Planning strategies for U.S. foreign nationals.

• Author: Dougherty, Clarissa M.
• Position: Tax planning

When a company transfers a foreign national to the U.S., a number of tax traps threaten to snare the unwary expatriate. However, many of these unfavorable situations can be avoided, and potential tax liabilities reduced, with appropriate tax planning of U.S. assignments.

Compensation

Individuals who transfer from a country with a lower tax rate than the U.S. should consider accelerating the payment of compensation that accrues prior to their residency start date. Conversely, individuals coming from a high-tax country may want to defer income until after the residency start date if deferral would reduce or eliminate foreign tax on compensation.

Sale of Assets

Depending on foreign tax law and the respective tax rates, it may be advantageous to sell investments (such as stock) and then acquire similar assets prior to the commencement of U.S. residency. This technique creates a tax-free step-up in basis in the new stock, although foreign tax issues should be considered. If the new stock is sold after U.S. residency begins, the step-up in basis for U.S. tax purposes enables the taxpayer to avoid U.S. tax on the earlier appreciation. Alternatively, the sale of assets should be deferred until after the residency end date to avoid U.S. taxation.

Short-Term Visits to the U.S.

Most income tax treaties between the U.S. and other countries allow full exemption from U.S. income tax provided certain conditions are met. Often, an internal charge-back of the compensation to a U.S. subsidiary will deprive the individual of a treaty exemption. If structured properly, an overall management fee (which may be required to include a profit element this is not directly tied to the individual's compensation) could be charged by the foreign parent to the U.S. subsidiary for the employee's services, while preserving the individual's treaty exemption. The management fee needs also to be properly structured to mitigate or avoid any value-added tax in the foreign country.

An individual assigned to the U.S. for a period expected to last 12 months or less in a single location will typically be considered temporarily away from home and, therefore, eligible for tax-free treatment of certain living-expense reimbursements (such as meals and lodging) provided under an accountable expense reimbursement plan. The payment of per diems, rather than actual reimbursement of costs, can achieve similar results for tax purposes and reduce administration for the employer.

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