interest income includes the following items:
Interest on bonds, notes, or other interest-bearing obligations of U.S. residents or domestic corporations
Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time during the tax year
Original issue discount
Interest from a state, the District of Columbia, or the U.S. government
The place or manner of payment is immaterial in determining the source of the income.
A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security.
U.S. source interest income does not include the following items:
1 Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the three-year period ending with the close of the payer’s tax year preceding the interest payment, at least 80% of the payer’s total gross income:Is from sources outside the United States, andIs attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U.S. possession.However, the interest will be considered U.S. source interest income if either of the following apply.The recipient of the interest is related to the resident alien or domestic corporation. See Section 954(d)(3) for the definition of related person.The terms of the obligation are significantly modified after August 9, 2010. Any extension of the term of the obligation is considered a significant modification.
2 Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association.
3 Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business.
Dividends
In most cases, dividend income received from domestic corporations is U.S. source income. Dividend income from foreign corporations is usually foreign-source income. Exceptions to both of these rules are discussed in the following material.
A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security.
Dividend equivalent payments
U.S. source dividends also include all dividend equivalent payments. Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U.S. sources. The IRS has issued final regulations on this topic.
Guarantee of indebtedness
Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U.S. source income. They must be paid by a noncorporate resident or U.S. corporation or by any foreign person if the amounts are effectively connected with the conduct of a U.S. trade or business. For more information, see Internal Revenue Code Sections 861(a)(9) and 862(a)(9).
Personal services
All wages and any other compensation for services performed in the United States are considered to be from sources in the United States subject to very specific exceptions for employees of foreign persons, organizations, or offices, and crew members.
If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Compensation (other than certain fringe benefits) is sourced on a time basis. Certain fringe benefits (such as housing and education) are sourced on a geographical basis, or, you may be permitted to use an alternative [time] basis to determine the source of compensation.
Transportation income
Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. This is true whether the vessel or aircraft is owned, hired, or leased. The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.
All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States.
For transportation income from personal services, 50% of the income is U.S. source income if the transportation is between the United States and a U.S. possession. For nonresident aliens, this applies only to income derived from, or in connection with, an aircraft.
Scholarships, grants, prizes, and awards
Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds.
For example, payments for research or study in the United States made by the United States, a noncorporate U.S. resident, or a domestic corporation, are from U.S. sources. Similar payments from a foreign government or foreign corporation are foreign-source payments even though the funds may be disbursed through a U.S. agent.
Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources.
Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U.S. source income.
These rules do not apply to amounts paid as salary or other compensation for services.
Pensions and annuities
If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U.S. sources. That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded).
If you performed services as an employee of the United States, you may receive a distribution from the U.S. government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Your U.S. source income is the otherwise taxable amount of the distribution that is attributable to one’s total U.S. government basic pay other than tax exempt pay for services performed outside the United States.
Rents
