Question

19. Matching: Place the number below next to the corresponding business entity being described:

ECI _____

FDAP ______

FIRPTA _____

Portfolio Interest_____

Branch Profits Tax _____

1. Exception from FDAP withholding on interest income from certain portfolio debt investments.

2. 30% withholding tax on passive-type income (interest, dividends, etc..).

3. 30% tax imposed on a foreign corporation based on a deemed distribution of US branch operations.

4. Imposed on 1980 by the Foreign Investment in Real Property Tax Act.

5. A withholding tax on income that is effectively connected with a United States trade or business.

Answer 1

According to the website of Internal Revenue Service

1.Portfolio interest ,Exception from FDAP withholding on interest income from certain portfolio debt investments.

The interest income is earned from debt.Certain portfolio debt investment interest are exempted from tax (should be qualified for exemption) and certian portfolio debt investment interest are taxable .Certain types of U.S. source interest income of a foreign person qualify for statutory exemptions from tax and withholding:
bank deposit interest (It should be qualified for exemption)
portfolio interest (It should be qualified for exemption )

2. FDAP ,Fixed , Determinable, Annual Periodic Income ,applies to foreign person earning income in the U.S. 30% withholding tax on passive-type income (interest, dividends, etc..).

FDAP incomes are dividend , interest , royalties etc.

Tax @ 30 % rate applies to FDAP income or gains from U. S. sources.

3.Branch profit tax ,30% tax imposed on a foreign corporation based on a deemed distribution of US branch operations.

The Branch Profit tax is for the income earned by the foreign corporations which have operation in the United States.Under the branch profits rule, income is taxed at a maximum marginal rate of 35 percent when it is earned, and an additional 30 percent branch profits tax is imposed when the income is repatriated to the foreign headquarters.

4. FIRPTA Imposed on 1980 by the Foreign Investment in Real Property Tax Act. FIRPTA imposes income tax on foreign persons on dispositions of U.S. real property interests.

5. ECI, Effectively Connected Income  A withholding tax on income that is effectively connected with a United States trade or business.

Generally When a foreign person is engaged in trade or business in the United States all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income

Generally, no need to withhold tax on ECI income if you receive a Form W-8ECI and fulfill certain conditions.