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Inbound Transactions (continued)

Whether foreign persons are EBT (Effectively Connected with a Trade or Business) is a question

of fact that depends upon the economic activities conducted within the U.S., because this

determination is highly factual, the IRS ordinarily will not issue rulings in this subject.

Branch Profits Tax

The branch profit tax was enacted to equalize the treatment of U.S. branches and subsidiaries

of foreign corporations. For example, profits from a domestic subsidiary of a foreign

corporation would be subject to the regular corporate tax rates, as well as the 30% tax on

dividends paid by the subsidiary to the foreign parent. If, instead the corporation operates a

branch office in the U.S. , its effectively connected income would be subject to tax, but profits

paid to the head office would not be subject to withholding. To achieve equality, there is a

second level tax imposed on the business income derived from the operation of a business in

the U.S. and not reinvested in the U.S. business.

A foreign corporation conducting business in the U.S. may be required to pay a branch profits

tax in addition to paying U.S. corporate income tax (IRC. Sec. 884). The branch profits tax is a

30% tax on a foreign’ s corporation U.S. trade or business after-tax earnings that are neither

reinvested in a U.S. trade or business by the close of the year nor disinvested in a later tax year.

The amount subject to withholding is the dividend equivalent amount.