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Publication 515
taxmap/pubs/p515-004.htm#en_us_publink1000224897

Withholding on
Specific Income

rule
Different kinds of income are subject to different withholding requirements.
taxmap/pubs/p515-004.htm#en_us_publink1000224898

Effectively
Connected Income

rule
In most cases, when a foreign person engages in a trade or business in the United States, all income from sources in the United States connected with the conduct of that trade or business is considered effectively connected with a U.S. business. FDAP income may or may not be effectively connected with a U.S. business. For example, effectively connected income includes rents from real property if the alien chooses to treat that income as effectively connected with a U.S. trade or business.
The factors to be considered in establishing whether FDAP income and similar amounts are effectively connected with a U.S. trade or business include:
taxmap/pubs/p515-004.htm#en_us_publink1000224899

Income from securities.

rule
There is a special rule determining whether income from securities is effectively connected with the active conduct of a U.S. banking, financing, or similar business.
If the foreign person's U.S. office actively and materially participates in soliciting, negotiating, or performing other activities required to arrange the acquisition of securities, the U.S. source interest or dividend income from the securities, gain or loss from their sale or exchange, income or gain economically equivalent to such amounts, or amounts received for providing a guarantee of indebtedness, is attributable to the U.S. office and is effectively connected income.
taxmap/pubs/p515-004.htm#en_us_publink1000224900

Withholding exemption.

rule
In most cases, you do not need to withhold tax on income for purposes of chapter 3 or 4 if you receive a Form W-8ECI on which a foreign payee represents that:
This withholding exemption applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation). The exemption does not apply, however, to:
  1. Pay for personal services performed by an individual (for purposes of chapter 3),
  2. Effectively connected taxable income of a partnership that is allocable to its foreign partners (see Partnership Withholding on Effectively Connected Income, later),
  3. Income from the disposition of a U.S. real property interest (see U.S. Real Property Interest, later), or
  4. Payments to a foreign corporation for personal services if all of the following apply:
    1. The foreign corporation otherwise qualifies as a personal holding company for income tax purposes,
    2. The foreign corporation receives amounts under a contract for personal services of an individual whom the corporation has no right to designate, and
    3. 25% or more in value of the outstanding stock of the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform, or may be designated as the one to perform, the services called for under the contract.
taxmap/pubs/p515-004.htm#en_us_publink100015524

Withholding exemption for purposes of chapter 4.

rule
Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding for chapter 4 purposes. You do not need to withhold tax under chapter 4 if you receive a Form W-8ECI on which a foreign payee makes the representations described in Withholding exemptions, earlier.
taxmap/pubs/p515-004.htm#en_us_publink1000224901

Notional principal contract income.

rule
Certain payments attributable to a notional principal contract are not subject to withholding regardless of whether a Form W-8ECI is provided. However, specified notional principal contract income (described later under Dividend equivalent payments) is subject to withholding.
Income from a notional principal contract is subject to reporting on Form 1042-S if it is effectively connected with the conduct of a trade or business in the United States. You must treat the income as effectively connected with a U.S. trade or business if you pay the income to, or to the account of, a qualified business unit (a branch) of a foreign person located in the United States or a qualified business unit located outside the United States and you know, or have reason to know, the income is effectively connected with the conduct of a U.S. trade or business. You do not need to treat notional principal contract income as effectively connected if you receive a Form W-8BEN-E that represents that the income is not effectively connected with the conduct of a U.S. trade or business or if the payee provides a representation in a master agreement or in the confirmation on the particular notional principal contract transaction that the payee is a U.S. person or a non-U.S. branch of a foreign person.
taxmap/pubs/p515-004.htm#en_us_publink1000224902

Income paid to U.S. branch of foreign bank or insurance company.

rule
A payment to a U.S. branch of a foreign bank or a foreign insurance company that is subject to U.S. regulation by the Federal Reserve or state insurance authorities is presumed to be effectively connected with the conduct of a trade or business in the United States if you have an EIN for the branch, unless the branch provides a Form W-8BEN-E or Form W-8IMY for the income. If a U.S. branch of a foreign bank or insurance company receives income that the payer did not withhold upon because of the presumption that the income was effectively connected with the U.S. branch's trade or business, the U.S. branch is required to withhold on the income if it is in fact not effectively connected with the conduct of its trade or business in the United States. Withholding is required whether the payment was collected on behalf of other persons or on behalf of another branch of the same entity.
taxmap/pubs/p515-004.htm#en_us_publink1000224903

Income Not
Effectively Connected

rule
This section discusses the specific types of income that are subject to chapter 3 withholding and where withholding under chapter 4 is required. The income codes contained in this section correspond to the income codes used on Form 1042-S (discussed later), and in most cases, on Tables 1 and 2 found at the end of this publication.
For purposes of chapter 3, you must withhold tax at the statutory rates shown in Chart C unless a reduced rate or exemption under a tax treaty applies. For U.S. source gross income that is not effectively connected with a U.S. trade or business, the rate is usually 30%. In most cases, you must withhold the tax at the time you pay the income to the foreign person. See When to withhold, earlier.
taxmap/pubs/p515-004.htm#en_us_publink1000224904

Interest

rule
Interest from U.S. sources paid to foreign payees is subject to chapter 3 withholding and is a withholdable payment except when the interest is paid with respect to a grandfathered obligation or another exemption under chapter 4 applies. When making a payment on an interest bearing obligation, you must withhold on the gross amount of stated interest payable on the interest payment date, even if the payment or a part of the payment may be a return of capital rather than interest.
A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is treated the same as the interest on the transferred security. Use Income Code 33 to report these substitute payments.
taxmap/pubs/p515-004.htm#en_us_publink1000224905

Interest paid by U.S. obligors—general (Income Code 1).

rule
With specific exceptions, such as portfolio interest (for purposes of chapter 3), you must withhold on interest paid or credited on bonds, debentures, notes, open account indebtedness, governmental obligations, certain deferred payment arrangements (as provided in section 483 of the Internal Revenue Code) or other evidences of indebtedness of U.S. obligors. U.S. obligors include the U.S. Government or its agencies or instrumentalities, any U.S. citizen or resident, any U.S. corporation, and any U.S. partnership.
If, in a sale of a corporation's property, payment of the bonds or other obligations of the corporation is assumed by the buyer, that buyer, whether an individual, partnership, or corporation, must deduct and withhold the taxes that would be required to be withheld by the selling corporation as if there had been no sale or transfer. Also, if interest coupons are in default, the tax must be withheld on the gross amount of interest whether or not the payment is a return of capital or the payment of income.
A resident alien paying interest on a margin account maintained with a foreign brokerage firm must withhold from the interest whether the interest is paid directly or constructively.
Interest on bonds of a U.S. corporation paid to a foreign corporation not engaged in a trade or business in the United States is subject to withholding even if the interest is guaranteed by a foreign corporation that made payment outside the United States.
Domestic corporations must withhold on interest credited to foreign subsidiaries or foreign parents.
For withholding under chapter 4 on the interest payments described in this section, see the definition of withholdable payments in Treasury regulations section 1.1473-1(a).
taxmap/pubs/p515-004.htm#en_us_publink1000224906

Original issue discount (Income Code 30).

rule
Original issue discount paid on the redemption of an obligation is subject to chapter 3 withholding and is a withholdable payment (except when paid with respect to a grandfathered obligation). Original issue discount paid as part of the purchase price of an obligation sold or exchanged, other than in a redemption, is not subject to chapter 3 withholding unless the purchase is part of a plan the principal purpose of which is to avoid tax and the withholding agent has actual knowledge or reason to know of the plan. However, such original issue discount is a withholdable payment (except when paid with respect to a grandfathered obligation). Withholding is required by a person other than the issuer of an obligation (or the issuer's agent).
The original issue discount that is subject to chapter 3 withholding and is a withholdable payment (except when paid with respect to a grandfathered obligation) is the taxable amount of original issue discount. The taxable amount for both chapters 3 and 4 withholding purposes is the original issue discount that accrued while the obligation was held by the foreign beneficial owner up to the time the obligation was sold or exchanged or a payment was made, reduced by any original issue discount that was previously taxed. If a payment was made, the tax due on the original issue discount may not exceed the payment reduced by the tax imposed on the part of the payment that is qualified stated interest.
If you cannot determine the taxable amount, you must withhold on the entire amount of original issue discount accrued from the date of issue until the date of redemption (or sale or exchange, if subject to chapter 3 withholding or a withholdable payment) determined on the basis of the most recently published Publication 1212, Guide to Original Issue Discount (OID) Instruments.
For more information on original issue discount, see Publication 550, Investment Income and Expenses.

Chart C. Withholding Tax Rates
for Purposes of Chapter 3

(Note. You must withhold tax at the following rates on payments of income unless a reduced rate or exemption is authorized under a tax treaty. The President may apply higher tax rates on income paid to residents or corporations of foreign countries that impose burdensome or discriminatory taxes on U.S. persons.)
IF you paid the following type of income:THEN you generally must withhold at the following rate:
Taxable part of U.S. scholarship or fellowship grant paid to holder of "F," "J," "M," or "Q" visa (see Scholarships and Fellowship Grants, later) 14%
Gross investment income from interest, dividends, rents, and royalties paid to a foreign private foundation4%
Pensions—part paid for personal services (see Pensions, Annuities, and Alimony, later) Graduated rates in Circular A or Circular E
Wages paid to a nonresident alien employee (see Pay for Personal Services Performed, later) Graduated rates in Circular A or Circular E
Each foreign partner's share of effectively connected income of the partnership (see Partnership Withholding on Effectively Connected Income, later) 39.6% for noncorporate partners;
35% for corporate partners
Distributions of effectively connected income to foreign partners by publicly traded partnerships (see Publicly Traded Partnerships, later) 39.6% for noncorporate partners;
35% for corporate partners
Dispositions of U.S. real property interests (see U.S. Real Property Interest, later) 10%*
Dividends paid to Puerto Rico corporation10%
All other income subject to withholding30%
*35% in the case of certain distributions by corporations, partnerships, trusts, or estates.
 
taxmap/pubs/p515-004.htm#en_us_publink1000224909

Reduced Rates of
Withholding on Interest

rule
Notwithstanding the exception from withholding under chapter 3 on interest described under this heading, withholding may still apply under chapter 4 when the payment is a withholdable payment and an exception from withholding under chapter 4 does not apply.
Certain interest is subject to a reduced rate of, or exemption from, withholding.
taxmap/pubs/p515-004.htm#en_us_publink1000224910

Portfolio interest exempt from chapter 3 withholding.

rule
Interest and original issue discount that qualifies as portfolio interest is exempt from chapter 3 withholding. However, these amounts are not exempt from withholding under chapter 4 when the interest is a withholdable payment, unless an exception from chapter 4 withholding applies. To qualify as portfolio interest, the interest must be paid on obligations issued after July 18, 1984, and otherwise subject to chapter 3 withholding.
Note. The rules for determining whether interest is portfolio interest changed for obligations issued after March 18, 2012. Before March 19, 2012, portfolio interest included interest on certain registered and nonregistered (bearer) bonds if the obligations meet the requirements described below.
For obligations issued after March 18, 2012, portfolio interest does not include interest paid on debt that is not in registered form, except for interest paid on foreign-targeted registered obligations issued before January 1, 2016, as described in Foreign-targeted registered obligations, later.
taxmap/pubs/p515-004.htm#en_us_publink1000224912
Obligations in registered form.
Portfolio interest includes interest paid on an obligation that is in registered form, and for which you have received documentation that the beneficial owner of the obligation is not a United States person.
Generally, an obligation is in registered form if: (i) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new holder; (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book entry system maintained by the issuer or its agent; or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be transferred both by surrender and reissuance and through a book entry system.
An obligation that would otherwise be considered to be in registered form is not considered to be in registered form as of a particular time if it can be converted at any time in the future into an obligation that is not in registered form, except as otherwise provided in Notice 2013-43, 2013-31 I.R.B. 113, as described in the following section.
taxmap/pubs/p515-004.htm#en_us_publink1000224913
Dematerialized book-entry systems and effectively immobilized obligations.
An obligation will be considered to be in registered form if it is issued through either a dematerialized book entry system maintained by a clearing organization (or agent thereof) or a clearing system in which the obligation (including a global obligation in bearer form) is effectively immobilized. See Notice 2012-20, 2012-13 I.R.B. 574, amplified by Notice 2013-43, 2013-31 I.R.B. 113.
Under dematerialized book-entry systems, bonds are required to be represented only by book entries, and no physical certificates are issued or transferred. The bonds are transferred only by book entries.
An obligation will be considered to be effectively immobilized if (1) it is represented by one or more global securities in physical form that are issued to and held by a clearing organization (or by a custodian or depository acting as an agent of the clearing organization) for the benefit of purchasers and under arrangements that prohibit transfer except to a successor clearing organization subject to the same terms, and (2) beneficial interest in the underlying obligation are transferrable only through a book entry system maintained by the clearing organization or its agent.
These bonds are considered to be in registered form if the holder may only obtain a physical certificate in bearer form when: (1) the clearing organization that maintains the book-entry system goes out of business without a successor; (2) the issuer defaults; or (3) definitive securities are issued at the issuer’s request upon a change in tax law adverse to the issuer. See Notice 2012-20 for more information on registered form requirements.
taxmap/pubs/p515-004.htm#en_us_publink1000297463
Foreign-targeted registered obligations.
A registered bond issued after March 18, 2012, and before January 1, 2016, will also be considered to be in registered form if it is targeted to foreign markets, and portfolio interest treatment may apply even when you do not receive documentation regarding the beneficial owner of the bond.
If the registered obligation is not targeted to foreign markets, you must receive documentation on which you may rely to treat the payee as a foreign person that is the beneficial owner of the interest. A registered obligation is targeted to foreign markets if it is sold (or resold in connection with its original issuance) only to foreign persons or to foreign branches of U. S. financial institutions in accordance with procedures similar to those provided under section 1.163-5(c)(2)(i) of the regulations. However, the procedure that requires the obligation to be offered for sale (or resale) only outside the United States does not apply if the registered obligation is offered for sale through a public auction. Also, the procedure that requires the obligation to be delivered outside the United States does not apply if the obligation is considered registered because it may be transferred only through a book-entry system and the obligation is offered for sale through a public auction. The documentation needed depends on whether the interest is paid to a financial institution, a member of a clearing organization, or to some other foreign person. See Notice 2012-20 and Treasury regulations section 1.871-14(e) for more information on foreign-targeted registered obligations.
taxmap/pubs/p515-004.htm#en_us_publink1000297464
Obligations not in registered form and obligations issued before March 19, 2012.
For obligations issued before March 19, 2012, interest on an obligation that is not in registered form (bearer obligation) is portfolio interest if the obligation is foreign-targeted. A bearer obligation is foreign-targeted if:
Documentation is not required for interest on bearer obligations to qualify as portfolio interest. In some cases, however, you may need documentation for purposes of Form 1099 reporting and backup withholding.
Interest on such obligations is not a withholdable payment under chapter 4, except when the instrument is materially modified after March 18, 2012.
taxmap/pubs/p515-004.htm#en_us_publink1000224914

Interest that does not qualify as portfolio interest.

rule
Payments to certain persons and payments of contingent interest do not qualify as portfolio interest. You must withhold at the statutory rate on such payments unless some other exception, such as a treaty provision, applies and withholding under chapter 4 does not apply.
taxmap/pubs/p515-004.htm#en_us_publink1000259730
Contingent interest.
Portfolio interest generally does not include contingent interest. Contingent interest is interest that is determined by reference to any of the following. The term "related person" is defined in section 871(h)(4)(B) of the Internal Revenue Code.
The contingent interest rule does not apply to any interest paid or accrued on any indebtedness with a fixed term that was issued:
taxmap/pubs/p515-004.htm#en_us_publink1000224915
Ten-percent owners.
Interest paid to a foreign person that owns 10% or more of the total combined voting power of all classes of stock of a corporation, or 10% or more of the capital or profits interest in a partnership, that issued the obligation on which the interest is paid is not portfolio interest. To determine 10% ownership, see Regulations section 1.871-14(g).
taxmap/pubs/p515-004.htm#en_us_publink1000224916
Banks.
Except in the case of interest paid on an obligation of the United States, interest paid to a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of the bank's trade or business does not qualify as portfolio interest.
taxmap/pubs/p515-004.htm#en_us_publink1000224917
Controlled foreign corporations.
Interest paid to a controlled foreign corporation from a person related to the controlled foreign corporation is not portfolio interest.
taxmap/pubs/p515-004.htm#en_us_publink1000224919

Reduced rate or exemption from chapter 3 withholding for interest on real property mortgages (Income Code 2).

rule
Certain treaties (see Table 1) permit a reduced rate or exemption for interest paid or credited on real property mortgages. This is interest paid on any type of debt instrument that is secured by a mortgage or deed of trust on real property located in the United States, regardless of whether the mortgagor (or grantor) is a U.S. citizen or a U.S. business entity.
taxmap/pubs/p515-004.htm#en_us_publink1000224920
REMIC excess inclusions.
A domestic partnership must separately state a partner's allocable share of REMIC taxable income or net loss and the excess inclusion amount on Schedule K-1 (Form 1065). If the partnership allocates all or some part of its allocable share of REMIC taxable income to a foreign partner, the partner must include the partner's allocated amount in income as if that amount was received on the earlier of the following dates.
  1. The date of distribution by the partnership.
  2. The date the foreign partner disposed of its indirect interest in the REMIC residual interest.
  3. The last day of the partnership's tax year.
For purposes of item (2), the disposition may occur as a result of:
The partnership must withhold tax on the part of the REMIC amount that is an excess inclusion. Excess inclusion income is treated as income from sources in the United States and is not eligible for any reduction in withholding tax (by treaty or otherwise). It is also a withholdable payment for chapter 4 purposes.
An excess inclusion allocated to the following foreign persons must be included in that person's income at the same time as other income from the entity is included in income. The entity must withhold on the excess inclusion.
For information on the taxation and reporting of excess inclusion income by REITs, RICs, and other pass-through entities, see Notice 2006-97, 2006-46 I.R.B. 904, available at www.irs.gov/irb/2006-46_IRB/ar14.html.
taxmap/pubs/p515-004.htm#en_us_publink1000224921

Reduced rate or exemption from chapter 3 withholding for interest paid to controlled foreign corporations (Income Code 3).

rule
A treaty may permit a reduced rate or exemption for interest paid by a domestic corporation to a controlling foreign corporation. The interest may be on any type of debt, including open or unsecured accounts payable, notes, certificates, bonds, or other evidences of indebtedness.
taxmap/pubs/p515-004.htm#en_us_publink1000224922

Reduced rate or exemption from chapter 3 withholding for interest paid by foreign corporations (Income Code 4).

rule
If a foreign corporation is engaged in a U.S. trade or business, any interest paid by the foreign corporation's trade or business in the United States (branch interest) is subject to chapter 3 withholding as if paid by a domestic corporation (without considering the "payer having income from abroad" exception) and is a withholdable payment. As a result, the interest paid to foreign payees is generally subject to chapter 3 withholding and withholding may apply under chapter 4 absent an applicable withholding exception. In addition, if "allocable interest" exceeds the branch interest paid, the excess interest is also subject to tax and reported on the foreign corporation's income tax return, Form 1120-F. See Instructions for Form 1120-F for more information.
If there is no treaty provision that reduces the rate of withholding on branch interest, you must withhold tax under chapter 3 at the statutory rate of 30% on the interest paid by a foreign corporation's U.S. trade or business and you must withhold under chapter 4 when otherwise applicable and without regard to a treaty provision.
In general, payees of interest from a U.S. trade or business of a foreign corporation are entitled to reduced rates of, or exemption from, tax under a treaty in the same manner and subject to the same conditions as if they had received the interest from a domestic corporation. However, a foreign corporation that receives interest paid by a U.S. trade or business of a foreign corporation also must be a qualified resident of its country of residence to be entitled to benefits under that country's tax treaty. If the payee foreign corporation is a resident of a country that has entered into an income tax treaty since 1987 that contains a limitation on benefits article, the foreign corporation need only satisfy the limitation on benefits article in that treaty to qualify for a reduced rate of tax.
Alternatively, a payee may be entitled to treaty benefits under the payer's treaty if there is a provision in that treaty that applies specifically to interest paid by the payer foreign corporation. This provision may exempt all or a part of this interest. Some treaties provide for an exemption regardless of the payee's residence or citizenship, while others provide for an exemption according to the payee's status as a resident or citizen of the payer's country.
A foreign corporation that pays interest must be a qualified resident (under section 884 of the Internal Revenue Code) of its country of residence for the payer's treaty to exempt payments from tax by the foreign corporation. However, if the foreign corporation is a resident of a country that has entered into an income tax treaty since 1987 that contains a limitation on benefits article, the foreign corporation need only satisfy the limitation on benefits article in that treaty to qualify for the exemption.
taxmap/pubs/p515-004.htm#en_us_publink1000224923

Interest on deposits (Income Code 29).

rule
Foreign persons are not subject to chapter 3 withholding on interest that is not connected with a U.S. trade or business if it is from: Deposits include certificates of deposit, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements.
You may have to file Form 1042-S to report certain payments of interest on deposits. See Deposit interest paid to certain nonresident alien individuals under Returns Required, later. You may also have to file Form 1042-S when the deposit interest is a withholdable payment to which withholding applies (or was applied) under chapter 4.
taxmap/pubs/p515-004.htm#en_us_publink1000224924
Interest from foreign business arrangements.
In certain cases, interest received from a domestic payer most of whose gross income is active foreign business income is not subject to chapter 3 withholding and is not a withholdable payment.
Active foreign business income is gross income which is:
taxmap/pubs/p515-004.htm#en_us_publink1000263959

Obligations issued before August 10, 2010.

rule
Interest received from a resident alien individual or a domestic corporation is not subject to chapter 3 withholding and is not a withholdable payment if the interest meets all of the following requirements.
taxmap/pubs/p515-004.htm#en_us_publink1000263960

Corporations existing on January 1, 2011.

rule
Certain interest received from a domestic corporation that is an existing 80/20 company is not subject to withholding. An existing 80/20 company must meet all of the following requirements.
taxmap/pubs/p515-004.htm#en_us_publink1000263961

Transitional rule for active foreign business income.

rule
In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes one or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.
A foreign beneficial owner does not need to provide a Form W-8 or documentary evidence for this exception. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
taxmap/pubs/p515-004.htm#en_us_publink1000224925

Sales of bonds between interest dates.

rule
Amounts paid as part of the purchase price of an obligation sold or exchanged between interest payment dates is not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. This does not apply if the sale or exchange is part of a plan the principal purpose of which is to avoid tax and you have actual knowledge or reason to know of the plan. The exemption from chapter 3 withholding and from withholdable payments applies even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
taxmap/pubs/p515-004.htm#en_us_publink1000224926

Short-term obligations.

rule
Interest and original issue discount paid on an obligation that is payable 183 days or less from the date of its original issue (without regard to the period held by the taxpayer) that satisfy other requirements intended to ensure that the debt is not held by a U.S. non-exempt person is not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. These exemptions apply even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
taxmap/pubs/p515-004.htm#en_us_publink1000224927

Income from U.S. Savings Bonds of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands.

rule
Interest from a Series E, Series EE, Series H, or Series HH U.S. Savings Bond is not subject to chapter 3 withholding if the nonresident alien individual acquired the bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.
taxmap/pubs/p515-004.htm#en_us_publink1000224928

Dividends

rule
The following types of dividends paid to foreign payees are generally subject to chapter 3 withholding and are generally withholdable payments such that withholding under chapter 4 applies absent an exception available under chapter 4.
taxmap/pubs/p515-004.htm#en_us_publink1000224930

Dividends paid by U.S. corporations — general (Income Code 6).

rule
This category includes all distributions of domestic corporations (other than dividends qualifying for direct dividend rate—Income Code 7).
A corporation making a distribution with respect to its stock or any intermediary making a payment of such a distribution, is required to withhold on the entire amount of the distribution at the rate applicable under chapter 3 when withholding under chapter 4 does not apply. However, a distributing corporation or intermediary may elect to not withhold on the part of the distribution that:
  1. Represents a nontaxable distribution payable in stock or stock rights,
  2. Represents a distribution in part or full payment in exchange for stock,
  3. Is not paid out of current or accumulated earnings and profits, based on a reasonable estimate of the anticipated amount of earnings and profits for the tax year of the distribution made at a time reasonably close to the date of the distribution,
  4. Represents a capital gain dividend (use Income Code 36) or an exempt interest dividend by a regulated investment company, or
  5. Is subject to withholding under section 1445 of the Code (withholding on dispositions of U.S. real property interests) and the distributing corporation is a U.S. real property holding corporation or a qualified investment entity (QIE).
The election is made by actually reducing the amount of withholding at the time the distribution is paid.
A QIE is:
  1. Any REIT, or
  2. Any RIC that is a U.S. real property holding corporation, but only for distributions by the RIC to a nonresident alien or a foreign corporation that are directly or indirectly attributable to distributions the RIC received from a REIT.
EIC
At the time this publication went to print, Congress had not enacted legislation that would extend the definition of a QIE for this purpose to any RIC that is a U.S. real property holding corporation. To find out if legislation has been enacted, go to www.irs.gov/formspubs or www.irs.gov/pub515.
In determining if the RIC is a U.S. real property holding corporation, the RIC is required to include as U.S. real property interests its holdings of stock in a RIC or REIT that is a U.S. real property holding company, even if the stock is regularly traded and the RIC owns more than 5% of the stock.
taxmap/pubs/p515-004.htm#en_us_publink1000224931
Dividends paid by a QIE.
A distribution by a QIE to a nonresident alien or a foreign corporation is treated as a dividend and is not subject to withholding under section 1445 as a gain from the sale or exchange of a U.S. real property interest if:If these requirements are not met, item (5) in the previous list applies to the distribution.
taxmap/pubs/p515-004.htm#en_us_publink1000224932
Dividends paid by a domestic corporation (an existing "80/20" company).
The active foreign business percentage of any dividend paid by a domestic corporation that is an existing 80/20 company is not subject to withholding. A domestic corporation is an existing 80/20 company if it satisfies all of the following.
  1. It was in existence on January 1, 2011.
  2. For the 3 tax years beginning before January 1, 2011 (or for all years of existence if it was in existence for less than 3 tax years), at least 80% of its gross income from all sources was active foreign business income. Active foreign business income is gross income that is:
    1. Derived from sources outside the United States, and
    2. Attributable to the active conduct of a trade or business in a foreign country or possession of the United States by the corporation.
  3. It continues to meet the 80-percent test for every tax year beginning after December 31, 2010.
  4. It has not added a substantial line of business after August 10, 2010.
taxmap/pubs/p515-004.htm#en_us_publink1000263972
Transitional rule for item (2).
In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes one or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.
The active foreign business percentage is found by dividing the corporation’s active foreign business income for the testing period by the corporation’s total gross income for that period. The testing period is the 3 tax years before the year in which the dividends are declared (or shorter period if the corporation was not in existence for 3 years). If the corporation has no gross income for that 3-year period, the testing period is the tax year in which the dividend is paid.
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Consent dividends.
If you receive a Form 972, Consent of Shareholder To Include Specific Amount in Gross Income, from a nonresident alien individual or other foreign shareholder who agrees to treat the amount as a taxable dividend, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend had been actually paid.
taxmap/pubs/p515-004.htm#en_us_publink100019914
Dividends paid by a RIC.
Beginning in 2014, the exemption from chapter 3 withholding on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other RIC expired.
EIC
At the time this publication went to print, Congress had not enacted legislation that would extend the exemption of these dividends from chapter 3 withholding. To find out if legislation extended the exemption, go to www.irs.gov/formspubs or www.irs.gov/pub515.
taxmap/pubs/p515-004.htm#en_us_publink1000224935

Dividends qualifying for direct dividend rate (Income Code 7).

rule
A treaty may reduce the rate of withholding on dividends from that which generally applies under the treaty if the shareholder owns a certain percentage of the voting stock of the corporation when withholding under chapter 4 does not apply. In most cases, this preferential rate applies only if the shareholder directly owns the required percentage, although some treaties permit the percentage to be met by direct or indirect ownership. The preferential rate may apply to the payment of a deemed dividend under section 304(a)(1) of the Code. Under some treaties, the preferential rate for dividends qualifying for the direct dividend rate applies only if no more than a certain percentage of the paying corporation's gross income for a certain period consists of dividends and interest other than dividends and interest from subsidiaries or from the active conduct of a banking, financing, or insurance business. A foreign person should claim the direct dividend rate by filing the appropriate Form W-8.
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Consent dividends.
If you receive a Form 972 from a foreign shareholder qualifying for the direct dividend rate, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend had been actually paid.
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Dividends paid by foreign corporations (Income Code 8).

rule
Dividends paid by a foreign corporation are generally not subject to chapter 3 withholding and are not withholdable payments. This exception does not require a Form W-8. However, a Form W-8 may be required for purposes of Form 1099 reporting and backup withholding.
The payment to a foreign corporation by a foreign corporation of a deemed dividend under section 304(a)(1) of the Code is subject to chapter 3 withholding and may be a withholdable payment except to the extent it can be clearly determined to be from foreign sources.
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Corporation subject to branch profits tax.
If a foreign corporation is subject to branch profits tax for any tax year, withholding is not required on any dividends paid by the corporation out of its earnings and profits for that tax year. Dividends may be subject to withholding if they are attributable to any earnings and profits when the branch profits tax is prohibited by a tax treaty.
A foreign person may claim a treaty benefit on dividends paid by a foreign corporation to the extent the dividends are paid out of earnings and profits in a year in which the foreign corporation was not subject to the branch profits tax. However, you may apply a reduced rate of withholding under an income tax treaty only under rules similar to the rules that apply to treaty benefits claimed on branch interest paid by a foreign corporation. You should check the specific treaty provision.
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Dividends paid to Puerto Rico corporation.

rule
For chapter 3 purposes, the tax rate on dividends paid to a corporation created or organized in, or under the law of, the Commonwealth of Puerto Rico is 10%, rather than 30%, if:
No special rules apply to Puerto Rico corporations for chapter 4 purposes, but special withholding rules do apply for withholdable payments made to territory financial institutions and nonfinancial entities. See the chapter 4 regulations for information on these special requirements.
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Dividend equivalent payments.

rule
Dividend equivalent payments are treated as U.S. source dividends such that withholding under chapter 3 may apply. Use Income Code 34 or 40 to report dividend equivalent payments. Dividend equivalent payments are withholdable payments except when an exception applies for chapter 4 purposes. For example, withholdable payments exclude certain offshore payments made before January 1, 2017.
A dividend equivalent is a payment that, directly or indirectly, is contingent on, or determined by reference to, the payment of a dividend from U.S. sources. Dividend equivalent payments include the following payments.
  1. A substitute dividend made under a securities lending or sale-repurchase transaction involving a U.S. stock,
  2. A payment made under a specified notional principal contract, and
  3. Any payment determined by regulations to be substantially similar to a payment in (1) or (2) above.
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Substitute dividend (Income Code 34).
A substitute dividend is any payment made in a securities lending or sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources in the United States.
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Specified notional principal contract (SNPC).
For payments made before January 1, 2016, a specified notional principal contract is any notional principal contract that satisfies one or more of the following.
For payments made after January 1, 2016, an SNPC is any notional principal contract unless regulations provide that the contract is a type that does not have the potential for tax avoidance.
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Amounts paid to qualified securities lenders.
A withholding agent that makes payments of substitute dividends to a qualified securities lender (QSL) should treat the QSL as the recipient. The withholding agent is not required to withhold under chapter 3 or 4 on a substitute dividend payment if it receives, at least annually, a certificate from the QSL that includes a statement with the following information.
For more information, see Notice 2010-46, 2010-24 I.R.B. 757, available at www.irs.gov/irb/2010-24_IRB/ar09.html.
EIC
The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. You can view this regulation at www.irs.gov/irb/2013-52_IRB/ar08.html.
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Gains

rule
You generally do not need to withhold under chapter 3 or 4 on any gain from the sale of real or personal property because it is not FDAP income. However, see U.S. Real Property Interest, later.
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Capital gains (Income Code 9).

rule
You must withhold at 30%, or if applicable, a reduced treaty rate, on the gross amount of the following items:
If you do not know the amount of the gain, you must withhold an amount necessary to ensure that the tax withheld will not be less than 30% of the recognized gain. The amount to be withheld, however, must not be more than 30% of the amount payable because of the transaction.
Unless you have reason to believe otherwise, you may rely upon the written statement of the person entitled to the income as to the amount of gain. The Form W-8 or documentary evidence must show the beneficial owner's basis in the property giving rise to the gain.
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Tax treaties.

rule
Many tax treaties exempt certain types of gains from U.S. income tax. Be sure to carefully check the provision of the treaty that applies before allowing an exemption from withholding.
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Royalties

rule
In general, you must withhold tax under chapter 3 on the payment of royalties from sources in the United States. However, certain types of royalties are given reduced rates or exemptions under some tax treaties. Accordingly, these different types of royalties are treated as separate categories for withholding purposes. For chapter 4 purposes, royalties are nonfinancial payments and are therefore excluded as withholdable payments.
EIC
Most treaties have more than one withholding rate on royalties, which varies by the classification of the payment in that treaty. Be sure to check your particular treaty for the specific rate that applies to you.
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Industrial royalties (Income Code 10).

rule
This category of income includes royalties for the use of, or the right to use, patents, trademarks, secret processes and formulas, goodwill, franchises, "know-how," and similar rights. It may also include payments for the use of, or right to use, industrial, commercial, and scientific equipment, when this is included in the treaty definition of royalties.
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Motion picture or television copyright royalties (Income Code 11).

rule
This category refers to royalties paid for the use of motion picture and television copyrights.
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Other royalties (for example, copyright, recording, publishing) (Income Code 12).

rule
This category refers to the royalties paid for the use of copyrights on books, periodicals, articles, etc., except motion picture and television copyrights.
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Real Property Income and
Natural Resources Royalties
(Income Code 13)

rule
You must withhold tax under chapter 3 on income (such as rents and royalties) from real property located in the United States and held for the production of income, unless the foreign payee elects to treat this income as effectively connected with a U.S. trade or business. If the foreign payee chooses to treat this income as effectively connected, the payee must give you Form W-8ECI (discussed earlier). This real property income includes royalties from mines, wells, or other natural deposits, as well as ordinary rents for the use of real property. For chapter 4 purposes, income from real property is either a nonfinancial payment (and therefore not a withholdable payment) or is excluded as a withholdable payment because it is effectively connected income. For withholding that applies to the disposition of U.S. real property interests, see U.S. Real Property Interest, later.
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Pensions, Annuities, and
Alimony (Income Code 14)

rule
The following rules apply to withholding on pensions, annuities, and alimony of foreign payees.
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Pensions and annuities.

rule
In most cases, you must withhold tax on the gross amount of pensions and annuities that you pay that are from sources within the United States. This includes amounts paid under an annuity contract issued by a foreign branch of a U.S. life insurance company. However, most tax treaties provide that private pensions and annuities are exempt from chapter 3 withholding.
For purposes of chapter 3 withholding, in the absence of a treaty exemption, you must withhold at the statutory rate of 30% on the entire distribution that is from sources within the United States. You may, however, apply withholding at graduated rates to the part of a distribution that arises from the performance of services in the United States after December 31, 1986.
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 distribution is from such a plan, you can use the method in Revenue Procedure 2004-37 to allocate the distribution to sources in the United States.
The withholding rules that apply to payments to foreign persons generally take precedence over any other withholding rules that would apply to distributions from qualified plans and other qualified retirement arrangements.
Foreign pension plans are exempt from applying withholding under chapter 4 when they are exempt beneficial owners under Treasury regulations section 1.1471-6(f). A payment from a U.S. pension plan to a foreign individual beneficiary in the plan is not subject to withholding under chapter 4.
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No withholding.

rule
Do not withhold tax on an annuity payment to a nonresident alien if at the time of the first payment from the plan, 90% or more of the employees eligible for benefits under the plan are citizens or residents of the United States and the payment is:
  1. For the nonresident's personal services performed outside the United States; or
  2. For personal services by a nonresident individual present in the United States for 90 days or less during each tax year, whose pay for those services did not exceed $3,000, and the personal services were performed for:
    1. A nonresident alien individual, foreign partnership, or foreign corporation not engaged in a trade or business in the United States; or
    2. An office or place of business of a U.S. resident or citizen which was maintained outside the United States.
If the payment otherwise qualifies under these rules, but less than 90% of the employees eligible for benefits are citizens or residents of the United States, you still need not withhold tax on the payment if:
The foreign person entitled to the payments must provide you with a Form W-8BEN that contains the TIN of the foreign person.
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Alimony payments.

rule
In most cases, alimony payments made by U.S. resident aliens to nonresident aliens are taxable and subject to chapter 3 withholding whether the recipients are residing abroad or are temporarily present in the United States.
Many tax treaties, however, provide for an exemption from withholding for alimony payments. These treaties are shown in Table 1 by a footnote reference under Income Code 14.
Alimony payments made to a nonresident alien by a U.S. ancillary administrator of a nonresident alien estate are from foreign sources and are not subject to withholding. Alimony payments are not subject to chapter 4 withholding.
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Scholarships and Fellowship
Grants Subject to Chapter 3 Withholding (Income Code 15)

rule
A scholarship or fellowship grant is an amount given to an individual for study, training, or research, and which does not constitute compensation for personal services. Whether a fellowship grant from U.S. sources is subject to chapter 3 withholding depends on the nature of the payments and whether the recipient is a candidate for a degree. These amounts are not subject to chapter 4 withholding. See Scholarships, fellowships, and grants under Source of Income, earlier.
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Candidate for a degree.

rule
Do not withhold on a qualified scholarship from U.S. sources granted and paid to a candidate for a degree. A qualified scholarship means any amount paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant, the amount is to be used for the following expenses:
The payment of a qualified scholarship to a nonresident alien is not reportable and is not subject to withholding. However, the part of a scholarship or fellowship paid to a nonresident alien which does not constitute a qualified scholarship is reportable on Form 1042-S and is subject to withholding. For example, those parts of a scholarship devoted to travel, room, and board are subject to withholding and are reported on Form 1042-S. The withholding rate is 14% on taxable scholarship and fellowship grants paid to nonresident aliens temporarily present in the United States in "F," "J," "M," or "Q" nonimmigrant status. Payments made to nonresident alien individuals in any other immigration status are subject to 30% withholding.
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Nondegree candidate.

rule
If the person receiving the scholarship or fellowship grant is not a candidate for a degree, and is present in the United States in "F," "J," "M," or "Q" nonimmigrant status, you must withhold tax at 14% on the total amount of the grant that is from U.S. sources if the following requirements are met.
  1. The grant must be for study, training, or research in the United States.
  2. The grant must be made by:
    1. A tax-exempt organization operated for charitable, religious, educational, etc. purposes,
    2. A foreign government,
    3. A federal, state, or local government agency, or
    4. An international organization, or a binational or multinational educational or cultural organization created or continued by the Mutual Educational and Cultural Exchange Act of 1961 (known as the Fulbright-Hays Act).
If the grant does not meet both (1) and (2) above, you must withhold at 30% on the amount of the grant that is from U.S. sources.
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Alternate withholding procedure.

rule
You may choose to treat the taxable part of a U.S. source grant or scholarship as wages. The student or grantee must have been admitted into the United States on an "F," "J," "M," or "Q" visa. The student or grantee will know that you are using this alternate withholding procedure when you ask for a Form W-4.
The student or grantee must complete Form W-4 annually following the instructions given here and forward it to you, the payer of the scholarship, or your designated withholding agent. You may rely on the information on Form W-4 unless you know or have reason to know it is incorrect. You must file a Form 1042-S (discussed later) for each student or grantee who gives you, or your withholding agent, a Form W-4.
Each student or grantee who files a Form W-4 must file an annual U.S. income tax return to be allowed the exemptions and deductions claimed on that form. If the individual is in the United States during more than one tax year, he or she must attach a statement to the annual Form W-4 indicating that the individual has filed a U.S. income tax return for the previous year. If he or she has not been in the United States long enough to have to file a return, the individual must attach a statement to the Form W-4 saying that a timely U.S. income tax return will be filed.
A prorated part of allowable personal exemptions based on the projected number of days he or she will be in this country is allowed. This is figured by multiplying the daily exemption amount by the number of days the student or grantee expects to be in the United States during the year. The prorated exemption amount should be shown on line A of the Personal Allowances Worksheet that comes with Form W-4. See Publication 519 for the current year daily exemption amount.
In most cases, zero (-0-) should be shown on line B of the worksheet. But, a student or grantee who qualifies under Article 21(2) of the United States-India income tax treaty can enter the standard deduction if he or she does not claim away-from-home expenses or other itemized deductions (discussed later).
In most cases, zero (-0-) should be shown on lines C and D of the worksheet. But, an additional daily exemption amount may be allowed for the spouse and each dependent if the student or grantee is: These additional amounts should be entered on lines C and D, as appropriate.
As lines E, F, and G of the worksheet do not apply to nonresident aliens subject to this procedure, there should be no entries on those lines.
The nonresident alien student or grantee may deduct away-from-home expenses (meals, lodging, and transportation) on Form W-4 if he or she expects to be away from his or her tax home for 1 year or less. The amount of the claimed expenses should be the anticipated actual amount, if known.
The actual expenses or the per diem allowance should be shown on line A of the worksheet in addition to the personal exemption amount.
The student or grantee can claim other expenses that will be deductible on Form 1040NR, U.S. Nonresident Alien Income Tax Return. These include student loan interest, certain state and local income taxes, charitable contributions, casualty losses, and moving expenses. He or she should include these anticipated amounts on line A of the worksheet.
The student or grantee can also enter on line A of the worksheet, the part of the grant or scholarship that is tax exempt under the statute or a tax treaty.
Lines A through D of the Personal Allowances Worksheet are added and the total should be shown on line H.
The payer of the grant or scholarship must review the Form W-4 to make sure all the necessary and required information is provided. If the withholding agent knows or has reason to know that the amounts shown on the Form W-4 may be false, the withholding agent must reject the Form W-4 and withhold at the appropriate statutory rate (14% or 30%). However, if the only incorrect information is that the student or grantee's stay in the United States has extended beyond 12 months, the withholding agent may withhold under these rules, but without a deduction for away-from-home expenses.
After receipt and acceptance of the Form W-4, the payer must withhold at the graduated rates in Publication 15 (Circular E) as if the grant or scholarship income were wages. The gross amount of the income is reduced by the total amount of exemptions and deductions on the Form W-4 and the withholding tax is figured on the rest.
When completing Form 1042-S for the student or grantee, enter the taxable part (gross amount less qualified scholarship) of the scholarship or fellowship grant in box 2, enter the withholding allowance amount from line H of the Personal Allowances Worksheet of Form W-4 in box 3, and show the net of these two amounts in box 4.
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Pay for services rendered.

rule
Pay for services rendered as an employee by an alien who also is the recipient of a scholarship or fellowship grant usually is subject to graduated withholding under chapter 3 according to the rules discussed later in Wages Paid to Employees—Graduated Withholding. This includes taxable amounts an individual who is a candidate for a degree receives for teaching, doing research, and carrying out other part-time employment required as a condition for receiving the scholarship or fellowship grant.
Grants given to students, trainees, or researchers which require the performance of personal services as a necessary condition for disbursing the grant do not qualify as scholarship or fellowship grants. Instead, they are compensation for personal services considered to be wages. It does not matter what term is used to describe the grant (for example, stipend, scholarship, fellowship, etc.).
EIC
Withholding agents who pay grants that are in fact wages must report such grants on Forms 941 and W-2 and withhold income tax on them at the graduated rates. Withholding agents may not allow tax treaty exemptions that apply to scholarships and fellowships to be applied to grants that are really wages. It is the responsibility of the withholding agent to determine whether a grant is "wages" or a "scholarship or fellowship," and to report and withhold on the grant accordingly. An alien student, trainee, or researcher may not claim a scholarship or fellowship treaty exemption against income that has been reported to him on Form W-2 as wages.
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Per diem paid by the U.S. Government.

rule
Per diem for subsistence paid by the U.S. Government (directly or by contract) to a nonresident alien engaged in a training program in the United States funded by the U.S. Agency for International Development are not subject to 14% or 30% withholding. This is true even if the alien is subject to income tax on those amounts.
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Tax treaties.

rule
Many treaties contain exemptions from U.S. taxation for scholarships and fellowships. Although usually found in the student articles of the tax treaties, many of these exemptions also apply to research grants received by researchers who are not students. Table 2 of this publication shows a line entry entitled "Scholarship or fellowship grant" for those treaties which have such an exemption. The treaty provision usually exempts the entire scholarship or fellowship amount, regardless of whether the grant is a "qualified scholarship" under U.S. law.
An alien student, trainee, or researcher may claim a treaty exemption for a scholarship or fellowship by submitting Form W-8BEN to the payer of the grant. However, a scholarship or fellowship recipient who receives both wages and a scholarship or fellowship from the same institution can claim treaty exemptions on both kinds of income on Form 8233.
The scholarship or fellowship recipient who is claiming a treaty exemption must provide you with his or her U.S. or foreign TIN on Form W-8BEN or on Form 8233 or you cannot allow the treaty exemption. A copy of a completed Form W-7, showing that a TIN has been applied for, can be given to you with a Form 8233. See Form 8233, later, under Pay for Personal Services Performed.
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Nonresident alien who becomes a resident alien.
In most cases, only a nonresident alien individual may use the terms of a tax treaty to reduce or eliminate U.S. tax on income from a scholarship or fellowship grant. A student (including a trainee or business apprentice) or researcher who has become a resident alien for U.S. tax purposes may not use the terms of a tax treaty due to a provision known as a "saving clause." However, an exception to the saving clause may permit an exemption from tax to continue for scholarship or fellowship grant income even after the recipient has otherwise become a U.S. resident alien for tax purposes. In this situation, the individual must give you a Form W-9 and an attachment that includes all the following information.
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Example.

Article 20 of the U.S.-China income tax treaty allows an exemption from tax for scholarship income received by a Chinese student temporarily present in the United States. Under the Internal Revenue Code, a student may become a resident alien for tax purposes if his or her stay in the United States exceeds 5 calendar years. However, the treaty allows the provisions of Article 20 to continue to apply even after the Chinese student becomes a resident alien of the United States.
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Other Grants, Prizes, and Awards
Subject to Chapter 3 Withholding

rule
Other grants, prizes, and awards made by grantors that reside in the United States are treated as income from sources within the United States. Those made for activities conducted outside the United States by a foreign person or by grantors that reside outside the United States are treated as income from foreign sources. These provisions do not apply to salaries or other pay for services.
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Grant.

rule
The purpose of a grant must be to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. A grant must also be an amount which does not qualify as a scholarship or fellowship. The grantor must not intend the amount to be given to the grantee for the purpose of aiding the grantee to perform study, training, or research.
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Prizes and awards.

rule
Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, or are received as the result of entering a contest. A prize or award is taxable to the recipient unless all of the following conditions are met:
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Targeted grants and achievement awards.

rule
Targeted grants and achievement awards received by nonresident aliens for activities conducted outside the United States are treated as income from foreign sources. Targeted grants and achievement awards are issued by exempt organizations or by the United States (or one of its instruments or agencies), a state (or a political subdivision of a state), or the District of Columbia for an activity (or past activity in the case of an achievement award) undertaken in the public interest.
taxmap/pubs/p515-004.htm#en_us_publink1000224965

Pay for Personal
Services Performed

rule
This section explains the rules for withholding tax from pay for personal services. You generally must withhold tax at the 30% rate on compensation you pay to a nonresident alien individual for labor or personal services performed in the United States, unless that pay is specifically exempted from withholding or subject to graduated withholding. This rule applies regardless of your place of residence, the place where the contract for service was made, or the place of payment.
Payments for personal services are not withholdable payments under chapter 4 when they are nonfinancial payments. See Treasury regulations section 1.1473-1(a)(4)(iii) for a description of these payments and their exclusion as withholdable payments.
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Illegal aliens.

rule
Foreign workers who are illegal aliens are subject to U.S. taxes in spite of their illegal status. U.S. employers or payers who hire illegal aliens may be subject to various fines, penalties, and sanctions imposed by U.S. Immigration and Customs Enforcement. If such employers or payers choose to hire illegal aliens, the payments made to those aliens are subject to the same tax withholding and reporting obligations that apply to other classes of aliens. Illegal aliens who are nonresident aliens and who receive income from performing independent personal services are subject to 30% withholding unless exempt under some provision of law or a tax treaty. Illegal aliens who are resident aliens and who receive income from performing dependent personal services are subject to the same reporting and withholding obligations that apply to U.S. citizens who receive the same kind of income.
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Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

rule
This form is used by a nonresident alien individual to claim a tax treaty exemption from withholding on some or all compensation paid for:
Persons providing independent personal services can use Form 8233 to claim the personal exemption amount.
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Form W-4, Employee's Withholding Allowance Certificate.

rule
This form is used by a person providing dependent personal services to claim the personal exemption amount, but not a tax treaty exemption. Nonresident alien individuals are subject to special instructions for completing the Form W-4. See the discussion under Wages Paid to Employees—Graduated Withholding, later.
taxmap/pubs/p515-004.htm#en_us_publink1000224969

Pay for independent personal services (Income Code 16).

rule
Independent personal services (a term commonly used in tax treaties) are personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee. This category of pay includes payments for professional services, such as fees of an attorney, physician, or accountant made directly to the person performing the services. It also includes honoraria paid by colleges and universities to visiting teachers, lecturers, and researchers.
Pay for independent personal services is subject to chapter 3 withholding and reporting as follows.
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30% rate.
You must withhold at the statutory rate of 30% on all payments unless the alien enters into a withholding agreement or receives a final payment exemption (discussed later).
The amount of pay subject to 30% withholding may be reduced by the personal exemption amount if the alien gives you a properly completed Form 8233. A nonresident alien is allowed only one personal exemption. However, individuals who are residents of Canada, Mexico, or South Korea, or are U.S. nationals generally are entitled to the same exemptions as U.S. citizens. See Publication 519 for the current year personal exemption amounts.
Students and business apprentices covered by Article 21(2) of the United States-India income tax treaty may claim an additional exemption for their spouse if a joint return is not filed, and if the spouse has no gross income for the year and is not the dependent of another taxpayer. They also may claim additional exemptions for children who reside with them in the United States at any time during the year, but only if the dependents are U.S. citizens or nationals or residents of the United States, Canada, or Mexico. They may not claim exemptions for dependents who are admitted to the United States on "F-2," "J-2," or "M-2" visas unless such dependents have become resident aliens.
Each allowable exemption must be prorated according to the number of days during the tax year during which the alien performs services in the United States. Multiply the number of these days by the daily exemption amount to figure the prorated amount. Residents of South Korea must make a further proration of their additional exemptions based on their gross income effectively connected with a U.S. trade or business. The rules for this proration are discussed in detail in Publication 519.
A U.S. national is an individual who owes his sole allegiance to the United States, but who is not a U.S. citizen. Such an individual is usually a citizen of American Samoa or a Northern Mariana Islander who chose to become a U.S. national.
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Example 1.
Hans Schmidt, who is a resident of Country X, worked (not as an employee) for a U.S. company in the United States for 100 days during 2014 before returning to his country. He earned $7,500 for the services performed (not considered wages) in the United States. Hans is married and has three dependent children. His spouse did not work and had no income subject to U.S. tax. Hans is allowed $1,082 as a deduction against the payments for his personal services performed in the United States (100 days × $10.82 (the personal exemption amount for 2014)). Tax must be withheld at 30% on the rest of his earnings, $6,418 ($7,500 − $1,082).
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Example 2.
If, in Example 1, Hans were a resident of Mexico, working under contract with a domestic corporation, $5,410 (100 days × $10.82 per day (the daily exemption amount for 2014) for each of five exemptions) would be allowed against the payments for personal services performed in the United States. Tax must be withheld at 30% on the rest of his earnings, $2,090 ($7,500 − $5,410).
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Withholding agreements.
Pay for personal services of a nonresident alien who is engaged during the tax year in the conduct of a U.S. trade or business may be wholly or partially exempted from withholding at the statutory rate if an agreement has been reached between the Commissioner or his delegate and the alien as to the amount of withholding required. This agreement will be effective for payments covered by the agreement that are made after the agreement is executed by all parties. The alien must agree to timely file an income tax return for the current tax year.
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Final payment exemption.
The final payment of compensation for independent personal services may be wholly or partially exempt from withholding at the statutory rate. This exemption applies to the last payment of compensation, other than wages, for personal services rendered in the United States that the alien expects to receive from any withholding agent during the tax year.
To obtain the final payment exemption, the alien, or the alien's agent, must file the forms and provide the information required by the Commissioner or his delegate. This information includes, but is not limited to, the following items. The alien must give a statement, signed and verified by a declaration that it is made under the penalties of perjury, that all the information provided is true, and that to his or her knowledge no relevant information has been omitted.
If satisfied with the information provided, the Commissioner or his delegate will determine the amount of the alien's tentative income tax for the tax year on gross income effectively connected with the conduct of a U.S. trade or business. Ordinary and necessary business expenses may be taken into account if proved to the satisfaction of the Commissioner or his delegate.
The Commissioner or his delegate will provide the alien with a letter to you, the withholding agent, stating the amount of the final payment of compensation for personal services that is exempt from withholding, and the amount that would otherwise be withheld that may be paid to the alien due to the exemption. The amount of pay exempt from withholding cannot be more than $5,000. The alien must give two copies of the letter to you and must also attach a copy of the letter to his or her income tax return for the tax year for which the exemption is effective.
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Travel expenses.
If you pay or reimburse the travel expenses of a nonresident alien, the payments are not reportable to the IRS and are not subject to chapter 3 withholding if the payments are made under an accountable plan as described in section 1.62-2 of the regulations. This treatment applies only to that part of a payment that represents the payment of travel and lodging expenses and not to that part that represents compensation for independent personal services.
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Tax treaties.
Under some tax treaties, pay for independent personal services performed in the United States is treated as business income and taxed according to the treaty provisions for business profits.
Under other tax treaties, pay for independent personal services performed in the United States is exempt from U.S. income tax only if the independent nonresident alien contractor performs the services during a period of temporary presence in the United States (usually not more than 183 days) and is a resident of the treaty country.
Independent nonresident alien contractors use Form 8233 to claim an exemption from withholding under a tax treaty. For more information, see Form 8233, earlier.
Deposit
Form 8233 should be used to claim a treaty benefit based on a business profits provision or an independent personal services provision.
Often, you must withhold under the statutory rules on payments made to a treaty country resident contractor for services performed in the United States. This is because the factors on which the treaty exemption is based may not be determinable until after the close of the tax year. The contractor must then file a U.S. income tax return (Form 1040NR) to recover any overwithheld tax by providing the IRS with proof that he or she is entitled to a treaty exemption.
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Wages Paid to Employees—
Graduated Withholding

rule
Salaries, wages, bonuses, or any other pay for personal services (referred to collectively as wages) paid to nonresident alien employees are subject to graduated withholding in the same way as for U.S. citizens and residents if the wages are effectively connected with the conduct of a U.S. trade or business. Any wages paid to a nonresident alien for personal services performed as an employee for an employer are generally not subject to the 30% withholding if the wages are subject to graduated withholding.
Also, the 30% withholding does not apply to pay for personal services performed as an employee for an employer if it is effectively connected with the conduct of a U.S. trade or business and is specifically exempted from the definition of wages. Chapter 4 withholding does not apply to these payments. See Pay that is not wages, later.
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Special rule for certain agricultural workers.

rule
The 30% withholding does not apply to pay for personal services performed by a foreign agricultural worker in the United States on an H-2A visa. However, if the total wages are $600 or more and the worker does not give you a TIN, you may need to backup withhold. You may withhold at graduated rates if the employee asks you to by giving you a completed Form W-4.
Pay for personal services that is not subject to withholding is not subject to reporting on Form 1042-S. If the compensation is more than $600, report it on Form W-2 (if the employee gave you a TIN) or on Form 1099-MISC (if the employee did not give you a TIN).
For more information on withholding on foreign agricultural workers, go to IRS.gov and enter "agricultural workers" in the search box.
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Employer-employee relationship.

rule
For pay for personal services to qualify as wages, there must be an employer-employee relationship.
Under the common law rules, every individual who performs services subject to the will and control of an employer, both as to what shall be done and how it shall be done, is an employee. It does not matter that the employer allows the employee considerable discretion and freedom of action, as long as the employer has the legal right to control both the method and the result of the services.
If an employer-employee relationship exists, it does not matter what the parties call the relationship. It does not matter if the employee is called a partner, coadventurer, agent, or independent contractor. It does not matter how the pay is measured, how the individual is paid, or what the payments are called. Nor does it matter whether the individual works full-time or part-time.
The existence of the employer-employee relationship under the usual common law rules will be determined, in doubtful cases, by an examination of the facts of each case.
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Employee.
An employee generally includes any individual who performs services if the relationship between the individual and the person for whom the services are performed is the legal relationship of employer and employee. This includes an individual who receives a supplemental unemployment pay benefit that is treated as wages.
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No distinction is made between classes of employees.
Superintendents, managers, and other supervisory personnel are employees. In most cases, an officer of a corporation is an employee, but a director acting in this capacity is not. An officer who does not perform any services, or only minor services, and neither receives nor is entitled to receive any pay is not considered an employee.
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Employer.
An employer is any person or organization for whom an individual performs or has performed any service, of whatever nature, as an employee. The term "employer" includes not only individuals and organizations in a trade or business, but organizations exempt from income tax, such as religious and charitable organizations, educational institutions, clubs, social organizations, and societies. It also includes the governments of the United States, the states, Puerto Rico, and the District of Columbia, as well as their agencies, instrumentalities, and political subdivisions.
Two special definitions of employer that may have considerable application to nonresident aliens are:
For example, if a trust pays wages, such as certain types of pensions, supplemental unemployment pay, or retired pay, and the person for whom the services were performed has no legal control over the payment of the wages, the trust is the employer.
These special definitions have no effect upon the relationship between an alien employee and the actual employer when determining whether the pay received is considered to be wages.
If an employer-employee relationship exists, the employer ordinarily must withhold the income tax from wage payments by using the percentage method or wage bracket tables as shown in Publication 15 (Circular E).
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Pay that is not wages.

rule
Employment for which the pay is not considered wages (for graduated income tax withholding) includes, but is not limited to, the following items.
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Services performed outside the United States.
Compensation paid to a nonresident alien (other than a resident of Puerto Rico, discussed later) for services performed outside the United States is not considered wages and is not subject to withholding.
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Withholding exemptions.

rule
The amount of wages subject to graduated withholding may be reduced by the personal exemption amount. The personal exemptions allowed in figuring wages subject to graduated withholding are the same as those discussed earlier under Pay for independent personal services, except that an employee must claim them on Form W-4.
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Special instructions for Form W-4.
A nonresident alien subject to wage withholding must give the employer a completed Form W-4 to enable the employer to figure how much income tax to withhold.
EIC
A nonresident alien cannot claim exemption from withholding on Form W-4. Use Form 8233 to claim a tax treaty exemption from withholding. See Form 8233, earlier.
In completing Form W-4, nonresident aliens should use the following instructions instead of the instructions on Form W-4.
  1. Check "Single" on line 3 (regardless of actual marital status).
  2. Claim only one withholding allowance on line 5, unless a resident of Canada, Mexico, or South Korea, or a U.S. national.
  3. Write "Nonresident Alien" or "" above the dotted line on line 6.
Also see Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens.
Deposit
Nonresident alien employees are not required to request an additional withholding amount, but they can choose to have an additional amount withheld on line 6.
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Students and business apprentices from India.
Students and business apprentices who are eligible for the benefits of Article 21(2) of the United States-India income tax treaty can claim additional withholding allowances on line 5 for their spouses. In addition, they can claim an additional withholding allowance for each dependent who has become a resident alien.
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Determining amount to withhold.

rule
Employers are required to add an amount to the wages of a nonresident alien employee solely for the purpose of calculating income tax withholding. The specific amounts depend on the payroll period. These amounts can be found in Withholding Adjustment for Nonresident Aliens in chapter 9 of Publication 15 (Circular E). This adjustment does not apply to students and business apprentices from India.
EIC
Do not include the additional amount on the employee's Form W-2, Wage and Tax Statement.
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Reporting requirements for wages and withheld taxes paid to nonresident aliens.

rule
The employer must report the amount of wages and deposits of withheld income and social security and Medicare taxes by filing Form 941. Household employers should see Publication 926, Household Employer's Tax Guide, for information on reporting and paying employment taxes on wages paid to household employees.
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Form W-2.
The employer also must report on Form W-2 the wages subject to chapter 3 withholding and the withheld taxes. You must give copies of this form to the employee. If the employee submits Form 8233 to claim exemption from withholding under a tax treaty, the wages are reported on Form 1042-S and not in box 1 of Form W-2. Wages exempt under a tax treaty may still be reported in the state and local wages boxes of Form W-2 if such wages are subject to state and local taxation. For more information, see the instructions for these forms.
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Trust fund recovery penalty.

rule
If you are a person responsible for withholding, accounting for, or depositing or paying employment taxes, and willfully fail to do so, you can be held liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.
"Willfully" in this case means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the business instead of the withholding taxes.
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Social security and Medicare tax.

rule
The employer generally must also withhold FICA and file Form 941, Employer's Quarterly Federal Tax Return. In certain cases, wages paid to students and railroad and agricultural workers are exempt from FICA. Wages paid to nonresident alien students, teachers, researchers, trainees, and other nonresident aliens in “F-1”, “J-1”, M-1”, or “Q” nonimmigrant status are not subject to FICA. See Publication 15, Employer’s Tax Guide, for the rules on withholding.
In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay in excess of $200,000 in a calendar year. See Publication 15 for more information.
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Federal unemployment tax (FUTA).

rule
The employer must pay FUTA and file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Only the employer pays this tax; it is not deducted from the employee's wages. In certain cases, wages paid to students and railroad and agricultural workers are exempt from FUTA tax. For more information, see the instructions for these forms.
Wages paid to nonresident alien students, teachers, researchers, trainees, and other nonresident aliens in "F-1," "J-1," "M-1," or "Q" nonimmigrant status are not subject to FUTA tax.
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Pay for dependent personal services (Income Code 17).

rule
Dependent personal services are personal services performed in the United States by a nonresident alien individual as an employee rather than as an independent contractor.
Pay for dependent personal services is subject to chapter 3 withholding and reporting as follows.
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Graduated rates.
Ordinarily, you must withhold on pay (wages) for dependent personal services using graduated rates. The nonresident alien must complete Form W-4 as discussed earlier under Special instructions for Form W-4, and you must report wages and income tax withheld on Form W-2. However, you do not have to withhold if any of the following four exceptions applies.
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Exception 1.
Compensation paid for labor or personal services performed in the United States is deemed not to be income from sources within the United States and is exempt from U.S. income tax if:
  1. The labor or services are performed by a nonresident alien temporarily present in the United States for a period or periods not exceeding a total of 90 days during the tax year;
  2. The total pay does not exceed $3,000; and
  3. The pay is for labor or services performed as an employee of, or under a contract with:
    1. A nonresident alien individual, foreign partnership, or foreign corporation that is not engaged in a trade or business in the United States, or
    2. A U.S. citizen or resident alien individual, a domestic partnership, or a domestic corporation, if the labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by this individual, partnership, or corporation.
If the total pay is more than $3,000, the entire amount is income from sources in the United States and is subject to U.S. tax.
Also, compensation paid for labor or services performed in the United States 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 sources within the United States.
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Exception 2.
Compensation paid by a foreign employer to a nonresident alien for the period the alien is temporarily present in the United States on an "F," "J," or "Q" visa is exempt from U.S. income tax. For this purpose, a foreign employer means:
You can exempt the payment from withholding if you can reliably associate the payment with a Form W-8BEN containing the taxpayer identification number of the payee.
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Exception 3.
Compensation paid to certain residents of Canada or Mexico who enter or leave the United States at frequent intervals is not subject to withholding. These aliens must either:
To qualify for the exemption from withholding during a tax year, a Canadian or Mexican resident must give the employer a statement with the employee's name, address, and identification number, and certifying that the resident:
The statement can be in any form, but it must be dated and signed by the employee and must include a written declaration that it is made under penalties of perjury.
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Canadian and Mexican residents employed entirely within the United States.
Neither the transportation service exception nor the international projects exception applies to the pay of a resident of Canada or Mexico who is employed entirely within the United States and who commutes from a home in Canada or Mexico to work in the United States. If an individual works at a fixed point or points in the United States (such as a factory, store, office, or designated area or areas), the wages for services performed as an employee for an employer are subject to graduated withholding.
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Exception 4.
Compensation paid for services performed in Puerto Rico by a nonresident alien who is a resident of Puerto Rico for an employer (other than the United States or one of its agencies) is not subject to withholding.
Compensation paid for either of the following types of services is not subject to withholding if the alien does not expect to be a resident of Puerto Rico during the entire tax year.
To qualify for the exemption from withholding for any tax year, the employee must give the employer a statement showing the employee's name and address and certifying that the employee: The statement must be signed and dated by the employee and contain a written declaration that it is made under penalties of perjury.
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Tax treaties.
Pay for dependent personal services under some tax treaties is exempt from U.S. income tax only if both the employer and the employee are treaty country residents and the nonresident alien employee performs the services while temporarily living in the United States (usually for not more than 183 days). Other treaties provide for exemption from U.S. tax on pay for dependent personal services if the employer is any foreign resident and the employee is a treaty country resident and the nonresident alien employee performs the services while temporarily in the United States.
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Pay for teaching (Income Code 18).

rule
This category is given a separate income code number because some tax treaties provide at least partial exemption from withholding and from U.S. tax. Pay for teaching means payments to a nonresident alien professor, teacher, or researcher by a U.S. university or other accredited educational institution for teaching or research work at the institution.
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Graduated rates.
Graduated withholding of income tax usually applies to all wages, salaries, and other pay for teaching and research paid by a U.S. educational institution during the period the nonresident alien is teaching or performing research at the institution.
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Social security and Medicare tax.
A nonresident alien temporarily in the United States on an "F-1," "J-1," "M-1," or "Q-1" visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount.
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Example.

A nonresident alien is issued a visa to teach for a university. While in the United States, he takes a part-time job working for a chemical company. The wages earned while teaching at the university are exempt from social security and Medicare taxes. The wages earned at the chemical company are subject to social security and Medicare taxes.
If an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien is still in one of the nonimmigrant statuses mentioned above. This rule also applies to FUTA (unemployment) taxes paid by the employer. Teachers, researchers, and other employees temporarily present in the United States on other nonimmigrant visas or in refugee or asylee immigration status are fully liable for social security and Medicare taxes unless an exemption applies from one of the totalization agreements in force between the United States and several other nations.
EIC
The Social Security Administration publishes the complete texts and explanatory pamphlets of the totalization agreements, which are available by calling 1-800-772-1213 or by visiting the Social Security Administration web site at:
www.socialsecurity.gov/international.
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Tax treaties.
Under most tax treaties, pay for teaching or research is exempt from U.S. income tax and from withholding for a specified period of time when paid to a professor, teacher, or researcher who was a resident of the treaty country immediately prior to entry into the United States and who is not a citizen of the United States (see Table 2). The U.S. educational institution paying the compensation must report the amount of compensation paid each year which is exempt from tax under a tax treaty on Form 1042-S. The employer should also report the compensation in the state and local wages boxes of Form W-2 if the wages are subject to state and local taxes, or in the social security and Medicare wages boxes of Form W-2 if the wages are subject to social security and Medicare taxes.
Claimants must give you either Form W-8BEN or 8233, as applicable, to obtain these treaty benefits.
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Pay during studying and training (Income Code 19).

rule
This category refers to pay (as contrasted with remittances, allowances, or other forms of scholarships or fellowship grants—see Scholarships and Fellowship Grants, earlier) for personal services performed while a nonresident alien is temporarily in the United States as a student, trainee, or apprentice, or while acquiring technical, professional, or business experience.
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Graduated rates.
Wages, salaries, or other compensation paid to a nonresident alien student, trainee, or apprentice for labor or personal services performed in the United States are subject to graduated withholding.
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Social security and Medicare tax.
A nonresident alien temporarily in the United States on an "F-1," "J-1," "M-1," or "Q-1" visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount. This exemption from social security and Medicare taxes also applies to employment performed under Curricular Practical Training and Optional Practical Training, on or off campus, by foreign students in "F-1," "J-1," "M-1," or "Q" status as long as the employment is authorized by the U.S. Citizenship and Immigration Services.
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Example.

A nonresident alien is admitted to the United States to study surveying. As part of her course, she apprentices to a surveyor. She also works part time at a restaurant to supplement her income. The wages she earns as an apprentice are not subject to social security and Medicare taxes. The wages and tips she earns at the restaurant are subject to social security and Medicare taxes.
If an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien is still in one of the nonimmigrant statuses mentioned above. This rule also applies to FUTA (unemployment) taxes paid by the employer.
Any student who is enrolled and regularly attending classes at a school may be exempt from social security, Medicare, and FUTA taxes on pay for services performed for that school. See Publication 15 (Circular E).
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Tax treaties.
Many tax treaties provide an exemption from U.S. income tax and from withholding on compensation paid to nonresident alien students or trainees during training in the United States for a limited period. In addition, some treaties provide an exemption from tax and withholding for compensation paid by the U.S. Government or its contractor to a nonresident alien student or trainee who is temporarily present in the United States as a participant in a program sponsored by the U.S. Government (see Table 2). However, a withholding agent who is a U.S. resident, a U.S. Government agency, or its contractor must report the amount of pay on Form 1042-S.
Claimants must give you either Form W-8BEN or 8233, as applicable, to obtain these treaty benefits.
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Artists and Athletes
(Income Codes 42 and 43)

rule
Because many tax treaties contain a provision for pay to artists and athletes, a separate category is assigned these payments for chapter 3 withholding purposes. This category includes payments made for performances by public entertainers (such as theater, motion picture, radio, or television artists, or musicians) or athletes.
Use Income Code 42 to report payments to artists and athletes who have not signed a central withholding agreement (CWA), discussed later. Use Income Code 43 to report payments to artists and athletes who have signed a CWA.
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Income Code 42.

rule
You must withhold tax at a 30% rate on payments to artists and athletes for services performed as independent contractors. See Pay for independent personal services, earlier, for more information. You must withhold tax at graduated rates on payments to artists and athletes for services performed as employees. See Pay for dependent personal services, earlier, for more information. However, in any situation where the nature of the relationship between the payer of the income and the artist or athlete is not ascertainable, you should withhold at a rate of 30%.
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Income Code 43.

rule
Nonresident alien entertainers and athletes who perform or participate in events in the United States can request a CWA for a lower rate of withholding. A CWA is an agreement entered into by the athlete or entertainer, a designated withholding agent, and the IRS. Under no circumstances will a CWA reduce taxes withheld to less than the anticipated amount of income tax liability.
Nonresident alien entertainers or athletes requesting a CWA must submit a written application and appropriate attachments. Use Form 13930, Application for Central Withholding Agreement, and its instructions to apply for a CWA.
The designated withholding agent must agree to withhold income tax from payments made to the nonresident alien, to pay over the withheld tax to the IRS on the dates and in the amounts specified in the agreement, and to have the IRS apply the payments of withheld tax to the withholding agent's Form 1042 account. The designated withholding agent will be required to file Form 1042 and Form 1042-S for each tax year in which income is paid to a nonresident alien covered by the CWA. The designated withholding agent will issue Form 1042-S to each nonresident alien athlete and entertainer affected by the agreement.
Due date
A request for a CWA must be received at the following address at least 45 days before the agreement is to take effect, and must contain all supporting documentation specified in the instructions or no consideration will be given to entering into a CWA. Exceptions will be considered on a case by case basis.


Central Withholding Agreement Program
Internal Revenue Service
Mail Stop: 1441
2001 Butterfield Rd.
Downer's Grove, IL 60515-1050


Deposit
You do not need to complete box 3 or box 5 on Form 1042-S for any artist or athlete who is covered by a CWA. For more information on the CWA program, go to www.irs.gov/Individuals/International-Taxpayers/Central-Withholding-Agreements.
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Tax treaties.

rule
Under many tax treaties, compensation paid to public entertainers or athletes for services performed in the United States is exempt from U.S. income tax only when the alien is present for a limited period of time and the pay is within limits provided in the tax treaty (see Table 2).
Employees and independent contractors may claim an exemption from withholding under a tax treaty by filing Form 8233. Often, however, you will have to withhold at the statutory rates on the total payments to the entertainer or athlete. This is because the exemption may be based upon factors that cannot be determined until after the end of the year.
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Other Income

rule
For the discussion of Income Codes 24, 25, and 26, see U.S. Real Property Interest, later. For the discussion of Income Code 27, see Publicly Traded Partnerships, later.
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Gambling winnings (Income Code 28).

rule
In general, nonresident aliens are subject to chapter 3 withholding at 30% on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U.S. trade or business and is not exempted by treaty. The tax withheld and winnings are reportable on Forms 1042 and 1042-S. Chapter 4 withholding does not apply to these proceeds.
No tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. A Form W-8BEN is not required to obtain the exemption from withholding, but a Form W-8BEN may be required for purposes of Form 1099 reporting and backup withholding. Gambling income that is not subject to chapter 3 withholding is not subject to reporting on Form 1042-S.
Nonresident aliens are taxed at graduated rates on net gambling income won in the U.S. that is effectively connected with a U.S. trade or business.
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Tax treaties.
Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.
Gambling income of residents of Malta is taxed at 10%.
Claimants must give you a Form W-8BEN (with a U.S. or foreign TIN) to claim treaty benefits on gambling income that is not effectively connected with a U.S. trade or business. See U.S. Taxpayer Identification Numbers, later, for when you can accept a Form W-8BEN without a TIN.
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Transportation income.

rule
U.S. source gross transportation income (USSGTI), as defined in section 887, is not subject to 30% gross withholding tax, and chapter 4 withholding does not apply to this income. Transportation income is income from the use of a vessel or aircraft, whether owned, hired, or leased, or from the performance of services directly related to the use of a vessel or aircraft. U.S. source gross transportation income includes 50% of all transportation income from transportation that either begins or ends in the United States. USSGTI does not include transportation income of a foreign corporation taxable in a U.S. possession. The recipient of USSGTI must pay tax on it annually at the rate of 4% on Section I of Form 1120-F, unless the income is effectively connected with the conduct of a U.S. trade or business and is reportable on Section II of Form 1120-F. Special rules apply to determine if a foreign corporation's USSGTI is effectively connected with a U.S. trade or business.
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Canadian truck and rail income.
Under Article VIII (Transportation) of the U.S.-Canada treaty, any U.S. source income derived by a Canadian company engaged in the operation of trucks or a railway as a common carrier or contract carrier, and attributable to the transportation of property between Canada and the United States is exempt from tax in the United States, provided the company is otherwise eligible for treaty benefits. Payments for the use of trucks (including trailers) or railway rolling stock, or from the use, maintenance, or rental of containers (including trailers and related equipment for the transport of containers) used to transport property between Canada and the United States are also exempt from U.S. tax, provided the company is otherwise eligible for treaty benefits. Canadian companies must file Form 1120-F and Form 8833 to claim an exemption from tax for profits from their operating income. Canadian corporations are subject to chapter 3 withholding on rental payments for the use of such equipment in the United States and may claim an exemption on Form W8-BEN-E.
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Foreign freight charges or rental of equipment used outside the United States.
Payments for transportation of property, whether by ship, air, or truck, solely between points outside the United States or rental of tangible property in connection with transportation solely for use between points outside the United States is not U.S. source income and not subject to chapter 3 withholding.
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Payments to certain expatriates.

rule
Certain payments to nonresident aliens who are covered expatriates under section 877A(g)(1) are subject to withholding at 30%. In general, nonresident aliens are covered expatriates if they were U.S. citizens or long-term residents who renounced their citizenship or ceased to be long-term residents for U.S. tax purposes after June 16, 2008, and satisfied other tests for average annual net income tax and net worth. For more information on the definition of covered expatriates, see the Instructions for Form 8854.
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Eligible deferred compensation items (Income Code 38).
In general, you must withhold tax at a 30% rate on any payment of an eligible deferred compensation item. The amount subject to tax is the amount of the payment that would have been included in the nonresident alien's U.S. gross income if he had continued to be taxed as a U.S. citizen or resident.
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Distributions from a nongrantor trust (Income Code 39).
In general, you must withhold tax at a 30% rate on any direct or indirect distribution from a nongrantor trust. The amount subject to tax is the part of the distribution that would have been included in the nonresident alien's U.S. gross income if he had continued to be taxed as a U.S. citizen or resident. If the nonresident alien was not a beneficiary of the nongrantor trust on the day before he gave up his U.S. citizenship or long-term residence, you do not have to withhold tax.
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Guarantee of indebtedness (Income Code 41).

rule
An amount paid to a foreign payee for the provision of a guarantee of indebtedness issued after September 27, 2010, may be subject to chapter 3 withholding. The amounts must be paid by one of the following:
  1. A noncorporate U.S. resident,
  2. A domestic corporation, or
  3. Any foreign person if the amount paid is connected with income that is effectively connected, or treated as effectively connected, with a U.S. trade or business.
An indirect payment includes a payment by a foreign bank to a foreign corporation for the foreign corporation's guarantee of indebtedness owed to the foreign bank by the foreign corporation's domestic subsidiary, where the cost of the guarantee fee is passed on to the domestic subsidiary through additional interest charged on the indebtedness.
The amounts described above for a guarantee of indebtedness are withholdable payments, such that chapter 4 withholding may apply absent an exclusion from withholding under chapter 4.
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Other income (Income Code 51).

rule
Use this category to report U.S. source FDAP income that is not reportable under any of the other income categories. Examples of income that may be reportable under this category are commissions, insurance proceeds, patronage distributions, prizes, and racing purses.
As discussed earlier under Income Subject to Chapter 3 Withholding, every kind of FDAP income from U.S. sources that is not effectively connected with a U.S. trade or business is subject to chapter 3 withholding unless the income is specifically exempt under the Code or a tax treaty. You generally must withhold at the 30% rate on this income. As a payment of U.S. source FDAP is generally a withholdable payment, you should review Treasury regulations section 1.1473-1(a) (definition of withholdable payment) to determine if the payment is excluded from the definition of a withholdable payment.