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Publication 515
taxmap/pubs/p515-003.htm#en_us_publink1000224880

Income Subject
to Withholding

rule
This section explains how to determine if a payment is subject to chapter 3 withholding or is a withholdable payment.
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Amounts Subject to Chapter 3 Withholding

rule
A payment is subject to chapter 3 withholding if it is from sources within the United States, and it is either:
In addition, a payment is subject to chapter 3 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 chapter 3 withholding even though a part of the distribution may be a return of capital or capital gain that is not FDAP income.
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Amounts not subject to chapter 3 withholding.

rule
The following amounts are not subject to chapter 3 withholding.
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Amounts Subject to
Chapter 4 Withholding

rule
Beginning on July 1, 2014, a withholding agent must withhold on a payment of U.S. source FDAP income that is a withholdable payment to which an exception does not apply under chapter 4.
Withholdable payment means:
U.S. source FDAP income means: U.S. source FDAP income for purposes of chapter 4 is similar to U.S. source FDAP income for purposes of chapter 3, but with the modifications described in Fixed or Determinable Annual or Periodical Income (FDAP), later.
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Amounts not subject to withholding under chapter 4.

rule
The following amounts are not subject to withholding under chapter 4.
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Source of Income

rule
In most cases, 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.
In most cases, 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.
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Guarantee income.

rule
Certain amounts paid, directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are from U.S. sources. The amounts must be paid by one of the following:
  1. A noncorporate U.S. resident or a U.S. corporation for the provision of a guarantee of the resident or corporation, or
  2. Any foreign person for the provision of a guarantee if the payment of income is effectively connected, or treated as effectively connected, with the conduct of a U.S. trade or business.
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Personal service income (for purposes of chapter 3 withholding).

rule
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
taxmap/pubs/p515-003.htm#en_us_publink10001195

Multi-year compensation.

rule
Generally, the source of multi-year compensation is determined on a time basis over the period to which the compensation is attributable. Multi-year compensation is compensation that is included in the taxable income of a recipient in one tax year but that is attributable to a period that includes two or more tax years. The determination of the period to which the compensation is attributable, for purposes of determining its source, is based on the facts and circumstances of each case. For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Where determining the source of multi-level compensation on a time basis is appropriate, the amount of compensation treated as from U.S. sources is figured by multiplying the total multi-year compensation by a fraction. The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that labor or personal services were performed in the United States in connection with the project. The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that labor or personal services were performed in connection with the project.
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Employees.
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. 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
Territorial limits.
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 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.
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Crew members.
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.
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Multi-level marketing.
Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable.
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Scholarships, fellowships, and grants.

rule
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.
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Activities outside the United States.
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.
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Pension payments.

rule
The source of pension payments is determined by the part of the distribution that constitutes the compensation element (employer contributions) and the part that constitutes the earnings element (the investment income).
The compensation element is sourced the same as compensation from the performance of personal services. The part attributable to services performed in the United States is U.S. source income, and the part 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 Revenue Procedure 2004-37 to allocate the payment to sources in and out of the United States. Revenue Procedure 2004-37, 2004-26 I.R.B.1099, is available at www.irs.gov/irb/2004-26_IRB/ar08.html.
The earnings part of a pension payment is U.S. source income if the trust is a U.S. trust.

Chart B. Summary of Source Rules for FDAP Income

IF you have:THEN the source of that income is determined by:
Pay for personal servicesWhere the services are performed
DividendsThe type of corporation (U.S. or foreign)
InterestThe residence of the payer
RentsWhere the property is located
Royalties—Patents, copyrights, etc.Where the property is used
Royalties—Natural resourcesWhere the property is located
Pensions: Distributions attributable to contributionsWhere the services were performed while a nonresident alien
Pensions: Investment earnings on contributionsThe location of pension trust
Scholarships and fellowship grantsIn most cases, the residence of payer
Guarantee of indebtednessThe residence of the debtor or whether the payment is effectively connected with a U.S. trade or business
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Fixed or Determinable Annual or Periodical
Income (FDAP)

rule
FDAP income is all income except:
The following items are examples of FDAP income.
Payments for the following purposes are examples of payments that are not withholdable payments.
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Installment payments.

rule
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.
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Insurance proceeds.

rule
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 chapter 3 withholding and is a withholdable payment. 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 part of the death benefit under contract to a viatical settlement provider. See Publication 525, Taxable and Nontaxable Income, for more information.
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Racing purses (for purposes of chapter 3 withholding).

rule
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-8 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-8 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.
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Covenant not to compete.

rule
Payment received for a promise not to compete is generally 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 chapter 3 withholding and are withholdable payments.