Discussion:Foreign Net Operating Loss - Double tax Treaty
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Discussion Forum Index --> Tax Questions --> Foreign Net Operating Loss - Double tax Treaty
| 18 April 2008 | |
| I have a German client who has recently obtained a green card. He still has some rental income from Germany (around $200,000 per year). However, in Germany he has over $3 Million in NOL Carryovers.
Here's the Problem: According to the Double Tax Treaty, he will have to report his rental income according to US Tax Laws and will then get credited for any German Taxes paid. Since, however, no German taxes are due because of the NOL Carryover, he does not pay any taxes in Germany. I am leaning towards Article 24, Paragraph 1 as the trumping rule which gives him permission to use the NOL against that German income, even on the US return. In other words, since he would have accrued a US NOL if he had been a US National for the last several years, he should be allowed to take the same deduction now that he has become a US tax resident. If this was disallowed, he would be 'subjected to taxation that is more burdensome than the taxation to which nationals of the US in the same circumstances' are subject to. What are your ideas on the subject? What do you think? | |
| 19 April 2008 | |
| I'd have advised the German twit to get advice BEFORE he got the greencard. My advice would have been not to move to the US until after he sold his rental properties. Dip.
Under the "too late now" category of advice, I note the following. Article 24 para 1 does not apply as he is a resident of the US. The clause specifically does NOT cover residents of US. Article 6 is the article regarding real property. There is nothing about historical NOL information, so no luck here. Article 7 business profits may apply, if he's a real estate developer. Again, if the RE isn't managed through a corp, tough luck, it doesn't apply. Instead, look into these possibilities: 1) Qualified Business Unit (QBU) - to use the whole of the business, including NOL cf'ds. I have no idea if this will work, it's just a thought to explore. 2) Form 3115 - change of accounting method, to claim all the historical deprecation in the current year. This might generate enough losses to match the historical NOL. Note that (1) and (2) are mutually exclusive, it's one or the other. Note that there is a TD F 90-22.1 filing requirement for this gent. Note that the method of depreciation under (2) is 40 yr SL. Note that if the NOL does qualify under (1), you may have to recompute under US law. Final note: grab every deduction you can: He may have had to return to Germany in several trips to do work on the properties. If so, airfare, FOCONUS for meals, rental cars, etc. | |
