Questions -
Q1. USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco's only assets are cash of $200,000, accounts receivable of $200,000 and its U.S. manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco to an independent U.S. buyer.
Is FORco's sale of USAco subject to withholding under FIRPTA? Explain.
Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U.S. manufacturing plant?
Q2. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cholati's effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati's interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati's stock, and $160,000 of interest to a domestic corporation.
Compute Cholati's branch profits tax, and determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country.