Foreign Tax Credits

Under regulations under Section 894, the laws of the country where the recipient of a payment is organized or resident is applied to determine fiscal transparence. This is one of the few instances where the IRS uses foreign law to determine US tax consequences. The US component authority has started to negotiate agreements to obtain reciprocal treatment - to apply US laws to determine whether an entity in the US is fiscally transparent when a payment is made by a nonresident of the US to a US person. Canada's persistent refusal to look-through a domestic limited liability company illustrates the problem that arises when there is no reciprocity. A summary of Section 894 withholding rules and Tax Treaty developments are presented. US taxpayers should not be too surprised that there is some confusion over the availability of treaty benefits under the check-the-box regime. It is one thing for the US to disregard a legal entity, but effectively the US is asking treaty partners to accept the check-the-box regime.