Page 27 - Withholding Taxes for Foreign Entities

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States. However, see Activities outside the Uni- Fixed or Determinable • Gambling winnings.
ted States next. Those made by entities created Annual or Periodical • Awards, prizes, and scholarships.
or domiciled in a foreign country are treated as • Interest on outstanding accounts payable
income from foreign sources. (FDAP) Income arising from the acquisition of goods or
Activities outside the United States. A FDAP income is all income except: services.
scholarship, fellowship, grant, targeted grant, or • Gains from the sale of property (not includ- Periodic or lump-sum payments. Income
an achievement award received by a nonresi- ing original issue discount and certain can be FDAP income whether it is paid in a ser-
dent alien for activities conducted outside the gains that are referred to in Amounts Sub- ies of repeated payments or in a single lump
United States is treated as foreign source in- ject to Chapter 3 Withholding, earlier); and sum. For example, $5,000 in royalty income
come. • Items of income excluded from gross in- would be FDAP income whether paid in 10 pay-
come without regard to U.S. or foreign sta- ments of $500 each or in one payment of
Pension payments. The source of pension tus of the owner of the income, such as $5,000.
payments is determined by the part of the distri- tax-exempt municipal bond interest and
bution that constitutes the compensation ele- qualified scholarship income. Insurance proceeds. Income derived by an
ment (employer contributions) and the part that insured nonresident alien from U.S. sources
constitutes the earnings element (the invest- The following items are examples of FDAP upon the surrender of, or at the maturity of, a life
ment income). income. insurance policy, is FDAP income and is sub-
The compensation element is sourced the • Compensation for personal services paid ject to Chapter 3 withholding and is a withholda-
same as compensation from the performance of to an individual or a sole proprietorship. ble payment. This includes income derived un-
personal services. The part attributable to serv- • Dividends and dividend equivalent pay- der a life insurance contract issued by a foreign
ices performed in the United States is U.S. ments. branch of a U.S. life insurance company. The
source income, and the part attributable to serv- • Interest. proceeds are income to the extent they exceed
ices performed outside the United States is for- • Original issue discount. the cost of the policy.
eign source income. • Real estate mortgage investment conduit However, certain payments received under
Employer contributions to a defined benefit (REMIC) excess inclusion income. a life insurance contract on the life of a termi-
plan covering more than one individual are not • Pensions and annuities. nally or chronically ill individual before death
made for the benefit of a specific participant, • Alimony (no longer income if the divorce or (accelerated death benefits) may not be subject
but are made based on the total liabilities to all separation agreement is executed after to tax. This also applies to certain payments re-
participants. All funds held under the plan are December 31, 2018, or if executed before ceived for the sale or assignment of any part of
available to provide benefits to any participant. January 1, 2019, but modified after De- the death benefit under contract to a viatical
If the payment is from such a plan, you can use cember 31, 2018, the modification must settlement provider. See Pub. 525, Taxable and
the method in Revenue Procedure 2004-37, state that section 11051 of P.L. 115-97 Nontaxable Income, for more information.
available at IRS.gov/irb/ (TCJA) applies to the modification).
2004-26_IRB#RP-2004-37, to allocate the pay- • Real property income, such as rents, other Racing purses (for purposes of Chapter 3
ment to sources within and without the United than gains from the sale of real property. withholding). Racing purses are FDAP in-
States. • Royalties. come and racetrack operators must withhold
The earnings part of a pension payment is • Taxable scholarships and fellowship 30% on any purse paid to a nonresident alien
U.S. source income if the trust is a U.S. trust. grants. racehorse owner in the absence of definite in-
• Other taxable grants, prizes, and awards. formation contained in a statement filed to-
Chart B. Summary of Source Rules • A sales commission paid or credited gether with a Form W-8 that the owner has not
for FDAP Income monthly. raced, or does not intend to enter, a horse in
• A commission paid for a single transaction. another race in the United States during the tax
IF you have... THEN the source of that • The distributable net income of an estate year. If available information indicates that the
income is determined by... or trust that is FDAP income and must be racehorse owner has raced a horse in another
pay for personal services where the services are distributed currently, or has been paid or race in the United States during the tax year,
performed. credited during the tax year. then the statement and Form W-8 filed for that
dividends the type of corporation (U.S. • FDAP income distributed by a partnership year are ineffective. The owner may be exempt
or foreign). that, or such an amount that, although not from withholding of tax at 30% on the purses if
interest the residence of the payer. actually distributed, is includible in the the owner gives you Form W-8ECI, which pro-
gross income of a foreign partner.
vides that the income is effectively connected
rents where the property is • Taxes, mortgage interest, or insurance with the conduct of a U.S. trade or business and
located. premiums paid to, or for the account of, a that the income is includible in the owner's
royalties—patents, nonresident alien landlord by a tenant un- gross income.
copyrights, etc. where the property is used. der the terms of a lease.
royalties—natural where the property is • Publication rights. Covenant not to compete. Payment received
resources located. • Prizes awarded to nonresident alien artists for a promise not to compete is generally FDAP
pensions—distributions for pictures exhibited in the United States. income. Its source is the place where the prom-
attributable to where the services were • Purses paid to nonresident alien boxers for isor forfeited his or her right to act. Amounts
contributions performed. prize fights in the United States. paid to a nonresident alien for his or her prom-
pensions—investment • Prizes awarded to nonresident alien pro- ise not to compete in the United States are sub-
earnings on contributions the location of pension trust. fessional golfers in golfing tournaments in ject to Chapter 3 withholding and are withholda-
the United States.
scholarships and in most cases, the ble payments.
fellowship grants residence of the payer. Payments for the following purposes are ex-
guarantee of the residence of the debtor amples of payments that are not withholdable Withholding on
indebtedness or whether the payment is payments.
effectively connected with a • Services (including wages and other forms Specific Income
U.S. trade or business. of employee compensation (such as stock
options)). Different kinds of income are subject to different
• The use of property. withholding requirements.
• Office and equipment leases.
• Software licenses.
• Transportation.
• Freight.
Publication 515 (2020) Page 25