example, U.S. house hunt February 1-8, move June 15. Residency starting date is June 15. This “10 day” exception is not applicable if more than 10 continuous days in U.S., e.g. house hunt February 1-15, residence starting date = February 1. Similar rules apply as to residence termination date for last year of residence.
International investors may elect U.S. income tax residency for either no 30% “FDAP” tax withholding or to take advantage of U.S. tax losses. Otherwise the investor may be subject to 30% non-resident alien withholding taxes.
The international investor may elect to be a U.S. tax resident under the substantial presence test if he makes a first year election. The requirements for the election are:
1. Not a U.S. tax resident in preceding year;
2. U.S. tax resident under substantial presence test in following tax year;
3. Sufficient presence in election year; i.e. 31 consecutive days, and in the U.S. for 75% of the days in “testing period”, i.e. portion of year beginning on first day of 31-day period and ending December 31.
For example, in 2011 non-resident alien, in 2013 resident alien under substantial presence test, for the first year election, in 2012, 2012 presence: in U.S. 8/1/12-11/30/12 (122 days), not in the U.S. for December 2012. The testing period is 8/1/12-12/31/12. The taxpayer is in the U.S. for 79% of days in testing period (i.e. 122 days out of 153 days for 8/12-12/12).
International investors with possible dual residence (U.S. and home country) may establish their tax residence under treaty tie-breaker rules. If dual residency is possible, conflict is resolved by application of the treaty tie-breaker rules. The following facts are evaluated:
1. Country of permanent home(s);
2. If permanent home in both countries, country with which personal and economic relations are closer (center of vital interests);
3. If no permanent home in either country and center of vital interests cannot be determined, country in which he has habitual abode;
4. Country of which he is a national;
5. Competent authorities (i.e. U.S./home country may settle);
6. If qualify under the treaty tie-breaker rules, the taxpayer is taxed as a non-resident alien.