Definition: The residence of the payor (also referred to as debtor) determines the source of interest income. Interest payments from U.S. residents and U.S. corporations are generally characterized as U.S. source income. Interest paid by foreign corporations and nonresidents, including U.S. citizens residing abroad, will generally be characterized as foreign source income. The residence of the payor is determined at the time the payment is made. In determining the source of an interest payment, the place of payment, the place the debt is located, the recipient’s
Definition: The Internal Revenue Code (IRC) defines general category income as income other than passive income. It also includes income that does not fall into one of the other additional separate categories. In effect, it is a general catch-all category. General category income generally includes: Wages, salary, other compensation and overseas allowances of an individual as an employee. Income earned in the active conduct of a trade or business. Gains from the sale of inventory or depreciable property used in a trade or business. Financial services
Definition: FTC (The Foreign Tax Credit) is allowed for taxes paid or accrued on a foreign source lump-sum distribution from a pension plan. Special formulas may be used to figure a separate tax on a qualified lump-sum distribution for the year in which the distribution is received. Elect by checking Form 1116 box e above Part I. Skip Part I. Complete Part II showing only foreign taxes that are attributable to the lump-sum distribution. Activity/ Implementation Elect by checking Form 1116 box e, above Part
Definition: An offshore account is an account maintained at an office or branch of a bank or other financial institution located outside the United States or an obligation, contract, or other instrument with respect to which the payor of the payment is either engaged in business as a broker or dealer in securities or a financial institution that engages in significant activities at an office or branch located outside the United States. See Page 11
Definition: A nonresident alien (NRA) is subject to U.S. income tax on income that is effectively connected with a trade or business in the United States (ECI) and on income that is fixed, determinable, annual, and periodical that is not effectively connected with a U.S. trade or business (FDAP). The payer (referred to as the “withholding agent”) making a payment of FDAP income to a NRA is generally required to withhold 30 percent of the gross amount of the payment under Internal Revenue Code (IRC) 1441.
Definition: The source of income from the performance of personal services is the place where the services are performed. Personal services income includes salaries, wages, fees, commissions, fringe benefits and self-employment income. It is not always clear if income received is compensation for personal services or some other type of income. For example, in Boulez, the taxpayer treated income as royalties and the court held it was personal services income. See Page 9
Definition: The source of rental and royalty income is determined by the place where the property is located or used. The source of royalty income for intangible property, such as patents, copyrights, trade secrets, trademarks, and goodwill depends on where the rights to the property are used. This is generally the country in which the intangible property derives its legal protection. See Page 11
Definition: A Registration-Required Obligation is any obligation (including any obligation issued by a governmental entity) that meets the following requirements: The obligation must not be issued by a natural person (i.e., a human) The obligation is of a type offered to the public. This will not apply if the obligation is deemed in the regulations by the Secretary to be used frequently in avoiding taxes or if the obligation is issued after the date on which the regulations take effect. The obligation has a maturity (at
Definition: Dividends are sourced where the payor corporation is incorporated. Generally, dividends received from a domestic corporation are U.S. source income and dividends received from a foreign corporation are foreign source income. Dividends from a foreign corporation will be treated in part as U.S. source income if, during the preceding three taxable years, 25 percent or more of the corporation’s gross income from all sources was effectively connected with the conduct of a U.S. trade or business. See Page 8
Definition: In the case of a partnerships or trusts, the source of income usually is determined at the entity level and the characterization carries over to the partner or beneficiary’s distributive share of income. An exception is the sale of personal property by the partnership, in which case the applicable source rule is applied at the partner level rather than the partnership level. See Page 22
Definition: The Portfolio Interest Exemption applies to interest and original issue discount that qualifies as portfolio interest. These types of income are exempt from Chapter 3 withholding, but they are not exempt from Chapter 4 or FATCA withholding, unless a different exemption from Chapter 4 withholding applies. In order to qualify as portfolio interest, see portfolio interest. In order for the portfolio interest exemption to apply to a payment made to a non-U.S. person, that person must provide to the withholding agent a statement (usually on Form W-8) indicating that the beneficial owner of
Definition: Portfolio Interest generally is paid on an obligation which is non-effectively connected interest that would be taxable at 30 percent and is paid on an obligation or debt that is either in bearer form or registered form. Interest (including OID) that qualifies as portfolio interest and is paid to a non-U.S. person is exempt from tax (unless effectively connected with a U.S. trade or business) and from NRA withholding. Note that this exemption from withholding does not apply to withholding under Chapter 4 as a withholdable payment. Not all
Definition: If a payment is made outside the United States with respect to an offshore obligation, a payee may give you documentary evidence, rather than a Form W-8, to establish that the payee is a foreign person. For accounts opened on or after July 1, 2014, through December 31, 2014, you may use the rules regarding the use of documentary evidence under Regulations sections 1.6049-5(c)(1) and (c)(4) as in effect prior to the issuance of the temporary regulations. A payment is made outside the United States
Definition: In 1980, Congress enacted the Foreign Investment in U.S. Real Property Tax Act of 1980 (FIRPTA) which added IRC 897 and treated gain or loss on the disposition of USRPI by a foreign corporation or a nonresident alien (NRA) as effectively connected with a U.S. trade or business. In 1984, the FIRPTA withholding tax regime under IRC 1445 was enacted under the Deficit Reduction Act of 1984 (Pub. L. 98-369). IRC 1445 generally requires the buyer/transferee to withhold 15 percent (10 percent for dispositions before
Definition: A payment card is any card, including any stored-value card (having prepaid value, including gift cards), issued according to an agreement or arrangement that provides for all of the following: One or more issuers of the cards. A network of persons unrelated to each other, and to the issuer, who agree to accept the cards as payment. Standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept the cards as payment. Citations: 6050W. Returns relating
Definition: IRC §871(b) provides that a nonresident alien (NRA) individual is generally subject to U.S. income taxes at graduated rates on taxable income which is effectively connected (ECI) with the conduct of a U.S. trade or business (USTB). Generally, the activities by the taxpayer directly or through agents, have to be regular, substantial and continuous in order to be engaged in a trade or business. Rents or royalties for the use of, or for the privilege of using, certain intangible property described in IRC §862(a)(4) derived
Definition: There are two categories of U.S. source income that may be effectively connected with the conduct of a USTB under IRC §864(c)(2) and §864(c)(3): Periodical, etc., income (includes FDAP income, portfolio interest income, and gain/loss from the sale or exchange of capital assets). All other U.S. source income, gains, and losses. See Page 4
Definition: Transportation income includes income derived from the use or lease of a vessel or aircraft or from the performance of personal services directly related to the use of a vessel or aircraft. Income from transportation that both begins and ends within the United States is treated as U.S. source income. If the transportation begins in the United States and ends abroad (or visa versa), then 50 percent of the income is treated as U.S. source income and the other 50 percent as foreign source income.
Definition: A third party payment network is any agreement or arrangement: Which involves the establishment of accounts with a central organizationby a substantial number of persons who— are unrelated to such organization, provide goods or services, and have agreed to settle transactionsfor the provision of such goods or services pursuant to such agreement or arrangement, Which provides for standards and mechanisms for settling such transactions, and Which guarantees persons providing goods or services pursuant to such agreement or arrangement that such persons will be paid for providing such goods or services. A third
Definition: The Stated Interest Rate is the interest rate set forth on an obligation and is the amount of interest that the issuer paid. For example, if the issuer pays $40 on an obligation with a face value of $1000, then the stated interest rate is 4 percent. Citation: IRC § 1274(d). Determination of issue price in the case of certain debt instruments issued for property.
Definition: Space and ocean activities include any activity conducted in space, and activity conducted on or under water not within the jurisdiction of a foreign country or the United States and any activity conducted in Antarctica. Income from space or ocean activity is treated as U.S. source income if derived by a U.S. person and as foreign source income if derived by a foreign person. See Page 21