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Question 32: I have a foreign parent with three wholly-owned subsidiaries in the U.S. (one foreign and two domestic) and a fairly large number of foreign subsidiaries outside of the U.S. Two of the subsidiaries in the U.S. have their own wholly-owned domestic subsidiaries. I am trying to figure out whether I need to include all of the foreign subsidiaries in the controlled group or just those somehow connected to the U.S. Further, how do I do non-discrimination testing? Do I need to include all employees of any corporation in the world that is owned by the parent? If I do, this will be a nightmare!
Answer: Nightmare in the IRC!
I mentioned this as a side note at a recent conference. From the questions I got both on tape and afterwards you would have thought I was announcing something folks had never heard before. So, let me take a bit of time to discuss this provision.
A nonresident alien must meet both of the following tests:
Point (i) is significant. If you have a green card, it is my understanding that point (i) is satisfied and hence you are a resident.
Being a nonresident alien isn't enough, however, to permit exclusion. The worker must also have no U.S.-source earned income from the employer. Alternatively, the worker must come under the following rule from Treas. Regs. section 1.410(b)-6(c)(1):
Special treaty rule. In addition, an employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B)) and who does receive earned income (within the meaning of section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of section 861(a)(3)) is permitted to be excluded, if all of the employee's earned income from the employer from sources within the United States is exempt from United States income tax under an applicable income tax convention. This paragraph (c)(2) applies only if all employees described in the preceding sentence are so excluded.Of course, that's going to vary on a treaty by treaty basis. What's more important is the more general case of excluding nonresident aliens with no U.S.-source income from the employer. What is U.S.-source income? 861(a)(3) tells us that US Source income includes:
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if?So, let's return to the situation at hand. Suppose a manager on the payroll of the parent comes to the states to oversee the sub. I had a lot of folks ask if it made a difference whether the parent or the sub paid manager. First, I would note that if he has a green card, it doesn't matter because he isn't an alien. But, I would also that that 861 doesn't care whether the payments are in yen or dollars, or where the check is written. It matters where the work is done. If the work is done in the U.S., it is U.S.-source income unless:
Of course, any U.S. citizens working for the parent cannot be excluded under this provision, regardless of where they are working.
The exclusion is not automatic. Your plan document needs to contain the language.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
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