Tax Obligations for US Persons with Income in Poland. Presentation delivered at the Consulate General of the Republic of Poland, June 10, 2013.

1. June%10,%2013%
Tax$Obliga*ons$of$US$Persons$with$Foreign$Income$
!
Tytus&Cytowski,&Esq.&
New&York,&NY&

2. CYTOWSKI!LLC!
Disclaimers$
! Any&US&federal&tax&advice&contained&in&this&presentaAon&is&not&intended&to&be&used,&
and& cannot& be& used,& to& avoid& penalAes& under& the& Internal& Revenue& Code& or& to&
promote,&market&or&recommend&any&transacAon&or&maFer&addressed&herein.&
! This&material&is&for&informaAonal&purposes&only&and&do&not&consAtute&adverAsing,&a&
solicitaAon,& or& legal& advice& and& should& not& be& construed& as& legal& advice& for& any&
purpose&whatsoever.&
&
! InformaAon&contained&herein&is&not&intended&to&create,&and&receipt&thereof&does&
not&consAtute&formaAon&of,&an&aForneyHclient&relaAonship.&
&
&
&

3. CYTOWSKI!LLC!
Agenda'
1. Outbound*Transaction*
2. Tax*Obligations*of*US*Person*with*Foreign*Income*–*Overview*
3. US*Tax*Treaty*–*Avoidance*of*Double*Taxation*
4. US/Poland*Double*Taxation*Treaty*(1974)*K*Fiscal*Residency*&*Permanent*Establishment**
5. US/Poland*Double*Taxation*Treaty*(1974)*–*Exempt*Income!
6. How!does!the!IRS!know!about!Foreign!Income?!
7. Reporting*of*Foreign*Income*and*Assets**
8. US*Persons*K**Living*Abroad*(Expat)*
9. US*Persons*with*a*Foreign*Corporation*
10. Foreign*Controlled*Corporation*(CFC)**
11. CFC*K*Subpart*F*Income*
12. Foreign*Tax*Credit*(FTC)*–*Overview*
13. Q&A*
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4. CYTOWSKI!LLC!
Outbound'Transaction'
“Outbound$ transac*on”$ refers! to! US! ci=zens,! residents,! and! corpora=ons! (US!
Persons)!doing!business!and!inves=ng!abroad.!
!
For!example:!Doing!business!directly,!branch!or!foreign!subsidiary.!!
!
! John,!US!ci=zen,!rents$property$in!Poland!and!has!bank!account.!
! Mike,!US!ci=zen,!travels!to!Germany!and!sells$his$IT$service!to!German!company.!
!
! Weronika,!US!resident,!receives!royalty!from!movies!in!Poland.!!
! PolCo!Inc.,!has!subsidiary!company!in!Poland!(sp.!z!o.!o.)!and!receives!dividend!in!
Poland.!
!
!
US$ESTATE$&$GIFT$TAX–!excluded!from!gross!income!of!donee,!but!taxed!at!donor!
level.!
!
!
!

5. CYTOWSKI!LLC!
Tax'Obligations'of'US'Person'with'Foreign'Income'='Overview'''''
! Where'to'find'the'law'regarding'the'outbound'transaction?'
!
• IRS!Code!(“IRC”)!and!Tax!Treaty,!especially!
!
" Foreign!Tax!Credit!–!IRC!§§!901W908!!
" Foreign!Controlled!Corpora=on!–!§§!IRC!951W960!
$
Tax$Obliga*ons$
!
! In!general!pay!tax!on$worldwide$income$regardless!of!type!of!revenue!or!
loca=on!(source).!
!
! Report!all!income!and!certain!foreign!financial!assets!and!transac=ons.!!!
!
!
!
!
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6. CYTOWSKI!LLC!
Tax'Obligations'of'US'Person'with'Foreign'Income'='Overview'''''
Extraterritorial$reach$of$US$tax$law$
$
! Poten=al$double$taxa*on$of!US!persons!with!foreign!income.!
!
! Casual$nonIcompliance!with!US!tax!rules!leads!to!serious!penal=es.!
Tools$for$minimalizing$double$taxa*on$
!
! Exclusion ! ! ! !!
! Deduc=on!
! Foreign!Tax!Credit!!
! Tax!Treaty!
! Other:!Sourcing,!forming!fiscally!transparent!en==es!
!
!
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7. CYTOWSKI!LLC!
US'Tax'Treaty'–'Avoidance'of'Double'Taxation'
Under$the$Treaty:$$
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! US!ci=zens,!are!taxed!at!reduced!rates!by!foreign!countries.!
!
! Exempts!from!US!income!taxes!income!received!by!foreigners!from!within!the!
US.!
! Treaty!does!not!reduce!US!tax!of!US!Persons,!reduces!only!foreign!tax.!
$
PolandIUSA$Tax$Treaty$(1974)$Withholding$Rates:$
$
! Dividends!5%!and!15%!(Art.11)!
!
! Interest!0%!(Art.12)!
!
! Royalty!10%!(Art.!13)!
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8. CYTOWSKI!LLC!
US/Poland'Double'Taxation'Treaty'(1974)''='Fiscal'Residency'&'
Permanent'Establishment'''
! Fiscal$Residency$(Art.!4):!
• Permanent!home!
• Center!of!Vital!Interests!
• Habitual!Abode!!
• Ci=zenship!
!
! Permanent$Establishment$(Art.6)$
• Branch!
• Office!
• Factory!
• Workshop!
• Mine,!quarry!or!other!place!of!extrac=on!of!natural!resources!
• Building! site! or! construc=on! or! assembly! project! which! exists! for! more! then! 18!
months!
!
! Permanent$Establishment$=$Business$Profit!(Art.!8!(1))!
!
! Exclusion:!Storage,!maintenance,!processing/reprocessing,!r&d,!adver=sing,!broker/
agent!or!trade!show!–!No!Permanent!Establishment!(Art.!(3)(4)(5)(6))!
!
!
!

9. CYTOWSKI!LLC!
US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'='Services'
! Personal$Service$(Art.$15)$
Income! that! residents! of! the! US! receive! for! performing! personal$ services$ as$ independent$
contractors$or$selfIemployed$individuals$(independent!personal!services)!in!Poland!is!exempt!
from!Polish!income!tax!if!they!are!in!the!Poland!for!no!more!than!182$days$during$the$tax$
year.!
!
! Employment!(Art.$16)$
Income!that!residents!of!the!US!receive!for!labor!or!personal!services!performed!as!employees!
(dependent!personal!services),!including!services!performed!by!an!officer!of!a!corpora=on!or!
company,!in!Poland!during!the!tax!year!is!exempt!from!Polish!income!tax!if!the!residents!meet!
three!requirements.!
• !They!are!in!the!Poland!for!no$more$than$182$days!during!the!tax!year.!
• Their!income!is!paid!by!or!on!behalf!of!an!employer$who$is$not$a$Polish$resident.!
• Their!income!is!not$borne$by$a$permanent$establishment$that$the$employer$has$in$the$
Poland.!
!
! Shipping$&$Transport$Services$(Art.$9)$
• Pay! received! by! employees! who! are! members! of! the! regular! complement! of! a! ship$ or$
aircra!operated!by!a!resident!of!the!US!in!interna=onal!traffic!is!exempt!from!Polish!tax.!$

10. CYTOWSKI!LLC!
US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'–'Academia/
Teachers'
Teaching/Research$(Art.$17)$
&
An! individual! who! is! a! resident! of! the! US! on! the! date! of! arrival! into! Poland! and! who! is!
temporarily!in!the!Poland!at$the$invita*on$of$the$Polish$Government,$a$university,$or$other$
recognized$educa*onal$ins*tu*on$in$Poland$primarily$to$teach$or$engage$in$research,!or!
both,!at!a!university!or!other!recognized!educa=onal!ins=tu=on!is!exempt!from!Polish!income!
tax!on!income!for!the!teaching!or!research!for!a!maximum!of!2!years!from!the!date!of!arrival!
in!Poland!.!!
!
This! exemp=on! does! not! apply! to! income! from! research! carried! on! mainly! for! the! private!
benefit!of!any!person!rather!than!in!the!public!interest.!!
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11. CYTOWSKI!LLC!
US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'–'Students'
! Student$(Art.$18)$
An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!Poland!and!who!is!temporarily!in!Poland!
primarily$ to$ study$ at$ a$ university$ or$ other$ recognized$ educa*onal$ ins*tu*on$ in$ Poland,! obtain!
professional! training,! or! study! or! do! research! as! a! recipient! of! a! grant,! allowance,! or! award! from! a!
governmental,!religious,!charitable,!scien=fic,!literary,!or!educa=onal!organiza=on!is!exempt!from!Polish!
income!tax!on!the!following!amounts.!!
• Gis!from!abroad!for!maintenance,!educa=on,!study,!research,!or!training.!
• The!grant,$allowance,$or$award.!
• Any$other$payments$received$from$US,$except$income$from$performing$personal$services.!
• Income!from!personal!services!performed!in!the!Poland!of!up!to!$2,000!each!tax!year.!
An!individual!is!en=tled!to!the!benefit!of!this!exemp=on!for!a!maximum!of!5!years.!!
!
An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!in!Poland!and!who!is!temporarily!in!the!
Poland!as!an!employee$of,$or$under$contract$with,$a$resident$of$the$US!is!exempt!from!Polish!income!tax!
for!1!year!on!up!to!$5,000!received!for!personal!services!if!the!individual!is!in!Poland!primarily!to:!!
• Acquire!technical,!professional,!or!business!experience!from!a!person!other!than!that!resident!of!
Poland!or!other!than!a!person!related!to!that!resident,!or!!
• Study!at!an!educa=onal!ins=tu=on.!
!
An!individual!who!is!a!resident!of!the!US!on!the!date!of!arrival!in!Poland!and!who!is!temporarily!in!the!
Poland!for!not$longer$than$1$year$as$a$par*cipant$in$a$program$sponsored$by$the$Polish$Government$
primarily$to$train,$research,$or$study$is!exempt!from!Polish!income!tax!on!up!to!$10,000!of!income!received!
for!personal!services!for!the!training,!research,!or!study.!!
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12. CYTOWSKI!LLC!
US/Poland'Double'Taxation'Treaty'(1974)''='Exempt'Income'–'Wages$and$
Pensions$Paid$by$a$Foreign$Government'
! Government$$(Art.!19)!
Wages,!salaries,!and!similar!income,!including!pensions,!annui=es,!and!similar!benefits,!paid!
from!public$funds$of$Poland$to$a$ci*zen$of$Poland$(other!than!a!U.S.!ci=zen!or!one!admiked!
to!the!United!States!for!permanent!residence)!for$labor$or$personal$services$performed$as$an$
employee$of$the$na*onal$Government$of$Poland$in$the$discharge$of$governmental$func*ons$
are$exempt$from$U.S.$income$tax.!
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13. CYTOWSKI!LLC!
How$does$the$IRS$know$about$foreign$income?$
! NonWVoluntary!Compliance!
• Whistleblowers$
• Overseas$Voluntary$Disclosure$Program$(OVDP)$
• FATCA$Intergovernmental$Agreement$(IGA)$
• Foreign$Account$Tax$Compliance$Act$(FATCA)$
$
FATCA$key$obliga*on$of$Foreign$Financial$Ins*tu*ons$(FFI)$start$in$2014,$unless$
there$is$an$IGA.$
" Due$diligence$of$accounts$for$US$Indicia$
" Request$informa*on$from$clients$and$closing$of$bank$accounts$
" Coopera*on$and$compliance$of$FFI$with$IRS$
" Repor*ng$of$US$persons$to$the$IRS$
" Withholding$of$income$from$US$sources$(FDAP,$etc)$
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! Voluntary!Compliance!
• Withholding&
• ReporAng&
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14. CYTOWSKI!LLC!
Reporting'of'Foreign'Income'and'Assets'(1)'''
! FBAR!(TD!F!90322.1)&
$
• Report:&direct&or&indirect&financial&interest&or&signatory$authority$over$financial$accounts$of&
over!$10,000.&
• Penalty:&willful&nonHfiling&50%&of&the&value&of&the&account&and/or&$10,000&when&nonHwillful&
nonHfiling.&
&
! Form!8938&&
$
• Report:& foreign$ financial$ assets& above& $50,000$ or$ $75,000$ (individual)& and& $100,000& or&
$150,000&(married&couple&filing&together).&Also&for&domesAc&corporaAon.&
• Penalty:&$10,000&per&return&plus&10,000&per&month,&but&no&more&then&$50,000.&
!
! Form!3520&&
&
• Report:&transacAons&with&foreign$trusts$and&receipt&of&foreign$gis$of&above&$100,000&from&
NRA&individual&or&estate&and/or&$13,258&from&foreign&corporaAons/partnerships&
• Penalty:&Gils:&5%&of&the&value&of&the&giW&per&month&up&to&25%&of&the&value&of&the&giW;&Trusts:&
the&greater&of&$10,000&or&35%&of&the&gross&reportable&amount&
%
!
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15. CYTOWSKI!LLC!
Reporting'of'Foreign'Income'and'Assets'(2)'''
!
!
!
!
!
!
! Form%926%!
&
• Report:&transfers$of$property$to$foreign$corpora*ons.&
• Penalty:& 10%& of& the& value& of& the& giW& and& up& to& a& maximum& penalty& of& $100,000& if& not&
intenAonal.&If&intenAonal&failure&no&limit&on&maximum&penalty.&
!
! Form!5471!
!
• Report:!persons&who&are&officers,$directors,$or$shareholders$in$foreign$corpora*ons.&
• Penalty:&$10,000&with&addiAonal&penalty&of&$10,000&per&month,&but&not&more&then&$50,000.&
!
! Form!8865!&
&
• Report:$interest$in$foreign$partnerships&and&transfer$of$property&to&foreign&partnerships&
• Penalty:&$10,000&with&addiAonal&penalty&of&$10,000&per&month,&but&not&more&then&$50,000&
and10%&on&the&value&of&the&transferred&property,&subject&to&$100,000&cap.&&
%

16. CYTOWSKI!LLC!
US'Persons'=''Living'Abroad'(Expat)'
! Exclusion$of$foreign$income$up$to$$95,000$if!!
• bona!fide!resident!or!physical!presence!test!in!foreign!jurisdic=on!!
• for!the!taxable!year.!(IRC§!911(d)(1))!!
• Important!when!person!arrived!in!foreign!jurisdic=on!to!establish!presence!!
! Foreign$Housing$Expenses$!
• 16%!of!the!foreign!earned!income!exclusion!(IRC§!911!(c))!
!
! Special!rules!on!sourcing,!withholding!in!US!double!taxa*on$treaty$
• New! Poland! and! US! tax! Treaty! executed! on! February! 13,! 2013! but! not!
ra=fied!and!not!in!force.!Not!clear!when!will!be!ra=fied.!
! Need!to!file!tax!return!by!June$15th!and!FBAR!on!June!30th.!
!
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17. CYTOWSKI!LLC!
US'Persons'with'a'Foreign'Corporation'
! US*Persons*who*conduct*foreign*activity*through*a*foreign*corporation*generally*
pay* no* tax* on* income* from* such* activity* until* the* corporation* repatriates* such*
income*by*paying*a*dividend.*
! US* Tax* can* be* deferred* but* not' avoided,* because* dividends* from* foreign*
corporations*trigger*US*tax*for*domestic*shareholders.*
! If* foreign* corporations* has* foreign* losses,* those* losses* generally* will* not* offset*
currently*and*of*the*income*of*the*US*shareholders.*
! If* US* Corporation* owns* 10%* of* more* of* a* foreign* corporation* US* domestic*
corporation* may* be* able* to* use* the* foreign* taxes* to* offset*US* income* tax* when*
shareholder*receives*dividend*(indirect'credit).**
! Nonetheless,'US'shareholders'of'foreign'corporations'can'be'taxed'on'income'
generated'by'foreign'corporations,'because'of'Subpart'F'of'IRC.''
!
!
!

18. CYTOWSKI!LLC!
Foreign'Controlled'Corporation'(CFC)''
Subpart'F'§§'951=964'IRC'
!
! Income!generated!by!controlled!foreign!corporations!are!included!in!gross!income!by!US'shareholders!
without!regard!to!actual!distributions.!!
! IRS'POSITION:'ALLOW'DEFFERAL'FOR'ACTIVE'FOREIGN'BUSINESS/DENY'DEFERAL!FOR'TAINTED'
INCOME.'
! PLAIN'ENGLISH:'US'TAX'ON'INCOME'GENERATE'BY'CFC'if''
'
CONTROL' '+ 'US'SHAREHOLDER' '+ 'SUBPART'F'INCOME''
!
Controlled!!
! US!shareholder!owns!in!aggregate%directly'or'indirectly'50%'of!the!voting!or!value!of!equity!of!the!CFC!for!
an!uninterrupted!30!days!or!more!during!the!taxable!year.!US!shareholders!must!include!their!pro!rata!
share!of!Subpart!F!income!
!
US'shareholder'!
! Any!shareholder!that!has!more!then!10%%of%the%equity%of%!the!CFC.!
!
Subpart'F''Income'!
! Immediate! US! tax! if! income! is! tainted! or! lacks' any' economic' connection! to! foreign! jurisdiction! or!
investments' in' US' property.! Structuring! by! establishing! substantial' presence' via! service,! office,!
bookkeeping,!employees!then!taxed!only!if!it!is!brought!back!to!the!US!and!cannot!!
'
!

19. CYTOWSKI!LLC!
CFC'='Subpart'F'Income'
! Foreign$base$company$sales$income$$
• Income&from&the&sale&of&goods&
• Goods&are&purchased&from&or&sold&to&a&related&person&
• Goods&are&neither&manufactured&nor&sold&for&use&in&CFC’s&country&of&incorporaAon&
!
EXAMPLE:& Sale& of& product& from& US& Parent& to& Irish& Subsidiary.& Packaged& in& Ireland& and& resold&
outside&of&Ireland.&
&
! Foreign$base$company$services$income$
• Fees&for&services&performed&outside&CFC’s&country&of&incorporaAon&for&a&related&person&
! Foreign$personal$holding$company$income$
• Passive&investment&income&such&as&dividends,&interest,&rents,&royalAes,&and&capital&gains&
! Foreign$base$company$oilIrelated$income$
&
! Insurance$income$
• Income&from&insuring&risks&outside&the&CFC’s&country&of&incorporaAon&
!
!
!

20. CYTOWSKI!LLC!
CFC'='Subpart'F'Income'
! Earnings$Invested$in$US$Property$(IRC$§956$)$
$
EXAMPLE:$
• CFC&makes&loan&to&US&shareholders&(includes&guarantees)&
• CFC&purchases&stock&issued&by&US&corporaAons&
• CFC&purchases&tangible&property&located&in&US&
• CFC&purchases&right&to&use&certain&intangible&property&in&US&
• Certain&pledges&and&guarantees&
$
&
!
!
!

21. CYTOWSKI!LLC!
Foreign'Tax'Credit'(FTC)'–'Overview'
! US!person!can!credit!or!deduct!foreign!tax!
!
! Cannot!decrease$tax$on$US$source$income!
!
! Direct!or!indirect!credit!(US!S/h!+10%!+!dividend!from!Foreign!sub)!
!
! Carryback!(one!year)!and!carryover!(ten!years)!
!
! Must!be$a$tax$(or!in!lieu!of!tax)!
! Must!be$paid$or!considered!paid!
! Must!be!based!on!net$gain$–$realiza*on,$gross$receipts,$net$income$
! Must!not!be!a!soakWup!tax!or!used!to!provide!a!subsidy!
! No!credit!allowed!for:!
W!Interest ! ! ! ! !W!NonWcompulsory!payments!
W!Penal=es!!!!!!!!!!!!!!!!!!!!! ! !W!Customs!du=es!
W!Property!taxes! ! ! !W!VAT!
W!Payment!for!specific!economic!benefit!
!

22. CYTOWSKI!LLC!
FTC'other'Limitations'
!
! Income$Baskets$Limita*ons$
! Country$Baskets$Limita*ons$
! AMT$FTC$$
! Who$can$claim$
! Form$1116$
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23. CYTOWSKI!LLC!
Q&A'
&
! THANK!YOU!!
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