Page 26 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
Page 24 of 55
Fileid: … tions/P515/2020/A/XML/Cycle10/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
certain types of non-financial payments and the source of the income, regardless of where the For information on what is included in these
inclusion (as U.S. source interest) of deposit in- contract was made, the place of payment, or benefits, see Regulations section 1.861-4(b)(2)
terest paid by a foreign branch of a U. S. corpo- the residence of the payer. (ii)(D).
ration or partnership. Also, see Fixed or Deter- However, under certain circumstances, pay- An employee's main job location (principal
minable Annual or Periodical Income (FDAP), ment for personal services performed in the place of work) is usually the place where the
later. United States is not considered income from employee spends most of his or her working
A withholding agent must withhold on a pay- sources within the United States. For informa- time. If there is no one place where most of the
work time is spent, the main job location is the
ment of U.S. source FDAP income that is a tion on this exception, see Pay for Personal place where the work is centered, such as
withholdable payment to which an exception Services Performed, later. where the employee reports for work or is other-
does not apply under Chapter 4. If the income is for personal services per-
formed partly in the United States and partly wise required to base his or her work.
Amounts not subject to withholding under outside the United States, you must make an An employee can use an alternative basis
Chapter 4. The following amounts are not accurate allocation of income for services per- based on facts and circumstances, rather than
the time or geographical basis. The employee,
subject to withholding under Chapter 4. formed in the United States based on the facts not the employer, must demonstrate that the al-
• Interest or original issue discount from a and circumstances. In most cases, you make ternative basis more properly determines the
short-term obligation. this allocation on a time basis. That is, U.S.
• Payments made under a grandfathered source income is the amount that results from source of the pay or fringe benefits.
obligation (for example, obligations out- multiplying the total amount of pay by the fol- Territorial limits. Wages received for serv-
standing on July 1, 2014). lowing fraction. ices rendered inside the territorial limits of the
United States and wages of an alien seaman
Source of Income Number of days services are performed in the earned on a voyage along the coast of the Uni-
United States ted States are regarded as from sources in the
In most cases, income is from U.S. sources if it Total number of days of service for which United States. Wages or salaries for personal
is paid by domestic corporations, U.S. citizens compensation is paid services performed in a mine or on an oil or gas
or resident aliens, or entities formed under the well located or being developed on the conti-
laws of the United States or a state. Income Multiyear compensation. Generally, the nental shelf of the United States are treated as
also is from U.S. sources if the property that source of multiyear compensation is deter- from sources in the United States.
produces the income is located in the United mined on a time basis over the period to which Income from the performance of services di-
States or the services for which the income is the compensation is attributable. Multiyear rectly related to the use of a vessel or aircraft is
paid were performed in the United States or the compensation is compensation that is included treated as derived entirely from sources in the
income is a dividend equivalent. A payment is in the taxable income of a recipient in 1 tax year United States if the use begins and ends in the
treated as being from sources within the United but that is attributable to a period that includes 2 United States. This income is subject to with-
States if the source of the payment cannot be or more tax years. The determination of the pe- holding if it is not effectively connected with a
determined at the time of payment, such as riod to which the compensation is attributable, U.S. trade or business. If the use either begins
fees for personal services paid before the serv- for purposes of determining its source, is based or ends in the United States, see Transportation
ices have been performed. Other source rules on the facts and circumstances of each case. income, later.
are summarized in Chart B and explained in de- For example, an amount of compensation that Crew members. Income from the perform-
tail in the separate discussions under Withhold- specifically relates to a period of time that in- ance of services by a nonresident alien in con-
ing on Specific Income, later. cludes several calendar years is attributable to nection with the individual's temporary pres-
In most cases, interest on an obligation of a the entire multiyear period. Where determining ence in the United States as a regular member
foreign corporation or foreign partnership is for- the source of multiyear compensation on a time of the crew of a foreign vessel engaged in trans-
eign-source income. If the entity is engaged in a basis is appropriate, the amount of compensa- portation between the United States and a for-
trade or business in the United States during its tion treated as from U.S. sources is figured by eign country or a U.S. possession is not income
tax year, interest paid by such entity is treated multiplying the total multiyear compensation by from U.S. sources.
as from U.S. sources only if the interest is paid a fraction. The numerator of the fraction is the Multilevel marketing. Certain companies
by a U.S. trade or business conducted by the number of days (or unit of time less than a day, sell products through a multilevel marketing ar-
entity or is allocable to income that is treated as if appropriate) that labor or personal services rangement, such that an upper-tier distributor,
effectively connected with the conduct of a U.S. were performed in the United States in connec- who has sponsored a lower-tier distributor, is
trade or business. This applies to a foreign part- tion with the project. The denominator of the entitled to a payment from the company based
nership only if it is predominantly engaged in fraction is the total number of days (or unit of on certain activities of that lower-tier distributor.
the active conduct of a trade or business out- time less than a day, if appropriate) that labor or Generally, depending on the facts, payments
side the United States. personal services were performed in connec- from such multilevel marketing companies to in-
tion with the project.
Guarantee income. Certain amounts paid, di- Employees. If the services are performed dependent (nonemployee) distributors (up-
per-tier distributors) that are based on the sales
rectly or indirectly, for the provision of a guaran- partly in the United States and partly outside the or purchases of persons whom they have spon-
tee of indebtedness issued after September 27, United States by an employee, the allocation of sored (lower-tier distributors) constitute income
2010, are from U.S. sources. The amounts pay, other than certain fringe benefits, is deter- for the performance of personal services in re-
must be paid by one of the following. mined on a time basis. The following fringe ben- cruiting, training, and supporting the lower-tier
1. A noncorporate U.S. resident or a U.S. efits are sourced on a geographical basis as distributors. The source of such income is gen-
corporation for the provision of a guaran- shown in the following list. erally based on where the services of the up-
tee of the resident or corporation. • Housing—employee's main job location. per-tier distributor are performed, and may, de-
2. Any foreign person for the provision of a • Education—employee's main job location. pending on the facts, be considered multiyear
compensation, with the source of income deter-
guarantee if the payment of income is ef- • Local transportation—employee's main job mined over the period to which such compen-
location.
fectively connected, or treated as effec- sation is attributable.
tively connected, with the conduct of a • Tax reimbursement—jurisdiction imposing
tax.
U.S. trade or business. • Hazardous or hardship duty pay—location Scholarships, fellowships, and grants.
Personal service income (for purposes of of pay zone. Scholarships, fellowships, and grants are
sourced according to the residence of the
Chapter 3 withholding). If the income is for • Moving expense reimbursement—employ- payer. Those made by entities created or domi-
personal services performed in the United ee's new main job location. ciled in the United States are generally treated
States, it is from U.S. sources. The place where as income from sources within the United
the services are performed determines the
Page 24 Publication 515 (2020)