In the U.S. tax system, there is no characteristic of associations or entities (partnerships, corporations, and trusts) that corresponds exactly to the “nationality” or “residence” of individuals.  For most organizations, however, there is a place – or at least a distinct legal environment – that establishes their existence and identity.  This place, sometimes referred to as an entity’s “situs”, bears heavily on its taxation.

Corporations

The situs of a corporation is inextricably tied to the country of its incorporation.  To that end, two simple words define the tax treatment of a corporation: “domestic” and “foreign.”  A “domestic” entity (including a partnership or a corporation) is one “organized in the United States under the laws of the United States or of any State.”  § 7701(a)(4).  Colloquially, domestic corporations are referred to as “U.S. corporations.”  All other corporations and partnerships are “foreign.”

The situs of a corporation has momentous tax consequences.  For example, a domestic corporation is subject to U.S. taxation on its worldwide income.  A foreign corporation, on the other hand, is only subject to U.S. taxation on the income that it derives from U.S. investment or business.

Because a corporation is nothing more than a piece of paper adorned by the official seal of a government that confers a separate legal status on it, some commentators have questioned the wisdom of having large tax consequences turn on which of several sovereigns have issued the document.  At the same time, no other basis for taxing corporations – including the nationality of their beneficial owners or the principal place of their operations or management – meshes as simply with the U.S. tax system overall.

A number of other elements of U.S. tax law have blunted the distinction between foreign and domestic corporations in various settings.  Among these are various “look-through” rules pertaining to source of income and the special regime of taxing U.S. shareholders of controlled foreign corporations.

Partnerships

Like corporations, the situs of a partnership is the place under the laws of which it is organized.  Because “general” partnerships may be formed by nothing more than a private agreement – i.e., with no involvement of any government – the practical determination of situs is more obscure for a partnership than for a corporation.

For example, suppose that a French businessperson and a Mexican businessperson agree to do business as partners in six U.S. states and three provinces of Canada.  Under what law is the partnership “organized”?

Fortunately, the situs of partnerships has only minor significance for tax purposes.  Because partnerships are not taxable entities, it is the nationality or residence of the individual partners that generally governs U.S. taxation of partnership income.  One situation where the situs of partnerships does become relevant is in withholding.  U.S. tax must be withheld from payments of income to foreign, but not domestic, partnerships.

There is also a lingering notion in the U.S. tax system that is an outdated remnant of a bygone era.  And that notion is that the “residence” of a partnership is distinct from its status as domestic or foreign.  However, that comes into play only in connection with the source rules for interest.  Reg. § 301.7701-5.

Trusts

The situs of trusts flows from the definition of a “United States person” in section 7701(a)(30).  A trust is a “United States person” and is subject to worldwide U.S. taxation if the following conditions are satisfied.  First, the trust must be subject to the jurisdiction of a court within the United States.  And second, the fiduciaries in control of the trust must be U.S. persons.

All other trusts are foreign trusts.  A foreign trust escapes U.S. taxation on its non-U.S. income.  However, U.S. beneficiaries of foreign trusts are ultimately subject to full U.S. taxation on any trust income from which they benefit.