U.S. Income Taxation of Foreign Corporations (Portfolio 6460)

Tax Management Portfolio No. 6460, U.S. Income 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 §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 §884, which is described in 6480 T.M., The Branch-Related Taxes of Section 884. In addition, all foreign corporations, whether or not engaged in a business in the United States, are subject to gross-basis tax under §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 §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 §881.