This section explains how to determine if a payment is subject to NRA withholding.
A payment is subject to NRA withholding if it is from sources within the United States, and it is either:
- Fixed or determinable annual or periodical (FDAP) income, or
- Certain gains from the disposition of timber, coal, and iron ore, or from the sale or exchange of patents, copyrights, and similar intangible property.
In addition, a payment is subject to NRA withholding if withholding is specifically required, even though it may not constitute U.S. source income or FDAP income. For example, corporate distributions may be subject to NRA withholding even though a portion of the distribution may be a return of capital or capital gain not otherwise subject to NRA withholding. taxmap/pubs/p515-003.htm#en_us_publink1000224881
The following amounts are not subject to NRA withholding.
- Portfolio interest on bearer obligations or foreign-targeted registered obligations if those obligations meet certain requirements. See Interest, later.
- Bank deposit interest that is not effectively connected with the conduct of a U.S. trade or business. See Interest, later.
- Original issue discount on certain short-term obligations. See Original issue discount, later.
- Nonbusiness gambling income of a nonresident alien playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. See Gambling winnings, later.
- Amounts paid as part of the purchase price of an obligation sold between interest payment dates. See Interest, later.
- Original issue discount paid on the sale of an obligation other than a redemption. See Original issue discount, later.
- Insurance premiums paid on a contract issued by a foreign insurer.
Generally, income is from U.S. sources if it is paid by domestic corporations, U.S. citizens or resident aliens, or entities formed under the laws of the United States or a state. Income is also from U.S. sources if the property that produces the income is located in the United States or the services for which the income is paid were performed in the United States. A payment is treated as being from sources within the United States if the source of the payment cannot be determined at the time of payment, such as fees for personal services paid before the services have been performed. Other source rules are summarized in Chart B and explained in detail in the separate discussions under Withholding on Specific Income, later.
Generally, interest on an obligation of a foreign corporation or foreign partnership is foreign-source income. If the entity is engaged in a trade or business in the United States during its tax year, interest paid by such entity is treated as from U.S. sources only if the interest is paid by a U.S. trade or business conducted by the entity or is allocable to income that is treated as effectively connected with the conduct of a U.S. trade or business. This applies to a foreign partnership only if it is predominantly engaged in the active conduct of a trade or business outside the United States. taxmap/pubs/p515-003.htm#en_us_publink1000224883
If the income is for personal services performed in the United States, it is from U.S. sources. The place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer.
However, under certain circumstances, payment for personal services performed in the United States is not considered income from sources within the United States. For information on this exception, see Pay for Personal Services Performed, later.
If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of income for services performed in the United States based on the facts and circumstances. In most cases, you make this allocation on a time basis. That is, U.S. source income is the amount that results from multiplying the total amount of pay by the following fraction:
|Number of days services are performed in the United States|
|Total number of days of service for which compensation is paid|
Chart B. Summary of Source Rules for FDAP Income
| IF you have: || THEN the source of that income is determined by: |
|Pay for personal services||Where the services are performed|
|Dividends||The type of corporation (U.S. or foreign)|
|Interest||The residence of the payer|
|Rents||Where the property is located|
|Royalties—Patents, copyrights, etc.||Where the property is used|
|Royalties—Natural resources||Where the property is located|
|Pensions: Distributions attributable to contributions||Where the services were performed while a nonresident alien|
|Pensions: Investment earnings on contributions||The location of pension trust|
|Scholarships and fellowship grants||Generally, the residence of payer|
If the services are performed partly in the United States and partly outside the United States by an employee, the allocation of pay, other than certain fringe benefits, is determined on a time basis. The following fringe benefits are sourced on a geographical basis as shown in the following list.
- Housing – employee's main job location.
- Education – employee's main job location.
- Local transportation – employee's main job location.
- Tax reimbursement – jurisdiction imposing tax.
- Hazardous or hardship duty pay – location of pay zone.
- Moving expense reimbursement – employee's new main job location.
For information on what is included in these benefits, see Regulations section 1.861-4(b)(2)(ii)(D).
An employee's main job location (principal place of work) is usually the place where the employee spends most of his or her working time. If there is no one place where most of the work time is spent, the main job location is the place where the work is centered, such as where the employee reports for work or is otherwise required to base his or her work.
An employee can use an alternative basis based on facts and circumstances, rather than the time or geographical basis. The employee, not the employer, must demonstrate that the alternative basis more properly determines the source of the pay or fringe benefits. taxmap/pubs/p515-003.htm#en_us_publink1000224887
Wages received for services rendered inside the territorial limits of the United States and wages of an alien seaman earned on a voyage along the coast of the United States are regarded as from sources in the United States. Wages or salaries for personal services performed in a mine or on an oil or gas well located or being developed on the continental shelf of the United States are treated as from sources in the United States.
Income from the performance of services directly related to the use of a vessel or aircraft is treated as derived entirely from sources in the United States if the use begins and ends in the United States. This income is subject to NRA withholding if it is not effectively connected with a U.S. trade or business. If the use either begins or ends in the United States, see Transportation income, later. taxmap/pubs/p515-003.htm#en_us_publink1000224888
Income from the performance of services by a nonresident alien in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession is not income from U.S. sources. taxmap/pubs/p515-003.htm#en_us_publink1000224889
Scholarships, fellowships, and grants are sourced according to the residence of the payer. Those made by entities created or domiciled in the United States are generally treated as income from sources within the United States. However, see Activities outside the United States, next. Those made by entities created or domiciled in a foreign country are treated as income from foreign sources. taxmap/pubs/p515-003.htm#en_us_publink1000224890
A scholarship, fellowship, grant, targeted grant, or an achievement award received by a nonresident alien for activities conducted outside the United States is treated as foreign source income. taxmap/pubs/p515-003.htm#en_us_publink1000224891
The source of pension payments is determined by the portion of the distribution that constitutes the compensation element (employer contributions) and the portion that constitutes the earnings element (the investment income).
The compensation element is sourced the same as compensation from the performance of personal services. The portion attributable to services performed in the United States is U.S. source income, and the portion attributable to services performed outside the United States is foreign source income.
Employer contributions to a defined benefit plan covering more than one individual are not made for the benefit of a specific participant, but are made based on the total liabilities to all participants. All funds held under the plan are available to provide benefits to any participant. If the payment is from such a plan, you can use the method in Rev. Proc. 2004-37 to allocate the payment to sources in and out of the United States. Rev. Proc. 2004-37, 2004-26 I.R.B.1099, is available at www.irs.gov/irb/2004-26_IRB/ar08.html
The earnings portion of a pension payment is U.S. source income if the trust is a U.S. trust. taxmap/pubs/p515-003.htm#en_us_publink1000224892
FDAP income is all income except:
- Gains from the sale of property (including market discount and option premiums but not including original issue discount), and
- Items of income excluded from gross income without regard to U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income.
The following items are examples of FDAP income.
- Compensation for personal services.
- Original issue discount.
- REMIC excess inclusion income.
- Pensions and annuities.
- Real property income, such as rents, other than gains from the sale of real property.
- Taxable scholarships and fellowship grants.
- Other taxable grants, prizes, and awards.
- A sales commission paid or credited monthly.
- A commission paid for a single transaction.
- The distributable net income of an estate or trust that is FDAP income and must be distributed currently, or has been paid or credited during the tax year.
- FDAP income distributed by a partnership that, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner.
- Taxes, mortgage interest, or insurance premiums paid to or for the account of, a nonresident alien landlord by a tenant under the terms of a lease.
- Publication rights.
- Prizes awarded to nonresident alien artists for pictures exhibited in the United States.
- Purses paid to nonresident alien boxers for prize fights in the United States.
- Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States.
Income can be FDAP income whether it is paid in a series of repeated payments or in a single lump sum. For example, $5,000 in royalty income would be FDAP income whether paid in 10 payments of $500 each or in one payment of $5,000. taxmap/pubs/p515-003.htm#en_us_publink1000224894
Income derived by an insured nonresident alien from U.S. sources upon the surrender of, or at the maturity of, a life insurance policy, is FDAP income and is subject to NRA withholding. This includes income derived under a life insurance contract issued by a foreign branch of a U.S. life insurance company. The proceeds are income to the extent they exceed the cost of the policy.
However, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual before death (accelerated death benefits) may not be subject to tax. This also applies to certain payments received for the sale or assignment of any portion of the death benefit under contract to a viatical settlement provider. See Publication 525, Taxable and Nontaxable Income, for more information. taxmap/pubs/p515-003.htm#en_us_publink1000224895
Racing purses are FDAP income and racetrack operators must withhold 30% on any purse paid to a nonresident alien racehorse owner in the absence of definite information contained in a statement filed together with a Form W-8BEN that the owner has not raced, or does not intend to enter, a horse in another race in the United States during the tax year. If available information indicates that the racehorse owner has raced a horse in another race in the United States during the tax year, then the statement and Form W-8BEN filed for that year are ineffective. The owner may be exempt from withholding of tax at 30% on the purses if the owner gives you Form W-8ECI, which provides that the income is effectively connected with the conduct of a U.S. trade or business and that the income is includible in the owner's gross income. taxmap/pubs/p515-003.htm#en_us_publink1000224896
Payment received for a promise not to compete is FDAP income. Its source is the place where the promisor forfeited his or her right to act. Amounts paid to a nonresident alien for his or her promise not to compete in the United States are subject to NRA withholding.