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Dear Tax Talk,
If a foreign corporation has ownership in a domestic corporation, when the foreign corporation sells the ownership (stock) and has capital gain, does the foreign corporation have to pay U.S. income tax?
A foreign person such as an individual or corporation does not pay U.S. income tax on its capital gains from the sale of most U.S. securities.
A foreign corporation is a corporation organized outside of the United States. This is true whether the U.S. securities represent publicly traded shares or the stock of a closely held U.S. corporation.
For example, a foreign corporation that owns 100 percent of a Florida corporation that operates a restaurant on Miami Beach (which leases its location) would not pay income tax on the sale of the Florida corporation’s stock.
The one exception to this general rule is the sale of stock of a U.S. real property holding corporation. A U.S. real property holding corporation is a domestic corporation (or a foreign corporation that has elected to be treated as domestic corporation) whose assets are more than 50 percent U.S. real property (including other U.S. real property holding corporation ownership).
For example, if a foreign corporation owns 100 percent of a Florida corporation whose sole asset was a condo on Miami Beach, the sale of the stock of the Florida corporation would be taxable to the foreign corporation.
A U.S. real property holding corporation does not include publicly traded stock unless the foreign person owns more than 5 percent. For example, a foreign corporation that sells 100 shares of Lennar (a U.S. home developer) at a gain would not pay U.S. income tax on the sale.
Substantial tax rules exist that prevent a U.S. citizen or resident from avoiding income tax by using a foreign corporation to trade securities.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.