International Businesses & Individuals
U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of taxpayers.
United States Persons
The term ''United States person'' means:
Foreign Persons
A foreign person includes:
Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person. For Federal tax purposes, certain business entities automatically are classified as corporations. Other business entities may choose how they are classified for Federal tax purposes. Except for a business entity automatically classified as a corporation, a business entity with at least two members can choose to be classified as either an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner. Check-the-box Entities (See Form 8832 and Instructions).
Essential Concepts of International Taxation
The taxation of aliens involves certain essential concepts as follows.
Resident Aliens
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
Nonresident Aliens
A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.
Dual-Status Aliens
You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.
Source of Income
A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. Similar rules exist with respect to the source of income for withholding purposes.
Income Types
In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.
Reporting your Income in U.S. Currency
You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income, or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars.
Tax Withholding on Foreign Persons
Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
Foreign Students and Scholars
Special rules apply to the taxation of foreign students and scholars which do not apply to other kinds of aliens.
Taxpayer Identification Numbers (TIN)
Anyone, including aliens, who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
Tax Treaties
The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.
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