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Planning opportunity for certain "J" visa holders.

Foreign Income & Taxpayers

Foreign nationals with "J" visas working at U.S. branches of a foreign corporation or partnership can be exempt from U.S. tax on compensation. This is a significant benefit for foreign banks and other foreign businesses with branches in the U.S.

"J" visas are granted to alien students, scholars, teachers, trainees, professors, others of similar description, and their spouses and children, for the purpose of teaching, instructing, lecturing, studying, observing, etc. Holders of 'J" visas are generally taxed as U.S. nonresidents, provided they were not teachers, trainees or students for two out of the preceding six calendar years (Sec. 7701 (b) (5) (E) ); otherwise, the law treats them as residents if: they meet the substantial presence test (Sec. 7701 (b) (3) ). However, "J" visa holders all of whose compensation is paid by a foreign employer as described in Sec.872 (b) (3) are generally taxed as U.S. nonresidents, provided they were not teachers, trainees or students for four out of the preceding six calendar years. Additionally, such individuals are exempt from Social Security taxation (Sec. 3121 (b) (19)).

A nonresident alien is generally subject to U.S. tax on income from U.S. sources (Sec. 871). Nonresident aliens who are "J" visa holders, however, are provided an exception. Under Sec. 872(b) (3), compensation paid to F, J and Q visa holders is excluded from gross income if the compensation is paid to the alien by his foreign employer. A foreign employer is defined as "(A) a nonresident alien individual, a foreign partnership, or a foreign corporation, or (B) an office or place of business maintained in a foreign country or in a possession of the United States by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States." The Code and regulations are silent, however, as to whether the U.S. branch of a foreign employer fits within the definition of a foreign employer. Furthermore, there have been no revenue rulings or court cases providing guidance on this definition. Because there is no special rule dealing with U.S. branches, and branches are not separate legal entities, an employee of a U.S. branch of a foreign corporation is the employee of a foreign corporation. Thus, if a nonresident alien employee has a "J" visa, he is eligible to exclude his compensation under Sec. 872(b) (3), because that compensation is paid by a foreign employer.

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Article Details
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Author:Fisher, Arthur L.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jun 1, 1996
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