Page 34 - Withholding Taxes for Foreign Entities

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Most treaties have more than one with- which is often treated as income from employ- Alimony payments. In most cases, alimony
! holding rate on royalties, which varies ment. payments made by U.S. resident aliens to non-
CAUTION by the classification of the payment in For purposes of Chapter 3 withholding, in resident aliens are taxable and subject to Chap-
that treaty. Be sure to check your particular the absence of a treaty exemption, you must ter 3 withholding whether the recipients are re-
treaty for the specific rate that applies to you. withhold at the statutory rate of 30% on the en- siding abroad or are temporarily present in the
tire distribution that is from sources within the United States.
Industrial royalties (Income Code 10). This United States. You may, however, apply with- Many tax treaties, however, provide for an
category of income includes royalties for the holding at graduated rates to the part of a distri- exemption from withholding for alimony pay-
use of, or the right to use, patents, trademarks, bution that arises from the performance of serv- ments. See Tax Treaties, later, for information
secret processes and formulas, goodwill, ices in the United States after December 31, about treaty benefits.
franchises, “know-how,” and similar rights. It 1986. Alimony payments made to a nonresident
also may include payments for the use of, or Employer contributions to a defined benefit alien by a U.S. ancillary administrator of a non-
right to use, industrial, commercial, and scien- plan covering more than one individual are not resident alien estate are from foreign sources
tific equipment, when this is included in the made for the benefit of a specific participant, and are not subject to withholding. Alimony pay-
treaty definition of royalties. but are made based on the total liabilities to all ments are not subject to Chapter 4 withholding.
participants. All funds held under the plan are
Motion picture or television copyright royal- available to provide benefits to any participant. Note. Under section 11051 of P.L. 115-97
ties (Income Code 11). This category refers If the distribution is from such a plan, you can (TCJA), alimony is no longer considered in-
to royalties paid for the use of motion picture use the method in Revenue Procedure 2004-37 come if the divorce or separation agreement is
and television copyrights. to allocate the distribution to sources in the Uni- executed after December 31, 2018, or if execu-
ted States. ted before January 1, 2019, but modified after
Other royalties (for example, copyright, re- The withholding rules that apply to pay- December 31, 2018, the modification must
cording, publishing) (Income Code 12). ments to foreign persons generally take prece- state that section 11051 of P.L. 115-97 applies
This category refers to the royalties paid for the dence over any other withholding rules that to the modification.
use of copyrights on books, periodicals, arti- would apply to distributions from qualified plans
cles, etc., except motion picture and television and other qualified retirement arrangements. Scholarships and Fellowship
copyrights. Foreign pension plans are exempt from ap- Grants Subject to Chapter 3
plying withholding under Chapter 4 when they Withholding (Income Code 16)
Real Property Income and are exempt beneficial owners under Regula-
Natural Resources Royalties tions section 1.1471-6(f). A payment from a A scholarship or fellowship grant is an amount
(Income Code 14) U.S. pension plan to a foreign individual benefi- given to an individual for study, training, or re-
ciary in the plan is not subject to withholding un- search, and which does not constitute compen-
You must withhold tax under Chapter 3 on in- der Chapter 4. sation for personal services. For information
come (such as rents and royalties) from real about withholding on scholarship and fellowship
property located in the United States and held No withholding. Do not withhold tax on an an- grants that is treated as compensation for serv-
for the production of income, unless the foreign nuity payment to a nonresident alien if at the ices, see Pay for services rendered, later.
payee elects to treat this income as effectively time of the first payment from the plan, 90% or Whether a fellowship grant from U.S. sources is
connected with a U.S. trade or business. If the more of the employees eligible for benefits un- subject to Chapter 3 withholding depends on
foreign payee chooses to treat this income as der the plan are citizens or residents of the Uni- the nature of the payments and whether the re-
effectively connected, the payee must give you ted States and the payment is: cipient is a candidate for a degree. These
Form W-8ECI (discussed earlier). This real 1. For the nonresident's personal services amounts are not subject to Chapter 4 withhold-
property income includes royalties from mines, performed outside the United States; or ing. See Scholarships, fellowships, and grants
wells, or other natural deposits, as well as ordi- under Source of Income, earlier.
nary rents for the use of real property. For 2. For personal services by a nonresident in-
Chapter 4 purposes, income from real property dividual present in the United States for 90 Candidate for a degree. Do not withhold on a
is either a nonfinancial payment (and therefore days or less during each tax year, whose qualified scholarship from U.S. sources granted
not a withholdable payment) or is excluded as a pay for those services did not exceed and paid to a candidate for a degree. A quali-
withholdable payment because it is effectively $3,000, and the personal services were fied scholarship means any amount paid to an
connected income. For withholding that applies performed for: individual as a scholarship or fellowship grant to
to the disposition of U.S. real property interests, a. A nonresident alien individual, foreign the extent that, in accordance with the condi-
see U.S. Real Property Interest, later. partnership, or foreign corporation not tions of the grant, the amount is to be used for
engaged in a trade or business in the the following expenses.
Pensions, Annuities, and United States; or • Tuition and fees required for enrollment or
attendance at an educational organization.
Alimony (Income Code 15) b. An office or place of business of a • Fees, books, supplies, and equipment re-
U.S. resident or citizen which was quired for courses of instruction at the edu-
The following rules apply to withholding on pen- maintained outside the United States. cational organization.
sions, annuities, and alimony of foreign payees.
If the payment otherwise qualifies under The payment of a qualified scholarship to a
Pensions and annuities. In most cases, you these rules, but less than 90% of the employees nonresident alien is not reportable and is not
must withhold tax on the gross amount of pen- eligible for benefits are citizens or residents of subject to withholding. However, the part of a
sions and annuities that you pay that are from the United States, you still need not withhold tax scholarship or fellowship paid to a nonresident
sources within the United States. This includes on the payment if: alien which does not constitute a qualified
amounts paid under an annuity contract issued • The recipient is a resident of a country that scholarship is reportable on Form 1042-S and
by a foreign branch of a U.S. life insurance gives a substantially equal exclusion to is subject to withholding. For example, those
company. U.S. citizens and residents, or parts of a scholarship devoted to travel, room,
Most tax treaties provide an exemption from • The recipient is a resident of a beneficiary and board are subject to withholding and are re-
tax on non-government pensions and annuities. developing country under the Trade Act of ported on Form 1042-S. The withholding rate is
See the specific treaty rules for government 1974. 14% on taxable scholarship and fellowship
pensions. The exemption may not apply to The foreign person entitled to the payments grants paid to nonresident aliens temporarily
lump-sum payments. See, for example, Article must provide you with a Form W-8BEN that present in the United States in “F,” “J,” “M,” or
17(2) of the United States–United Kingdom in- contains the TIN of the foreign person. “Q” nonimmigrant status. Payments made to
come tax treaty. In addition, it does not apply to nonresident alien individuals in any other immi-
payments treated as deferred compensation, gration status are subject to 30% withholding.

Page 32 Publication 515 (2020)