The United States (U.S.) is a key destination for many entertainers as it comprises a large, global market for musicians, actors, DJs, athletes, and other artists. Many non-U.S. entertainers receive inconsistent, incomplete, or otherwise inaccurate U.S. tax advice, and as a result they often suffer an excessive tax burden.
The following article discusses several pertinent issues that should be considered by foreign artists and entertainers coming to the U.S. either for limited engagements or permanent relocation. International tax planning for such creative individuals is a balancing act which should consider not only the ways to reduce U.S. tax exposure, but also the effects that such planning may have in the artist’s home country and globally. Proper global tax planning should be undertaken prior to U.S. engagements or moving to the U.S.
Who is a U.S. tax resident and why is it Important?
A foreign national is treated as a United States tax resident in any year during which they have a green card or spend a sufficient amount of time in the U.S., generally in excess of 183 days in a given year or a combination over three years. Non-green card holders who wish to avoid becoming U.S. residents should carefully monitor the amount of time spent in the U.S. Retaining competent tax advisors to ensure compliance and management of U.S. residency rules is important. The issue is particularly relevant for foreign entertainers as they are often not in control of their travel schedules and may become U.S. residents inadvertently because of frequent U.S. engagements.
Once an individual is treated as a U.S. tax resident, they are subject to U.S. federal income tax on all income, regardless of where it was earned. Due to robust U.S. foreign asset reporting rules, foreign entertainers who own companies and/or other foreign assets can also be subject to a host of additional U.S. reporting and tax filing requirements.
Tax Considerations for Nonresident Entertainers
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Taxation of Nonresident Entertainers Generally
Nonresident aliens who earn Effectively Connected Income (ECI) with a U.S. trade or business are taxed at a net basis and are required to file an annual tax return.
Most non-U.S. entertainers working in the U.S. on a temporary basis will have ECI since the performance of services in the U.S. is one of the few enumerated activities that definitively constitutes a U.S. trade or business. Promoters and venues who pay foreign entertainers are required under general rules to withhold 30% of the gross payment and remit the tax to the IRS. In most cases, the final tax liability can be reduced by filing a U.S. tax return and claiming the appropriate expenses against gross income.
While some U.S. treaties may reduce or eliminate the final tax owed, withholding is required even if payment is made to a loan-out entity used by the entertainer for contracting purposes. It is important to note that even though treaties are largely beneficial for foreign persons receiving U.S.-source income, there are significant limitations on benefits available to actors, entertainers, and athletes. In addition, while the artists’ and entertainers’ articles of several U.S. tax treaties do not apply to behind-the-scenes production staff, writers, directors, and coaches, there is considerable ambiguity as to whether these articles apply to other nonresidents engaged in less obvious creative endeavors in the U.S. such as models, stage and costume designers, choreographers, and other creative professionals. Any inbound entertainer who falls in this grey area should carefully consider whether the artist and entertainer article of a treaty applies to them as it will undoubtedly influence their exposure to U.S. federal income tax.
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Central Withholding Agreements
The imposition of the 30% withholding tax on gross U.S.-source services income can create significant cash restraints for entertainers who likely already operate on a tight budget. They often rely on ample cash flow to pay service providers and their management team. Where a reduced rate under a U.S. treaty does not apply, some entertainers may be able to reduce the rate of withholding tax by entering into a Central Withholding Agreement (“CWA”) with the IRS.
The applicant must submit documentation to the IRS substantiating the U.S. engagements, budgets, and expenses which support a lower withholding rate. If approved, payments are made to a designated withholding agent who is responsible for withholding tax at an agreed-upon rate and remitting it to the IRS.
Although CWAs can ease the cash-flow burdens faced by some foreign entertainers, they require meticulous record keeping and expense projections. Furthermore, applications must be submitted 45 days prior to the first U.S. engagement and contain a complete list of all anticipated U.S. work on a specified tour. This can be problematic for some musicians, in particular, as scheduled gigs are often cancelled, and new shows are added to a U.S. tour with little notice.
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Global Tax Leakage
Stranded Foreign Tax Credits (FTCs) often present a real and substantial cost to the nonresident entertainer performing services in the U.S. through a loan-out structure. The issue commonly arises where an entertainer utilizes a transparent company for U.S. engagements (typically a single member LLC) which is regarded as a corporate entity in the entertainer’s home country. For example, with very narrow exceptions, the United Kingdom (UK) regards U.S. LLCs as corporations. Therefore, U.S. taxes paid personally by a UK tax resident to the IRS with respect of fees paid to an LLC are not creditable against the individual’s UK tax liability because Her Majesty’s Revenue and Customs (HMRC) views the company as the technical taxpayer, not the individual. Similarly, when profits are extracted from the company, HMRC may view them as dividends which do not have an associated U.S. tax available for crediting in the UK.
While loan-out structures are commonplace and critical for most artists and entertainers for both liability purposes and to allow for the deductibility of expenses, tax advisors should consider the taxpayers overall global tax structure to prevent or minimize any global tax leakage.
Tax Considerations for Nonresident Entertainers Relocating to the US
Foreign entertainers who become U.S. tax residents face an array of complicated U.S. tax issues which can quickly become burdensome and costly if not managed properly. It is difficult to describe all these rules, and their various permeations, exceptions, and qualifications in this short article but we will discuss the most relevant to inbound entertainers.
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Dual Residents
In certain cases, foreign nationals who are treated as both a U.S. resident and resident of a country with which the U.S. has entered into a bilateral income tax treaty may be able to rely on the treaty’s “tie breaker rules” to avoid being subject to the full ambit of U.S. taxation. Generally, the tie breaker rules look to assign a single country of residence based on where the individual’s ties are strongest or “closer connection” exists.
Because foreign actors and entertainers may spend a considerable amount of time in the U.S. without developing very significant ties to the country, it is important to consider the applicability of the tie breaker rules. For example, a touring musician may spend more than the allowable number of days in the U.S. on a U.S. tour, but during that time he or she may stay primarily in hotels, have no family in the U.S., and may fail to develop any meaningful ties to the U.S. outside of their periodic work here. In this case, assuming a treaty applies, the musician may be able to avoid being treated as a U.S. tax resident by taking a dual resident treaty position with a timely-filed U.S. income tax return.
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Anti-Deferral Regimes
The Internal Revenue Code is replete with rules that attempt to discourage U.S. persons from using foreign corporations in low-tax jurisdictions to shelter foreign income. Unfortunately, many of these rules are broad and will generally encompass foreign entertainers earning income abroad once they are considered a U.S. tax resident. The scope of the rules applicable to the taxation of controlled foreign corporations (“CFCs”) was significantly expanded by the Tax Cuts and Jobs Act (“TCJA”) such that it is nearly impossible to earn income abroad through a CFC without the imposition of some current U.S. tax.
Many foreign actors, musicians, and athletes use foreign loan-out entities to provide services outside of the United States. Others may own foreign holding companies that own a variety of passive investments, or which service their royalty income streams. If a foreign loan-out company is treated as a foreign corporation under U.S. entity classification rules (which is usually the case) and the entity is more than 50% owned by a U.S. person or persons who individually own 10% or more of the company, the entity is treated as a CFC. As a CFC providing the personal services of one or more of its owners, any foreign source income earned by the corporation will generally be immediately taxable to its U.S. owners as Subpart F income, regardless of whether any actual distribution was made. In addition, foreign entities that are used to house a performer’s trademarks, image rights, and other intellectual property (IP) rights can be subject to the Subpart F rules depending on how the company is organized and managed.
There are various exceptions to the Subpart F rules and certain elections that a U.S. shareholder can make to ameliorate the impact of the rules. However, since the enactment of the Global Intangible Low-Taxed Income rules (“GILTI”) in 2017, many of these exceptions simply convert what would be Subpart F income into GILTI, which is also subject to immediate taxation, albeit at a lower rate.
There are several strategies and planning options that a foreign entertainer can use to mitigate the CFC rules; however, these strategies generally require prospective planning. This planning should be implemented prior to becoming a U.S. tax resident. It is essential for foreign entertainers and their tax advisors to have comprehensive knowledge of their structures and the intersecting rules which may impact how they are treated for U.S. tax purposes.
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Foreign Tax Credit Planning
To reduce the burden of double taxation of foreign income, the U.S. permits U.S. taxpayers to take a foreign tax credit (“FTC”) or deduction for certain foreign taxes paid to a foreign country with respect to non-U.S. source income. FTCs are also guaranteed by U.S.-model income tax treaties. FTCs are vitally important to entertainers who earn income overseas because it enables that such income is not subject to tax in two countries if the structured properly.
With respect to U.S. resident actors and entertainers who earn income abroad, one of the most significant changes is that for foreign withholding taxes on personal services income to be creditable absent a treaty, the foreign country imposing the tax must do so using sourcing rules that are reasonably similar to the U.S. rules. This means that the income must be sourced according to where the services were performed rather than the location of the payor, for example. The issue is particularly relevant to entertainers who receive royalty income from foreign payers. If those payors are resident in a non-treaty country and that country sources the income based on where the payor resides rather than where the property giving rise to the income was exploited, then the foreign tax may not be creditable.
In addition, for a foreign income tax to be creditable, it must be “non-compulsory.” Generally, this means that there is no opportunity under foreign law or an applicable treaty to reduce the burden of foreign taxation. For example, if a U.S. musician earns income in Canada, they are generally required to file a Canadian tax return to attempt to offset the withholding tax with allowable credits before an FTC can be claimed against their U.S. tax liability on that income. For this reason, it is important that entertainers who are U.S. persons work closely with both their U.S. and non-U.S. tax advisors to ensure that the requisite steps are taken in all countries to minimize tax leakage.
Conclusion
Whether a foreign national entertainer is considered a U.S. tax resident or a nonresident alien, the importance of prospective tax planning cannot be overstated. The tax issues endemic to entertainers operating in the international space are unique and highly fact specific. Foreign entertainers coming to the U.S., be it on a temporary or permanent basis, should work closely with their U.S. tax advisors to ensure that their tax affairs are managed in the most efficient and effective manner possible. A goal of any good tax advisor should be to manage the technical issues and to work closely with the entertainer’s management team to understand the facts particular to the individual and craft a custom plan to minimize the clients overall global tax liability whilst minimizing where possible any tax leakage. This will maximize the entertainer’s profitability, but it will also allow them to focus on their creative endeavors rather than esoteric international tax issues.
How Citrin Cooperman Can Help
Our dedicated International Tax Services Practice professionals are prepared to assist you in tax planning for inbound entertainers. For more information, please visit our website or contact Leon Dutkiewicz, ldutkiewicz@citrincooperman.com, or Connor Southwell, csouthwell@citrincooperman.com.
About Citrin Cooperman
"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is one of the nation’s largest professional services firms. Clients are in all business sectors and leverage a complete menu of service offerings. The entities include more than 200 partners and over 1,500 employees across the U.S.
By Leon Dutkiewicz
Citrin Cooperman
ldutkiewicz@citrincooperman.com