Foreign nonprofit organizations have become more active in the U.S. in carrying out their charitable mandates. Such activities include performances in the U.S. by foreign artistic companies and the use by U.S. charities of technology and know-how developed by foreign charities. Fees earned by foreign charities could be subject to U.S. income or withholding taxes, but those taxes can be reduced or eliminated if specific procedures are followed. Much will depend on the status of organization as a “public charity” or a “private foundation,” terms that make reference to the organization’s funding sources. Nina Krauthamer and Galia Antebi explain the U.S. rules that are applicable.

I. INTRODUCTION

The U.S. tax laws affecting foreign businesses with activity in the U.S. contain some of the more complex provisions of the Internal Revenue Code. Examples include:

Effectively connected income,
Allocation of expenses to that income,
Income tax treaties,
Arm’s length transfer pricing rules,
Permanent establishments under income tax treaties,
Limitation on benefits provisions in income tax treaties that are designed to prevent “treaty shopping,”
State tax apportionment,
F.I.R.P.T.A. withholding tax for transactions categorized as real property transfers,
Fixed and determinable annual and periodical income, and
Interest on items of portfolio debt.

One can imagine that it is no easy task to identify income that is subject to tax, to identify the tax regime applicable to the income, and to quantify gross income, net income, and income subject to withholding tax. Nonetheless, the I.R.S. has identified withholding tax obligations of U.S. payers as a Tier I audit issue.