USA Law and Practice Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
is not generally treated as having a permanent estab - lishment if its activities in the US are limited to certain activities that are generally preparatory or auxiliary in nature. A foreign person may have a US permanent establishment in respect of activities undertaken on its behalf by a dependent agent who has and habitually exercises an authority in the US to conclude binding contracts. A foreign person does not have a perma - nent establishment in the US merely because it car - ries on business in the US through a broker, general commission agent, or any other independent agent, provided that such person is acting in the ordinary course of their business as an independent agent. 3. Taxation of Cross-Border Income 3.1 Income From Immovable Property See 2.4 Taxation of Non-Resident Individuals . Non- US tax residents, whether individuals or entities, are subject to tax under FIRPTA (ie, on a net basis on their gain) on the disposition of a USRPI (generally, most types of immovable property in the US). As described above, this FIRPTA taxation is enforced by a withhold - ing regime that generally requires buyers to withhold 15% of the fair market value of the USRPI. 3.2 Business Profits US federal income tax is imposed on “taxable income”, which is calculated as “gross income” reduced by deductions allowed under the Code. The US employs a global definition of income based on the accretion concept, ie, gross income is defined as “income from whatever source derived”. Thus, any accession to wealth (other than mere appreciation of asset value) constitutes gross income unless the Code expressly excludes it. Cash and Accrual Methods of Accounting Every taxpayer must calculate its taxable income on an annual basis, called a “tax year”. The calendar year is the most common tax year, but other tax years can be selected (ie, fiscal year) in certain circumstances. Taxpayers must use a consistent tax accounting method, which is a set of rules for determining when to report income and expenses. These accounting methods are generally:
• the cash method (usually used by individuals and small businesses); and • the accrual method. Under the cash method, a taxpayer reports income in the tax year such income is actually received and deducts expenses in the tax year such expense is actually paid. Under the accrual method, the taxpayer reports income in the tax year it is earned (regardless of when payment is received) and deducts expenses incurred in the tax year (regardless of when payment is made). Classification of an Entity for Tax Purposes The classification of an entity under the “check-the- box regulations” is also essential in the taxation of business profits because such classification governs whether and how such entity is taxed for US federal income tax purposes. US and foreign business enti - ties may be classified as corporations, partnerships or entities disregarded as separate from their owners. A business entity with two or more owners is classified either as a corporation or a partnership, and a busi - ness entity with only one owner is either classified as a corporation or is disregarded as an entity separate from its owner. Per se corporations An entity is classified as a “per se corporation” if it is (i) organised under a US federal statute or a US state statute that describes the entity as incorporated or as a corporation, body corporate or body politic; or (ii) a foreign entity in a form enumerated in the regula - tions or if it falls within certain other categories. If an entity does not meet any of these requirements, it is an “eligible entity” with respect to which, its classifi - cation is elective. Default classification rules deter - mine initial classification, which can be changed by filing the appropriate forms with the IRS. By default, a “domestic eligible entity” is a partnership if it has two or more owners or is disregarded as an entity separate from its owner if it has a single owner; and a “foreign eligible entity” is a partnership if it has two or more owners and at least one has unlimited liability, an association (which is a per se corporation) if all owners have limited liability, or is disregarded as an entity separate from its owner if it has a single owner with limited liability.
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