USA Law and Practice Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
than an individual that is a resident of both contract - ing states is treated as not being a resident of either contracting state for the purposes of claiming treaty benefits under the 2016 Model Treaty, but, under the OECD Model Convention, the competent authorities of the contracting states should endeavour to deter - mine such person’s residence by mutual agreement. Additionally, the 2016 Model Treaty (and most in-force US treaties) includes a limitation on benefits article to tackle treaty abuse, as opposed to the principal purpose test. 1.4 Multilateral Instrument The US is not a signatory to the Multilateral Instru - ment (MLI).
present in the second year prior to the current year). 2.3 Taxation of Resident Individuals The US generally taxes individuals who are US tax res - idents on their worldwide income and such individuals are generally subject to income tax on such income on a net basis (ie, gross income minus certain deduc - tions). The maximum income tax rate for individuals (including individuals invested in pass-through enti - ties) that are US tax residents is 37%. Furthermore, certain US states and local governments levy income taxes on the same (or similar) income earned by such individuals. The rate of such additional taxes (if any) varies by state and the applicable local governments. Additionally, some US states and local governments may also levy an entity-level tax on a business entity notwithstanding its classification as a pass-through entity for US federal tax purposes. Capital Gains Gains from the disposition of capital assets held for more than one year (ie, long-term capital gains) are subject to preferential capital gains tax rates (gener - ally 15% to 20% depending on income thresholds) and losses from the disposition of capital assets may offset capital gains and, if exceeding the amount of such gains, ordinary income up to USD3,000 per year. Any unused capital losses can generally be carried forward indefinitely. Gains from the sale of certain cap - ital assets may also be subject to a 3.8% net invest - ment income tax for residents whose annual income exceeds certain thresholds (generally USD200,000– 250,000). Dividends Distributions by a corporation to individual sharehold - ers are generally taxed as “dividends”, to the extent that they are paid out of the corporation’s current or accumulated earnings and profits (“E&P”). Dividends received from domestic and certain qualifying foreign corporations received by individual shareholders (referred to as “qualified dividends”) may be taxed at a preferential tax rate (generally equivalent to long- term capital gains rates) or, if not qualified dividends, then at regular individual tax rates. If the corporation has no E&P (or if the distribution exceeds the corpora - tion’s E&P), the individual shareholder will be allowed
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation The US does not have a territorial tax regime and gen - erally taxes its tax residents on their global income. However, for tax years beginning on or after 1 January 2018, the US has shifted its international taxation to a “hybrid” system that exempts some foreign-source income (eg, foreign-source dividends received by certain US corporations), but that currently taxes, at reduced rates, a much broader scope of previously deferred foreign profits while curtailing certain types of base erosion payments (through anti-hybrid rules, limitation on interest deductibility, rules that re-char - acterise certain debt as equity, and a specific base erosion minimum tax for certain deductible payments to foreign affiliates). 2.2 Tax Residence of Individuals The US treats both its citizens and resident alien indi - viduals as tax residents of the USA. Resident alien individuals are generally: • lawful permanent residents (ie, US green card hold - ers) as long as they hold that status; and • individuals that are present in the USA for 31 days in the current year and 183 days during the cur - rent year and the two preceding years (taking into account a third of the days present in the first year prior to the current year and a sixth of the days
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