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are deemed “unfair.” Some of these laws vest considerable discretion in the State administration as to whether an issue may be registered, offered, and sold.

Registration is only required in the States in which the securities are offered. Small offerings can usually be made in a relatively small number of States, allowing the issuer to avoid the more burdensome problems of having the issue approved in many States or throughout the country.

Broker-dealers and their individual registered representatives must be registered in the States in which they wish to conduct business, as well as with the NASD. There are no specific restrictions on foreign controlled firms at the State level so long as they comply with the laws applicable to U.S. owned broker-dealers.

4. Institutional Disclosure. Enactment is imminent for legislation to require large institutional investors to report holdings and transactions above a certain size. Foreign institutions would presumably be covered by this legislation, which would add to their record keeping and reporting obligations.

III. TAXATION 1. Summary of Present Tax Treatment. U.S. taxation of foreign individuals and foreign legal entities ("corporations") on their U.S. direct or portfolio investment depends upon the relationship of the foreign taxpayer to the U.S. and the geographic source and nature of his income.

2. Source of income. The Internal Revenue Code (IRC) divides income into two classes: U.S. source income and foreign source income. If income is partially from within the U.S. and partially from without, it must be allocated between the two sources. Generally, U.S. source income includes: (1) income from personal services performed in the U.S.; (2) interest paid by a U.S. citizen, resident, corporation, State or local public entity and a pro rata portion of interest paid by certain foreign corporations which derive a substantial portion of their gross income from U.S. sources; and (3) dividends paid by U.S. corporations and a pro rata portion of dividends paid by those foreign corporations which have substantial U.S. source business income.

3. Nature of income. Treatment of income also varies according to its nature:

(1) Passive investment income, e.g., dividends, interest, rents, and royalties, is subject to a withholding tax at source of 30% (or lower treaty rate) on gross income; and

(2) Business income “effectively connected with the conduct of a trade or business in the U.S." (including income described in paragraph 1) is taxed at progressive rates on taxable income. The "effectively connected” concept was added to the Code in 1966 to segregate business income taxed at progressive rates from investment income taxed at the 30% withholding rate. Among the factors considered are whether the income is derived from assets used in the trade or business, whether the activities of the trade or business were a material factor in the realization of the income and whether the asset or the income was financially accounted for through the trade or business.

4. Summary of Current Treatment. Putting these variables together, U.S. income taxation of foreign individuals and corporations can be roughly summarized as follows:

(1) Resident alien individuals are taxed at progressive rates both on their U.S. and foreign source taxable income, just as are U.S. citizens.

(2) Non-resident alien individuals are taxed at 30% (or lower treaty rate) on gross U.S. source investment income and taxed at progressive rates on U.S. and foreign source taxable income effectively connected with a trade or business conducted in the U.S. In addition, if a non-resident alien is physically present in the U.S. for more than 183 days during a taxable period, his net capital gains from U.S. sources not "effectively connected" are taxed at 30% (or lower treaty rate). Such individuals are not taxed on foreign source investment income, nor on foreign source income not effectively connected with the conduct of a trade or business in the U.S.

(3) Foreign corporations engaged in trade or business in the U.S. are taxed in the same manner as U.S. corporations on their U.S. source income that is effectively connected with such trade or business, as well as upon certain categories of foreign source income effectively connected with the U.S. trade or business. Non-effectively connected U.S. investment income is taxed as described in para. 4.

(4) Foreign corporations not engaged in trade or business in the U.S. are taxed at 30% (or lower treaty rate) on gross U.S. source investment income. Since the corporation has no U.S. trade or business, by definition it will not have any U.S. source business income or effectively connected foreign source income. Such corporations are not taxed by the U.S. on their foreign source investment income.

(5) Gift Tax. U.S. gift tax is paid by resident aliens in the same manner as U.S. citizens. Gifts of intangible property by non-resident aliens are exempt from the tax. Corporations are not subject to the gift tax provisions.

(6) Foreign Investors Tax Act of 1966. The present status of U.S. treatment of foreign investors is largely the product of past attempts to remove re straints on such investment. The Revenue Act of 1936 liberalized U.S. taxation of capital gains realized in the U.S. by certain foreign individuals and corporations. In 1963 President Kennedy appointed a task force to examine means of encouraging increased foreign investment in the U.S. and increased foreign financing by U.S. corporations operating abroad. A report (“Fowler Report") was issued by this task force in 1964 containing thirty-nine recommendations on how to accomplish those objectives.

Legislation incorporating these recommendations, introduced in March 1965, underwent extensive modification by the Ways and Means Committee in which the focus changed from encouraging foreign investment to providing equitable treatment of such investment. The resulting “Foreign Investors Tax Act of 1966" (FITA) enacted all the recommendations contained in the Fowler Report except complete exemption from U.S. estate tax of all intangible personal property of non-resident alien decedents located in the U.S. Instead, FITA substantially reduced the tax rates applicable to foreign decedents and increased the available exemption from $2,000 to $30,000. In addition, FITA extended U.S. taxation for the first time to certain classes of foreign source income of non-resident aliens and foreign corporations if that income is effectively connected with the conduct of a trade or business in the U.S.

(7) Tax Treaties. In addition to legislation, treaties have a major impact on the tax treatment of foreign investment in the U.S. The tendency of recent treaties negotiated by the U.S. has been to incorporate the statutory changes effected by FITA and to provide for a mutual reduction of withholding rates.

(8) Estate Taxes. Estates of resident aliens are taxed on all ‘property wherever located, just as are estates of U.S. citizens. Estates of non-resident alien individuals are taxed only on property deemed situated in the U.S. Stock and debt obligations of a U.S. individual, corporation or State are deemed situated in the U.S. regardless of the physical location of the certificate or the note or the non-resident alien at death. After January 1, 1977, deposits with U.S. banks or domestic branches for foreign banks will also be deemed situated in the U.S.

(9) Capital Gains. In general no capital gains tax is imposed on a foreign investor not engaged in a trade or business in the United States. However, if the foreign individual is physically present in the United States for more than 183 days during a taxable period he is liable for the tax.

(10) State Taxes. State taxes, including corporate income and franchise taxes, personal income taxes, excise taxes, and property taxes may influence the size, type and location of foreign investment. Since State tax rates are substantially less than Federal rates, they probably do not constitute a major overall deterrent. However, bilateral tax treaties do not reduce or eliminate these taxes.

State taxes have little effect on the portfolio investments of non-resident alien individuals or foreign corporations since such taxes usually would not apply to dividends or interest paid to those foreign investors or to any gains realized upon final disposition of the securities.

The situation confronting direct investors is more complicated. In addition to the tax rates themselves, investors must consider the basis on which a State premises its taxing jurisdiction and the manner in which it determines the amount of income subject to such jurisdiction.

IV. VISA REQUIREMENTS 1. Nonimmigrants. Any nonimmigrant alien in the United States may, unless precluded from doing so because of restrictions in the foreign exchange area or because of actions or policies of his government, invest in any lawful venture. However, he may not, in the absence of official permission granted by the Immigration and Naturalization Service, engage in gainful employment or remain beyond the period of time authorized by that Service.

Of the several nonimmigrant visa classifications, four authorize foreigners to work for remuneration here, pursuant to bilateral agreement on reciprocity for U.S. citizens. These are: treaty trader, treaty investor, temporary workers, and intra-company transferee. The first two mentioned classifications were designed specifically to provide for those aliens desirous of investing here, or to otherwise engage in substantial business ventures. The latter are relatively new, having been established by legislation in 1970. So long as aliens in any of these four classifications maintain status with approval of the Immigration and Naturalization Service, there is no prescribed limit on the total length of time they may remain in the United States.

There is one other nonimmigrant classification that is available to the foreign businessman who wishes to invest in the United States, and that is the temporary visitor for business. Foreign businessmen admitted in this classification may not engage in gainful employment, however, nor may they remain longer than six months in the absence of Immigration and Naturalization Service authorized extensions to stay.

2. Immigrants. A foreign businessman who intends to reside in the United States for an indefinite period or permanently in connection with his investment and who cannot qualify for any of the non-immigrant classifications described must obtain an immigrant visa. In applying for an immigrant visa, he must meet the labor certification requirement of the Immigration and Naturalization Act by establishing that he is seeking to enter the United States for the purpose of engaging in a commercial or agricultural enterprise in which he has invested, or is actively in the process of investing, capital totalling at least $10,000, and establishes that he has had at least one year's experience or training qualifying him to engage in such enterprise." Also, a labor certification will usually be granted by the Department of Labor on an intra-company transfer basis for key personnel who have been emp yed by the firm abroad for a continuous period of more than one year. Once this requirement has been met, the foreign businessman will then complete the normal procedural requirements and, if a visa number is available for his use, will receive an immigrant visa without delay.

There are limitations imposed by law on the number of immigrant visas which may be issued each year–170,000 to persons born in the Eastern Hemisphere; 120,000 to persons born in independent countries of the Western Hemisphere (North and South America). Because the demand for immigrant visas is variable, there may be a waiting period before an immigrant visa number will become available for a qualified applicant. A foreign businessman intending to immigrate to the United States in connection with his investment in this country must consult the nearest Amercian Embassy or consulate for precise details of the process of applying for, and obtaining, an immigrant visa and for information concerning the waiting period, if any, which he may face before a visa number can be made available for his use.

Dept. of the Treasury News, May 27, 1975.

Securities Transactions

On April 28, 1975, the U.S. Court of Appeals for the Second Circuit handed down two decisions involving the securities of Investors Overseas Services, Ltd. (IOS) and involving the question of the territorial reach of Federal securities laws. The cases were Bersch v. Drexel Firestone, Inc., et al., 519 F.2d 974 (1975), cert. den. subnom. Bersch v. Andersen, 44 U.S. Law Week 3344 (1975), and IIT v. Vencap, Ltd., 519 F.2d 1001 (1975).

In Bersch, a class action was brought on behalf of purchasers of stock of IOS, an international sales and financial corporation organized under Canadian law and doing its main business in Geneva, Switzerland, against that corporation and others. It charged violation of Federal securities laws because of failure to reveal material facts in its prospectus, and common law fraud. The Court of Appeals held that the Federal securities laws apply to sales of securities to American residents in the United States, whether or not acts of material importance occurred in the United States, and to American residents abroad only if acts of material importance in the United States significantly contributed to losses, but that the Federal securities laws did not apply to losses from sales of securities to foreigners outside the United States where acts in the United States did not directly cause such losses. The Court added:

We freely acknowledge that if we were asked to point to language in the statutes, or even in the legislative history, that compelled these conclusions, we would be unable to respond. The Congress that passed these extraordinary pieces of legislation in the midst of the depression could hardly have been expected to foresee the development of offshore funds thirty years later. We recognize also that reasonable men might conclude that the coverage was greater, or less, than has been outlined in this opinion and in IIT v. Vencap, Ltd., ... this day decided. Our conclusions rest on case law and commentary concerning the application of the securities laws and other statutes to situations with foreign elements and on our best judgment as to what Congress would have wished if these problems had occurred to

it. (at p. 993.) The Court decided further that foreign purchasers should be dismissed from the class action and that there was no in personam jurisdiction over the Canadian investment house in connection with sales of the Canadian corporation's stock to Canadians.

In IIT, another product of the troubled existence of IOS, action was brought by a Luxembourg investment trust for fraud, conversion and corporate waste against a Bahamian corporation and other defendants. Here the Court of Appeals held that there was subject matter jurisdiction under Federal securities laws in a suit for damages or rescission by defrauded foreign individuals where the United States was used as the base for manufacturing fraudulent security devices for export, but that further findings by the district court were necessary to determine the existence of subject matter jurisdiction. Under that situation, the Court of Appeals retained jurisdiction of appeal pending further findings and conclusions. The opinion stated, in part:

We do not think Congress intended to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners. This country would surely look askance if one of our neighbors stood by silently and permitted misrepresented securities to be poured into the United States. By the same token it is hard to believe Congress meant to prohibit the SEC from policing similar activities within this country. . . . If there would be subject matter jurisdiction over a suit by the SEC to prevent the concoction of securities frauds in the United States for export, there would also seem to be jurisdiction over a suit for damages or rescission by a defrauded foreign individual. Our ruling on this basis of jurisdiction is limited to the perpetration of fraudulent acts themselves and does not extend to mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the activity was performed in foreign countries, such as in Bersch. Admittedly the distinction is a fine one. But the position we are taking here itself extends the application of the securities laws to transnational transactions beyond prior decisions and the line has to be drawn somewhere if the securities laws are not to apply in every instance where something has happened in the United States, however large the gap between the something and a consummated fraud and however negligible the effect in the United States or on its citizens. [at pp. 1017-1018.]

In discussing the issue of subject matter jurisdiction, the Court observed with respect to 28 U.S.C. 1350, which confers jurisdiction over "any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States":

This old but little used section is a kind of legal Lohengrin; although it has been with us since the first Judiciary Act, § 9, 1 Stat. 73, 77 (1789), no one seems to know whence it came.

Here there is no allegation of anyone's violating a treaty. The reference to the law of nations must be narrowly read. . . We cannot subscribe to plaintiffs' view that the Eighth Commandment “Thou shalt not steal” is part of the law of nations. While every civilized nation doubtless has this as a part of its legal system, a violation of the law of nations arises only when there has been “a violation by one or more individuals of those standards, rules or customs (a) affecting the relationship between states or between an individual and a foreign state, and (b) used by those states for their common good and/or in dealings inter se." ... [at p. 1015.)

Tax Treaties

U.S.-Canada

United States v. A. L. Burbank & Co., Ltd., et al., 525 F.2d 9 (1975) decided October 22, 1975, by the U.S. Court of Appeals for the

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