USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes Non-US tax residents are generally taxed in the USA on FDAP income (ie, interest, dividends and royalties), to the extent that such items of income are not effec - tively connected with the conducting of a US trade or business or attributable to a permanent establish - ment. Such FDAP income is subject to a 30% gross basis tax that is enforced by withholding at the source, unless such tax is reduced by exemption or an appli - cable income tax treaty. Notably, the PIE generally exempts, from the other - wise applicable withholding tax previously discussed, interest paid on registered obligations held by non-US persons who own less than 10% of the voting power of the payer. The PIE is subject to various require - ments and exceptions – for example, it is not avail - able to: • banks receiving interest on ordinary-course loans; and • certain CFCs. Special withholding rules also apply in the cases of: • dispositions of US real property interests; and • partnerships (with foreign partners) having effec - tively connected income. Dispositions of US real property interests are gener - ally subject to the FIRPTA withholding rules, which generally require the transferee to withhold 15% on the total amount realised by the foreign person on such disposition (see 5.3 Capital Gains of Non- Residents ). Partnerships (foreign or domestic) hav - ing income effectively connected with a US trade or business (or income treated as effectively connected) generally must pay a withholding tax on the effec - tively connected taxable income that is allocable to its foreign partners. The tax rate for such withholding varies depending on whether the foreign partner is a corporation or an individual. Currently, the withholding tax rate for effectively connected income allocable to non-corporate foreign partners is 37%, and is 21% for corporate foreign partners.
4.2 Key Treaty Jurisdictions for Inbound Investment The USA currently has 58 income tax treaties in force covering 66 jurisdictions. While most US income tax treaties provide reduced rates for dividends (with reduced rates generally ranging from 10% to 25%) and for interest (with reduced rates generally ranging from 0% to 17.5%), foreign investors generally must satisfy certain ownership, income and other require - ments before such beneficial rates can be obtained. Of note, on 19 December 2023, the US Department of the Treasury announced the entry into force of the tax treaty between the USA and Chile. The USA-Chile treaty is only the second comprehensive bilateral tax treaty that the USA has with a South American coun - try (the other country being Venezuela). In addition, the USA-Hungary income tax treaty was terminated, effective on 8 January 2023. However, in accordance with Article 26 (Termination) of the convention, the treaty ceased to have effect with respect to tax with - held at source on amounts paid or credited on or after 1 January 2024. For other taxes, the treaty ceased to have effect with respect to taxable periods beginning on or after 1 January 2024. Furthermore, because most US income tax treaties include a “limitation on benefits” article as well as other anti-treaty shopping provisions (see 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices ), foreign investors are somewhat limited as to which treaty country can be used to facilitate such invest - ment (ie, as some amount of substance in such juris - diction is generally required). 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices Most US income tax treaties in force include a “limita - tion on benefits” article and, in addition, those trea - ties may contain other anti-treaty shopping provisions. The 2016 US Model Income Tax Convention includes: • the “limitation on benefits” article, which prevents residents of third-country jurisdictions from obtain - ing benefits under a treaty; • a “triangular branch” provision, which limits treaty benefits for income attributable to a third-country permanent establishment if little or no tax is paid in the permanent establishment’s jurisdiction;
589 CHAMBERS.COM
Powered by FlippingBook