U.S. Income Taxation of Foreign Governments, International Organizations, Central Banks, and Their Employees (Portfolio 6520)

Tax Management Portfolio, U.S. Income Taxation of Foreign Governments, International Organizations, Central Banks, and Their Employees, No. 6520, discusses primarily the income tax exemptions under §892, §893 and §895. 

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Description

Tax Management Portfolio, U.S. Income Taxation of Foreign Governments, International Organizations, Central Banks, and Their Employees, No. 6520, discusses primarily the income tax exemptions under §892, §893 and §895. The Portfolio explores the development of the exemption under §892(a) for foreign governments, particularly the limitations placed on the scope of the exemption by the 1986 Tax Reform Act and by the 1988 temporary regulations and the clarifications (and liberalization) of existing rules by the 2011 proposed regulations. It analyzes in detail what types of organizations are exempt from tax and what kinds of income received by such organizations are exempt from tax. There is an extensive analysis of the issues raised by the regulations under §892 and the ambiguities still present in the law. Tax planning suggestions are also presented and analyzed. It further explores the broader income tax exemption available to certain international organizations under §892(b).

The Portfolio also discusses §893, which exempts employees of foreign governments and international organizations from income tax, and §895, which exempts foreign central banks from income tax. It also raises the possibility of exemption through income tax treaties, other international agreements, and other Code provisions, including §897(l), introduced and effective in late 2015, which exempts from the application of §897 U.S. real property interests held, as well as distributions from real estate investment trusts received, by qualified foreign pension funds and entities wholly owned by such funds.

This Portfolio may be cited as Nikravesh, 6520 T.M., U.S. Income Taxation of Foreign Governments, International Organizations, Central Banks, and Their Employees.

Authors

Babak E. Nikravesh, Esq.

Babak E. Nikravesh, B.A., University of California, Berkeley (1992); J.D., UCLA School of Law (1996); Summer Session, The Hague Academy of International Law (1996); LL.M., London School of Economics and Political Science (1997); M.A., Stanford University (1998).

Table of Contents

Detailed Analysis
I. Introduction
A. International Sovereign Immunity
B. Basic Statutory Provisions
1. Section 892
2. Section 893
3. Section 895
II. Exemption from U.S. Income Taxation of Foreign Governments and International Organizations Under §892
Introductory Material
A. Statutory Background
B. Regulatory Background
1. In General
2. 2011 Proposed Regulations
C. Historical Scope of the §892 Exemption
1. Early Rulings
2. Vial Case
3. Revenue Ruling 66-73
4. Post-Revenue Ruling 66-73 Period
5. Revenue Ruling 75-298
D. Exempt Entities Under the Temporary Regulations
1. Foreign Government vs. Foreign Sovereign
2. Integral Parts
3. Controlled Entities
4. Pension Plans and Pension Trusts
5. Prohibition on Private Inurement
6. Distinguishing Integral Parts from Controlled Entities
7. Political Subdivisions and Transnational Entities
8. FCBIs as Foreign Governments
E. Types of Income of Foreign Governments Eligible for Exemption
1. Bank Interest
2. Income from Stocks, Bonds, or Other Domestic Securities
a. Partnership Issues
(1) Partnerships that Are Not Publicly Traded Partnerships
(2) Publicly Traded Partnerships
b. USRPHCs, USRPIs, REITs, and Participating Mortgages
(1) General Rule
(2) Capital Gains Distributions from REITs and RICs
(a) Taxability Under §897(h)
(b) Branch Profits Tax
(c) Possible Use of Losses
(3) Participating Mortgages
3. Income from Financial Instruments
a. Execution of Financial or Monetary Policy
b. In Currency or Precious Metals
4. Notional Principal Contracts
F. Commercial Activity Exception
1. Relevance
2. Scope of the Term
3. Exceptions
a. The Investing Exception
b. The Trading Exception
(1) Trading in Stocks, Securities, and Commodities
(2) Trading in Derivatives and NPCs
(3) Special Issues Under the Investing and Trading Exceptions
(a) Banking, Financing, or Similar Business
(b) Real Estate and U.S. Real Property Holding Corporations
(c) Investing Through Partnerships and Private Equity Fund Issues
(i) Partnership Integration
(ii) Excess Fees
(iii) Partnership Attribution and the Limited Partner Exception
(d) Consent and Inducement Fees
c. Purchase of Goods
d. Cultural Events
e. Not-for-Profit Activities
f. Governmental Functions
g. Inadvertent Commercial Activity
(1) Reasonable Failure and “Safe Harbor”
(2) Prompt Cure
(3) Record Maintenance
4. Controlled Commercial Entities
a. General
b. USRPHCs
c. FCBIs
d. Pension Trusts
e. Effective Practical Control
5. Attribution of Commercial Activity
6. Duration of Commercial Activity
G. Application of Branch Profits Tax to Foreign Governments
H. Exempt Income of International Organizations
1. Background
2. Scope of Exemption
I. Entity Classification Under §7701 Regulations
J. Tax Reporting
K. Withholding
1. Withholding on FDAP Under §1441 and §1442
2. Backup Withholding and Information Reporting
3. Withholding by Partnerships, REITs, RICs, and on USRPIs
L. No Ruling Area
M. Foreign Account Tax Compliance Act (FATCA)
III. Exemption from U.S. Income Taxation of Compensation of Employees of Foreign Governments and International Organizations Under §893
A. Scope of the §893 Exemption
B. Filing Requirements
C. Failure to File Penalties
1. Civil Penalty
2. Criminal Penalty
D. Waiving the §893 Exemption
1. Government Officials
2. Treaty Traders
3. International Organization Representatives
IV. Exemption from U.S. Income Taxation of Foreign Central Banks Under §895
V. Other Exemption Possibilities
A. Income Tax Treaties
B. Other International Agreements
C. Other Code Provisions
1. Section 883
2. Section 897(l)

Working Papers

Table of Worksheets
Worksheet 1 S. Rep. No. 99-313, at 415 (1986)
Worksheet 2 H.R. Rep. No. 99-841, at II-654 (1986) (Conference Report)
Worksheet 3 Qualifying International Organizations