E-2 investors operating in the United States are subject to U.S. tax rules, and those rules raise practical questions early on. Does the United States tax only income earned inside the country, or can foreign income also be taxed? And if the investor continues to pay tax in a home country, how does U.S. law handle potential overlap?
The answers do not depend on the E-2 visa itself. For tax purposes, the Internal Revenue Service (IRS) looks at an individual’s presence and connections to the United States during a given year. Based on those factors, an investor is classified as either a U.S. tax resident or a nonresident, which determines what income must be reported and how double taxation is addressed.
Under IRS rules, the starting point for this classification is whether the individual meets the Substantial Presence Test for the year. This test measures the number of days a person is physically present in the United States over a defined period. Meeting the test generally results in treatment as a U.S. tax resident for that year, while not meeting it generally results in nonresident status.
For purposes of the Substantial Presence Test, the IRS counts days of physical presence in the United States during the year, along with a weighted consideration of days from prior years. In general terms, a day counts if the individual is physically present in the United States at any time during that day, subject to specific exceptions defined by IRS rules. These counting rules are applied mechanically and do not take into account the individual’s visa category or intent.
To show how these counting rules are applied in practice, consider the following illustration, which is provided solely to explain the IRS methodology and does not determine any individual’s tax status. Assume an individual was physically present in the United States for 120 days in each of the years 2022, 2023, and 2024. Under the IRS counting method, all 120 days of presence in 2024 would be counted, along with one-third of the 120 days from 2023 and one-sixth of the 120 days from 2022. In this illustration, the total number of counted days over the three-year period would be 180 days. Because this total does not reach the 183-day threshold referenced in IRS guidance, the Substantial Presence Test would not be met for 2024 under this illustration.
How Tax Residency Affects What Income Is Taxed
Once the IRS classifies an E-2 investor as either a U.S. tax resident or a nonresident for a given year, that classification determines what income the United States can tax.
If the investor is treated as a U.S. tax resident, U.S. federal income tax generally applies to income from both U.S. and foreign sources.
If the investor is treated as a nonresident, U.S. federal income tax generally applies only to income earned from U.S. sources, including income connected to operating a business in the United States.
These rules apply regardless of visa category and are assessed separately for each tax year under IRS guidance.
Addressing Double Taxation
When an E-2 investor is classified as a U.S. tax resident and therefore subject to U.S. tax on worldwide income, the same income may also be taxed by the investor’s home country. To address this overlap, U.S. tax law provides mechanisms designed to reduce or eliminate double taxation.
The primary tool is the foreign tax credit, which allows taxpayers to credit foreign taxes paid against their U.S. tax liability on the same income. Additionally, the United States has tax treaties with many countries that include provisions to prevent double taxation, such as reduced tax rates on certain types of income or rules that determine which country has primary taxing rights.
The availability and extent of relief from double taxation depend on the specific tax treaty between the United States and the investor’s home country, as well as the types of income involved. E-2 investors should consult with qualified tax professionals in both jurisdictions to understand how these mechanisms apply to their particular circumstances.
*This article provides general information about U.S. tax rules for E-2 visa investors and is not intended as tax or legal advice. Individual circumstances vary, and tax laws are complex. E-2 investors should consult with qualified tax professionals in both the United States and their home country for advice specific to their situation.
Sources:
- IRS. https://www.irs.gov/individuals/international-taxpayers/tax-treaties
- IRS. https://www.irs.gov/taxtopics/tc856
- IRS. https://www.irs.gov/publications/p519
- IRS. https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
- IRS. https://www.irs.gov/individuals/international-taxpayers/alien-taxation-certain-essential-concepts