Passive Income
interest -passive investment income or biz profit for a foreign financial institution who conduct biz in US?
interest from us source received by a foreign persons are usually treated as passive investment income thus taxed @ a flat 30% but how about the foreign persons who are doing financial business in usa? The rule applys? or should i treat it as business profits? if so what is the deduction?
Here are the additional facts one would need to know before answering this question:
First, is the foreign person an individual human being, a corporation, or some other business entity such as a GmbH? The most important thing to know here is whether the foreign person would be treated as a corporation for U.S. tax purposes.
Second, regarding the U.S. financial business: One would need to know the nature and extent of this business. More specifically, is the interest income the ONLY financial business in the U.S., or are there other U.S. connections?
Third, we would need to know something about the nature of the interest received–specifically, whether the interest is paid with respect to a debt obligation that is in “registered form,” which means generally that the instrument meets certain procedural requirements that will permit its owners to be traceable by U.S. taxing authorities.
Fourth, we would need to know of any Treaty between the person’s country of residence and the United States, and what that Treaty provides regarding interest payments and the definitions of “business profits” and “permanent establishment.”
Your question seems to indicate that the interest recipient is a “foreign financial institution” doing U.S. business (not an individual, in which case the answer above is irrelevant). If you’re talking about a foreign bank that would be treated as a corporation for U.S. tax purposes, then the question becomes whether the bank has a U.S. trade or business or U.S. permanent establishment. If so, the bank would be subject to net basis taxation–i.e., no withholding tax, and access to U.S. deductions. Whether the bank has a U.S. trade or business/permanent establishment would depend on a huge number of factors, all of which boil down to the extent of the bank’s business nexus with the United States.
If the institution is NOT a bank (and just what a “bank” is has been never resolved under this particular law), then it is likely that all of its interest would be exempt from tax altogether under section 881(c) of the Internal Revenue Code.
The are innumerable other complications here. It also matters whether the interest is received from a business entity owned 10% or more the interest recipient.
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