Page 4 - Brochure on doing Business in California_Neat

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U.S.A. Tax Requirements on Income Earned within the U.S.A.

1. PASSIVE INCOME (PERIODIC INCOME) DERIVED
FROM INVESTMENTS IN THE U.S.A.

In most cases, a foreign person is subject to U.S. tax on
its U.S. source income. Most types of U.S. source income
received by a foreign persons is subject to U.S. tax of
30%. A reduced rate, including exemption, may apply if
there is a tax treaty between the foreign person’s
country of residence and the United States. The tax is
generally withheld from the payment made to the
foreign person.

A withholding agent is the person responsible for withholding on payments made to a foreign
person.

a) However, a withholding agent that can reliably associate the payment with
documentation from a U.S.A. person that he/she is not required to be withheld.
b) In addition, the withholding agent may apply a reduced rate of withholding, including
an exemption from withholding, if it can reliably associate the payment with
documentation from a beneficial owner, that is a foreign person is entitled to a reduced
rate of withholding

Tax withholding at source is generally required on foreign persons earning passive income from
investments in the U.S.A.

2. EFFECTIVELY CONNECTED INCOME (ECI) WITHIN THE U.S.A.

Generally, when a foreign person engages in a trade or business in the United States, all income
from sources within the United States is connected with the conduct of that trade or business
and is considered to be Effectively Connected Income (ECI).

The foreign person, individual or corporate entity, must be engaged in a trade or business during
the tax year to be able to treat income received in that year as ECI. The foreign person is usually
considered to be engaged in a U.S. A. trade or business when he/she or it performs personal
services in the United States. If a foreign person or company claims to have earned income
effectively connected with a trade or business in the United States, the foreign person must:

a) File form 1120F, Corporate Income Tax of a foreign entity, for that year, and pay the tax
due on the net income
b) File form W-ECI to:
 Establish foreign status