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 interest qualifies as portfolio interest. See Interest that is Not Portfolio Interest. See §§ 871(h)(5) and 881(c)(5)
Timeline:
Below is a timeline of when and how the portfolio interest rules and the exemption has applied over the years:
| For obligations issued | To qualify as portfolio interest: |
| After July 17, 1984 | The interest must be paid on obligations issued after July 18, 1984, and otherwise subject to chapter 3 withholding. |
| Before March 19, 2012 | Portfolio interest included interest on certain registered and nonregistered (bearer) bonds if the obligations meet the requirements described below. – Interest on an obligation that is not in registered form (bearer obligation) is portfolio interest if the obligation is foreign targeted. Documentation is not required for interest on bearer obligations to qualify as portfolio interest. In some cases, however, you may need documentation for purposes of Form 1099 reporting and backup withholding. |
| After March 18, 2012 | Portfolio interest does not include interest paid on debt that is not in registered form, except for interest paid on foreign-targeted registered obligations issued before January 1, 2016, as described in Foreign-targeted registered obligations. |
Citations: IRC § 871(h). Tax on nonresident alien individuals IRC § 881(c). Tax on income of foreign corporations not connected with United States business Treas. Reg. § 1.1441-1 – Requirement for the deduction and withholding of tax on payments to foreign persons.