Glossary
U.S. International Tax Glossary
Simple definitions of the technical terms used in U.S. international taxation, each with a practical example and links to related answers, forms and services.
- Controlled Foreign Corporation (CFC)
- A controlled foreign corporation is a non-U.S. corporation in which U.S. shareholders, each owning at least 10%, together own more than 50% of the vote or value. CFC status can make some of its income taxable to the U.S. owners even without a distribution.
- Disregarded Entity (DRE)
- A disregarded entity is a business entity, most often a single-member LLC, that is treated as separate from its owner for legal purposes but not for federal income tax. Its activity is generally reported as if the owner conducted it directly.
- Effectively Connected Income (ECI)
- Effectively connected income (ECI) is income of a foreign person that comes from a U.S. trade or business, or that is treated as connected to one. It is generally taxed on a net basis at regular U.S. rates, after allowable deductions.
- FDAP Income (FDAP)
- FDAP stands for “fixed, determinable, annual or periodical” income. It is U.S.-source passive-type income paid to a foreign person, such as dividends, interest and royalties, and it is generally subject to 30% withholding unless a treaty or exemption reduces it.
- FIRPTA (FIRPTA)
- FIRPTA, the Foreign Investment in Real Property Tax Act, taxes a foreign person’s gain on the sale of a U.S. real property interest as effectively connected income. The buyer generally must withhold a portion of the sale price, commonly 15% of the amount realized.
- Foreign Earned Income Exclusion (FEIE)
- The foreign earned income exclusion lets qualifying U.S. citizens and residents living abroad exclude a limited amount of foreign earned income from U.S. income tax. The maximum is adjusted for inflation each year.
- Foreign Person
- For U.S. tax purposes, a foreign person is generally a nonresident alien individual, a foreign corporation, a foreign partnership, or a foreign trust or estate. It is the opposite of a “U.S. person,” which includes citizens, residents and domestic entities.
- Foreign Tax Credit (FTC)
- The foreign tax credit lets a U.S. taxpayer reduce U.S. income tax by certain income taxes paid or accrued to a foreign country. It is meant to limit double taxation on the same income.
- Global Intangible Low-Taxed Income (GILTI)
- GILTI is a category of income earned by a controlled foreign corporation that a U.S. shareholder must include in income each year, whether or not it is distributed. The inclusion depends on statutory calculations, exceptions and the applicable tax year.
- Individual Taxpayer Identification Number (ITIN)
- An ITIN is a nine-digit tax processing number issued by the IRS to individuals who must file or be listed on a U.S. tax return but are not eligible for a Social Security number. It is used only for federal tax purposes.
- Nonresident Alien (NRA)
- For U.S. tax purposes, a nonresident alien is an individual who is not a U.S. citizen and is neither a green card holder nor a resident under the Substantial Presence Test. Nonresident aliens are generally taxed only on certain U.S.-source income.
- Passive Foreign Investment Company (PFIC)
- A PFIC is a non-U.S. corporation that meets an income test (at least 75% passive income) or an asset test (at least 50% passive assets). Most foreign mutual funds and ETFs are PFICs, and U.S. taxpayers who own them face special tax and reporting rules.
- Reportable Transaction (Form 5472)
- In the Form 5472 context, a reportable transaction is a transaction between a reporting corporation, including a foreign-owned U.S. disregarded entity, and a related party that must be reported on the form. It covers more than sales, including loans and expense payments; additional rules cover contributions for foreign-owned disregarded entities.
- Resident Alien
- A resident alien, for U.S. tax purposes, is a non-citizen who is a lawful permanent resident (green card holder) or who meets the Substantial Presence Test for the year. Resident aliens are generally taxed on worldwide income like U.S. citizens.
- Substantial Presence Test (SPT)
- The Substantial Presence Test is a day-counting rule that decides whether a non-citizen who is not a green card holder is a U.S. tax resident for a calendar year. It requires at least 31 days in the current year and a weighted total of at least 183 days over three years.
- Tax Treaty
- A tax treaty is an agreement between the United States and another country that can reduce or eliminate double taxation. It may lower withholding rates, assign taxing rights, or provide tie-breaker rules for people resident in both countries.
- U.S. Trade or Business (USTB)
- A U.S. trade or business is regular, continuous and considerable activity in the United States carried on for profit. A foreign person engaged in one generally owes U.S. tax on the income effectively connected with it.
- Withholding Agent
- A withholding agent is any person with control, receipt, custody, disposal or payment of certain U.S.-source income of a foreign person. The agent must withhold the required U.S. tax, deposit it and report it to the IRS.