Is Your Act 20 Company Engaged in US Trade or Business After Hurricane Maria?
04 October 2017
In the aftermath of Hurricane María, many businesses have been forced to find creative solutions to continue to operate and deal with the disruption in our telecommunication systems and many other challenges currently faced in Puerto Rico.
Some Act 20 investors relocated temporarily to the United States following evacuation orders prior to the Hurricane and have not been able to return to Puerto Rico. Others have provisionally relocated their local employees to the United States providing them and their families some relief from the difficult conditions in the Island and seeking some normalcy in their operations.
Act 20 companies that currently have employees temporarily working from the United States must be cognizant of the potential tax implications of such circumstances. The United States imposes taxes on foreign corporations (most Act 20 companies are treated as foreign corporations for federal tax purposes) that are deemed to be engaged in a trade or business in the United States or that derive income from sources within the United States. A foreign corporation that is deemed to be engaged in a trade or business in the United States, will be required to file a federal income tax return and pay federal income taxes (and possibly state income taxes) with respect to its income that is effectively connected to its United States trade or business. Currently, federal corporate income tax rates may be as high as 38%.
Generally, a foreign corporation will be engaged in a trade or business in United States if it is involved in a profit oriented activity within the United States, either directly or indirectly, or through agents, when the activity is regular, substantial and continuous. The US Code and its regulations provide little guidance regarding the types of activities that might constitute a trade or business. One must closely examine the types of activities in which a foreign person is engaged in the United States and whether those activities are substantial enough to qualify as a trade or business.
However, in the case of personal services, Section 864 of the US Code provides that the performance of personal services within the United States at any time during the year constitutes a trade a business in the United States. The United States Code provides an exception for personal services rendered by a nonresident alien individual on behalf of a foreign corporation during a period not exceeding 90 days and generating revenues of not more than $3,000. Such exception will rarely apply to services rendered by Act 20 companies.
Furthermore, income derived from services rendered in the United States (i.e. United States source income) will be considered effectively connected to a United States trade or business if the activities of such trade or business were a material factor in the realization of such income. It must be noted that a foreign corporation will not necessarily be engaged in trade or business in the United States simply because some person controlling that corporation has an office or fixed place or business in the United States. However, if that person also controls and supervises the day to day operations and can negotiate and conclude contracts on behalf of the foreign corporation, such activities may be deemed a United States trade or business for the foreign corporation. Likewise, if an employee of a foreign corporation, uses a fixed facility in the United States in the ordinary course of his or her duties, such fixed facility may be attributed to the foreign corporation. A foreign corporation that is deemed to be engaged in trade or business in the United States and that has a fixed place of business in the United States, may be also subject to federal income taxes on certain items of foreign source income provided such office is a material factor in generating such income and such office regularly carries on the activities that generate such income.
The determination of whether a foreign corporation is engaged in a United States trade or business requires a detailed facts and circumstances analysis.
In order to understand and minimize the risks associated with the temporary relocation Our BDO team is here to help you analyze your particular situation and to help you plan accordingly during these extraordinary times.
Please contact any of the members of the BDO team to continue the conversation.