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Unformatted text preview: 3. App Co., a U.S. corporation, borrows $10 million from the Brussels office of a Belgian bank. During each of the preceding five years, 50 percent of the income of App Co. was from sources outside the United States and was attributable to the active conduct of business in Belgium. The remaining 50 percent of App Co.’s income was from U.S. sources. Interest payments are made in U.S. dollars to the account of the Belgium lender in Belgium. What is the source of the interest paid to the Belgium bank? Why? Would your answer change if during each of the preceding five years, 85 percent of the income of App Co. was from sources outside of the U.S.? Why? The source of interest paid to the Belgium bank is the US. This is because the source of interest income is generally the place of incorporation of corporate payor. The US will be the source of income. If, 85 percent of the income of App Co. was from sources outside of the U.S., The interest it pays is sourced where the trade or business is conducted i.e. Belgium. This is because an exception exists if a domestic corporation derives at least 80 percent of its gross income from the active conduct of a trade or business outside the United States. The rule is called the 80-20 rule. 4. Cosmetique, a French corporation, is engaged in the cosmetic business in France and the United States. The U.S. business is conducted through a branch. During each of the preceding four years, 35 percent of the gross income of Cosmetique was effectively connected with its U.S. business. If Cosmetique pays a dividend to its sole shareholder, a French holding company, is there any basis for characterizing all or a portion as U.S. – source income? The source of dividend payments is generally the jurisdiction in which the paying corporation is created or incorporated. Dividends from foreign corporations that have both U.S. source and foreign source income are partly U.S. source income and partly foreign source income, based upon the relative proportions of the corporation's income. Dividends paid by a foreign corporation are foreign source income unless 25 percent or more of its gross income for the three-year period ending the year before the year that the dividends were declared was effectively connected with a U.S. trade or business. When a foreign corporation's effectively connected gross income equals or exceeds 25 percent of its worldwide income, the fraction of the dividends that are U.S. source income equals the ratio of effectively connected income to worldwide income 5. Stars, a U.S. corporation engaged in the engineering business performed services under a contract with a Canadian corporation. The employee of Stars who performed the services spent 35 working days in Canada and 80 working days in the United States. Because the work in the United States was largely routine supervision of drafting plans while the work in Canada demanded a high degree of creativity and presence above the Arctic Circle, Stars charged $100,000 for the total 115 days of work. $100,000 for the total 115 days of work....
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- Spring '08
- Taxation in the United States, foreign source income