A company becomes subject to U.S. NRA (nonresident aliens) reporting or withholding requirements under the following circumstances:
- Payment of U.S. Sourced FDAP Income: When a company makes a payment of U.S. sourced fixed or determinable annual or periodical (FDAP) income to a foreign person that is not associated with such person’s U.S. trade or business. FDAP income includes interest, dividends, rents, royalties, compensation for personal services, pensions, annuities, and gains from the sale or exchange of certain intangibles.
- Withholding Agent Responsibilities: The company, as a withholding agent, is responsible for withholding tax on payments of U.S. sourced FDAP income to foreign persons and making deposits of such tax to the U.S. Treasury. If the withholding agent does not withhold and the foreign person does not satisfy its withholding tax obligation, both the withholding agent and the foreign person will be held liable for the tax and any associated interest and penalties.
- Documentation Requirements: The company must document the U.S. or foreign status of the payees who are paid FDAP income. This is typically done through the collection of Forms W-8 or W-9, depending on the payee's status.
- Exceptions and Exemptions: There are some exceptions to these requirements even for U.S. sourced payments. For example, certain types of interest, such as portfolio interest, may be exempt from withholding if specific conditions are met. Additionally, income tax treaties can modify the withholding requirements, potentially reducing or eliminating the withholding tax.
- Income Effectively Connected with a U.S. Trade or Business (ECI): If the income is effectively connected with the conduct of a trade or business within the United States, it is generally not subject to withholding under sections 1441 and 1442 but is instead taxed on a net basis at graduated rates. The foreign person must provide a Form W-8ECI to claim this exemption.
- Special Rules for Certain Payments: Payments such as those made under notional principal contracts (NPCs) or equity-linked instruments (ELIs) that reference U.S. source dividends may be subject to withholding under section 871(m) as dividend equivalents.
- Reporting Requirements: The company must report the income paid and the withholding applied on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, and file an annual return on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
In summary, a company becomes subject to U.S. NRA reporting or withholding requirements when it makes payments of U.S. sourced FDAP income to foreign persons, acts as a withholding agent, and must comply with documentation, withholding, and reporting obligations as outlined in the Internal Revenue Code and applicable Treasury Regulations.
Sources:
Publication 515 (2024)
Instructions for Form 1042-S (2024)
IRM Part 4. Examining Process. Chapter 10. Examination of Returns. Section 21. U.S. Withholding Agent Examinations - Form 1042
IRM Part 3. Submission Processing. Chapter 22. International Error Resolution. Section 110. Processing Form 1042 Withholding Returns
IRM Part 3. Submission Processing. Chapter 21. International Returns and Documents Analysis. Section 110. Processing Form 1042 Withholding Returns
CCA 201343020
