Non-Resident Income Sourcing

U.S. income sourcing rules determine whether income earned by non-residents is considered U.S.-sourced and therefore subject to U.S. taxation. Generally, income is sourced based on the type of income and where the economic activity generating it occurs. For example, compensation for personal services is sourced where the services are performed; interest is U.S.-sourced if paid by a U.S. resident or entity; dividends are U.S.-sourced if paid by U.S. corporations; rental and royalty income is sourced based on the location of the property; and capital gains are typically sourced based on the residence of the seller, with exceptions for U.S. real property interests. These rules are essential for determining tax obligations of non-resident aliens and foreign entities under U.S. tax law.

FDAP Withholding

FDAP (Fixed, Determinable, Annual, or Periodical) withholding refers to the U.S. tax imposed on certain types of passive income earned by non-resident aliens and foreign entities from U.S. sources. This includes interest, dividends, rents, royalties, and certain other types of income that are not effectively connected with a U.S. trade or business. Generally, this income is subject to a 30% withholding tax, unless a lower rate or exemption applies under an applicable income tax treaty.

Tax Treaty Exemptions

Tax treaty exemptions for non-residents allow individuals and entities from countries with which the U.S. has an income tax treaty to reduce or eliminate U.S. tax on certain types of income. These treaties typically provide for reduced withholding rates or full exemptions on passive income such as dividends, interest, royalties, and pensions, and may also exempt certain types of income, like compensation for short-term services or student scholarships.

Need to Plan Your Own Structure?

Work with us to develop tax charts that visually detail inbound and outbound International Tax transactions in relation to the United States taxing system.

With a given scenario, the deliverable will highlight the flow of income, expenses, other cash distributions, and summarize the tax implications and filing compliance.

Book an appointment to schedule a call for a tax structure consultation. Also feel free to send me a message before the call if not in communication already.