In May 2016 AFL Investments sponsored an International Tax and Planning Seminar for Bermuda Nationals who own U.S. investments, vacation homes and rental property in the United States. The sessions were chaired by Joel P. Schaefer, CEO of AFL Investments. Speakers were Stephen Ziobrowski, a senior international estate and trust attorney with the firm of Day Pitney in Boston and me. With reservations required and limited seating we are summarizing the presentation below for those who were unable to attend. The presentation will be split into 2 columns with the second to be published in November. This column will discuss how and when Bermuda nationals are subject to U.S. income tax. The November column will discuss how to structure your U.S. investments to minimize or eliminate U.S. income tax.

Are You Considering Investing in the United States?

 If so, you will need to obtain a U.S. Individual Tax Identification Number (ITIN). This number will be used for opening up bank accounts, obtaining a driver’s license, filing a tax return and will need to be provided to a withholding agent to withhold the proper amount of income tax from funds being sent to you. To obtain an ITIN you need to complete and file a Form W-7 along with a copy of your passport, birth certificate and driver’s license that have been

certified by the issuing agency and submit to the IRS in Austin, Texas. As the IRS has been the target of massive fraud by foreign individuals who have falsely obtained ITIN’s, the slightest deviation in the procedure will be cause for rejection.

Taxation by Withholding

 The United States subjects foreign nationals to income tax by generally requiring the withholding agent to withhold a 30% tax on all funds being sent to you. The withholding agent could be your rental property manager, the person who bought your vacation home or your investment advisor. If the withholding agent does not perform their duty the Internal Revenue Service will collect the withholding tax from them and also subject them to a 100% penalty for failure to withhold.

 Is All U.S. Source Income Subject to Income Tax?

 No.  The following type of income is excluded from U.S. income tax. Deposits (including certificates of deposit) with persons in the banking business, deposits or withdrawal accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan

associations and other savings institutions chartered and supervised as savings and loan or similar associations under Federal or state law and amounts held by an insurance company under an agreement to pay interest on them.

 Portfolio Interest - To qualify as portfolio interest, the interest must be paid on

obligations issued after July 18, 1984, and otherwise subject to withholding. For obligations issued after March 18, 2012, portfolio interest does not include interest paid on debt that is not

in registered form. Before March 19, 2012, portfolio interest included interest on certain registered and nonregistered (bearer) bonds.

 Capital Gains from the sale of most assets (except real property) are not subject to U.S. Income Tax

What Types of Income Are Subject to U.S. Income Tax?

 Dividend income paid by a U.S. Corporation is subject to a flat 30% income tax. Dividend income paid by a foreign corporation, including a foreign corporation trading on a U.S.

Stock Exchange, is not subject to U.S. Income Tax

Partnership income - Income from a partnership engaged in a trade or business in the United States is subject to U.S. Income Tax at ordinary tax rates that range from 10% to 39.6%. Some itemized deductions and personal exemptions are allowed to offset the income. Distributions from partnerships are subject to a 39.6% withholding tax.

 Rental Property - the income you receive from renting your condo, co-op, fractional share or chalet is subject to U.S. income Tax at a flat 30% that the management company or renter is required to withhold

 Election to treat as a U.S. trade or business. If you make an election to treat the rental property

as a U.S. trade or business you can then offset the income with expenses such as mortgage interest, real estate tax, insurance, association dues, depreciation, etc.

 Sale of U.S. Real property - when you sell your vacation home or rental property the gain will be subject to U.S. Income tax at a flat 35%. The buyer is required by law to withhold 15% of

the sales price and remit the tax withheld to the Internal Revenue Service. State income and withholding taxes are likely and differ by state.

 U.S. Estate Tax

 U.S. Estate Tax is imposed on Bermuda Nationals who own assets situated or deemed situated in the United States at the time of death. A graduated tax starting at 18% on $1 of taxable

assets to 40% on assets over $1,000,000. $60,000 of U.S. sites assets are excluded from the

estate tax. An investment portfolio managed by a Bermuda bank or investment advisor that holds any of the assets we discussed above is deemed to be situated in the United States and subject to U.S. estate tax.

 The most common question we are asked is “how will they know”? There is no statute of limitations on “failure to file,” especially if the fiduciaries of the Estate are U.S. citizens. Executors and beneficiaries should want to avoid any unpaid income tax liability that could apply to them as transferees and fiduciaries. There is a long line of cases including a recent one, where the First Circuit affirming a district court, found that the executrix was personally liable for the estate's unpaid income taxes in an amount equal to the value of the assets that she transferred to herself instead of using to pay the government's priority tax claim, when she had actual or constructive knowledge of the same.  The Federal priority statue directs that the government be paid first when the estate of a deceased debtor has insufficient assets to pay all its debts.  Personal liability will be imposed on a fiduciary of an estate who fails to honor a priority claim of the government.

 Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

 The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.