US Taxation of non-resident entities trading forex through US-based broker?

Hello. I have a question in regards to the US taxation of profits made by non-resident foreign firm, from trading spot forex through a US based broker. I've been trying to resolve this issue directly with IRS, however they just told me that I should rather consult with a CPA or EA with experience in international taxation. So, I've tried EAs. Talked to some 20 of them, and again most told me that they will not be able to assist me, as my issue is just nit something they are experienced in. So, at this point I figured out that it would probably make most sense to try and find someone who had a practical exposure to my issue. So, I would greatly appreciate any help, or a reference to a professional whom I could contact, to resolve my issue. Now in short my issue is as follows. I have a Cyprus based(paying all taxes in Cyprus) company. My company has a corporate trading account with a US broker. Trading account is my companys only US activity. It has no permanent establishment, and is a US non-resident. So, incomes not effectively connected. I, company owner, is neither a US citizen nor resident. I know that my broker must withhold tax on dividends and interest(subject to few exemptions and treaties). I know that I have to will a form W-8BEN with my broker. But what about US taxation of my trading income? I was told that as a non-resident with no business in US, my company will be exempt from capital gains taxes. However, this is where it gets confusing to me. My company trades mostly forex spot, which are classified as a 988 contracts. And gains from trading 988 contracts are treated as ordinary income(as opposed to say currency futures - 1256 contracts which result in cap. gains). Furthermore, my company will trade forex throughout the day, every day. With this in mind as a non-res, with non-effectively connected incomes, my company is liable to 30% flat tax on its ordinary income. However, I've also read in one of IRS publications, this my trading income will only be treated as ordinary income, if I specifically elect it to be treated this way(i.e. elect to take a trader status). If I dont make this election all my forex income will be treated as cap. gains by default. Finally, I've read in 26 USC sec 988, that the place of taxation of profits derived from trading 988 contracts, will be based on the residency of my company. So, in this sense, since my company is Cyprus-resident, it will only pay taxes in Cyprus and has no tax liability in US. This is all I've got so far. Hope I'm not being to confusing. I will appreciate any specific input to this, as well as general suggestions from anyone who's had any experience with this issue. My email is [email protected]

Publication 519 (2007), U.S. Tax Guide for Aliens
"Trading in stocks, securities, and commodities. If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States.

For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities.

For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange.

This discussion does not apply if you have a U.S. office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities.

Trading for a nonresident alien's own account. You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U.S. business activity. This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent.

This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities."

IMHO, this probably means you owe full taxes because the IRS doesnt count just trading as a real "Trade and Business" venture. Unless you've filed for Trader Tax Status.

TRADER TAX STATUS

IRS EXAMS


Hope that helps alittle.

to luckyd1976

Thanks for the info, that helps a bit. However the Publication 519 also differentiates between effectively and not effectively connected income. So, if I understand this correctly, despite the fact the my company has no business in US, its trading profits will be from US sources, and hence profits will simply be classified as 'not effectively connected to any US business'. In this case theres a 30% flat tax levied on non-residents(its somewhere in the publication 519). The main point is that my company may not have any business in US, but may still have taxable profits from US sources(since I trade in US). So far I've found just one thing. Since all my trading is done from Cyprus and my company is a tax resident there, it would be logical to assume that my profits should only be taxed in Cyprus. However, I'm still a bit concerned about the fact that I may have US source income.

Mike888 said:

Thanks for the info, that helps a bit. However the Publication 519 also differentiates between effectively and not effectively connected income. So, if I understand this correctly, despite the fact the my company has no business in US, its trading profits will be from US sources, and hence profits will simply be classified as 'not effectively connected to any US business'. In this case theres a 30% flat tax levied on non-residents(its somewhere in the publication 519). The main point is that my company may not have any business in US, but may still have taxable profits from US sources(since I trade in US). So far I've found just one thing. Since all my trading is done from Cyprus and my company is a tax resident there, it would be logical to assume that my profits should only be taxed in Cyprus. However, I'm still a bit concerned about the fact that I may have US source income.

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lol You lost me after Pub519.

I hear ya this crap shouldnt be this complicated. But I guess there wouldn't be any Accountants. I would highly reccommend GREEN TRADER TAX for anything Trading related in the US! Consulting costs are really cheap compared to other SEC -Trading (CPA and or Lawyers) expertise out there too.

Thats the whole point - making it as much complicated as possible. Thanks for the referal. Will definitely try them out. Hope they'll be of more assistance then other EAs I've tried over the past few weeks.

Mike888 said:

Thats the whole point - making it as much complicated as possible. Thanks for the referal. Will definitely try them out. Hope they'll be of more assistance then other EAs I've tried over the past few weeks.

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Any progress Mike888?

Mike it looks like you need to change your IB/trading structure.
Panama corp/brokerage house in Panama is all a zero tax situation. You can trade US and most global markets from Panama and that´s it. This is your tax return = $0.00 Done.
email me if you have any Qs

to stochastic

sounds appealing. could u advise any decent forex brokers in panama? my two main criterion's are safety of funds and the spread. the best one I know of so far is Oanda, with a 0.9 spread for eurusd pair, which is my main trading instrument. It doesn't however offer funds insurance. IB on the other hand does. Do u know any panaman broker who would offer funds insurance and spreads as low as 1 pip? would appreciate any reliable info.

Mike888 said:

sounds appealing. could u advise any decent forex brokers in panama? my two main criterion's are safety of funds and the spread. the best one I know of so far is Oanda, with a 0.9 spread for eurusd pair, which is my main trading instrument. It doesn't however offer funds insurance. IB on the other hand does. Do u know any panaman broker who would offer funds insurance and spreads as low as 1 pip? would appreciate any reliable info.

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Actually you can have your IB Broker anywhere. You can work with Oanda as a Panama company and your spread is the one you mention above. All you need is a bank account outside Panama so you are not taxed by Panama on your earnings. You still can have a secondary bank account in Panama to send your net profits to and take advantage of the banking here.

stochastic said:

Actually you can have your IB Broker anywhere. You can work with Oanda as a Panama company and your spread is the one you mention above. All you need is a bank account outside Panama so you are not taxed by Panama on your earnings. You still can have a secondary bank account in Panama to send your net profits to and take advantage of the banking here.

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It is my understanding that a Panamanian offshore company with a bank account in Panama is not taxed by Panama, the deciding factor being whether or not profits originate from activities in Panama. In other words: once your activities are conducted outside Panama, you're taxed at 0%. I think you don't need a bank account outside Panama.

They key issue here is Forex deposits. Banks in Panama won´t allow third party fund deposits for forex without a brokerage license. It has been tried a few times under the advice of attorneys in Panama only to have their clients´ funds frozen by the bank. Money coming in and leaving the account again falls into the money laundering characteristics. Banking regulations

stochastic said:

They key issue here is Forex deposits. Banks in Panama won´t allow third party fund deposits for forex without a brokerage license. It has been tried a few times under the advice of attorneys in Panama only to have their clients´ funds frozen by the bank. Money coming in and leaving the account again falls into the money laundering characteristics. Banking regulations

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Then the reason to have a bank account outside Panama isn't a tax issue but more of a brokerage licensing issue.

Yes, but those issues has been resolved by our company working a couple of different banking structures and/or debit cards.
Mike, any luck? "with a 0.9 spread for eurusd pair, which is my main trading instrument."
You could also have your Panama company and instruct your customers to send the funds directly to Oanda and not deal with the banking part. You´ll have faster deposits using the broker´s back office.

US Virgin Islands

There are three types of entities that can be established in the USVI which are either fully or partially exempt from USVI taxes and U.S. federal income taxes. One type of entity is a USVI corporation which obtains the benefits of the Virgin Islands Industrial Development Program for its business activities in the USVI. These companies are fully exempt from most local taxes and receive a 90% exemption from USVI income taxes. They also enjoy a special customs duty rate of one percent. These companies are generally not subject to U.S. federal income taxes on their USVI operations.

For foreign persons, even more generous exemptions are available through the use of the third type of tax-free entity: a USVI exempt company. The USVI is the only jurisdiction in the world where a non-U.S. person can establish a tax-free entity under the U.S. flag. USVI exempt companies are often used as holding companies for portfolio investments, for the ownership of aircraft that are registered with the U.S. Federal Aviation Administration, or as captive insurance companies. There are a number of other offshore tax planning structures that can take advantage of USVI exempt companies.
A USVI exempt company ought to be utilized rather than an offshore entity formed in another jurisdiction in any situation where U.S. flag protection is either desirable or essential to the purposes of the company.

***Under Section 936 of the U.S. Internal Revenue Code, U.S. companies do not pay U.S. income tax on dividends received from a U.S. Virgin Islands subsidiary.

i wanna know about one of the best trading company

headenboyce said:

i wanna know about one of the best trading company

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You mean Forex broker for US Citizens?