Nonresident Aliens A nonresident alien usually is subject to U.S. income tax only onU.S. source income. Under limited circumstances, certain foreignsource income is subject to U.S. tax. See Foreign Incomein chapter 4. The general rules for determining U.S. source income that apply tomost nonresident aliens are shown in Table 2-1. Thefollowing discussions cover the general rules as well as theexceptions to these rules. TaxTip: Not all items of U.S. source income are taxable. See chapter 3. Interest Generally, income from U.S. sources includes interest on bonds,notes, or other interest-bearing obligations of U.S. residents ordomestic corporations. Interest from U.S. sources also includesinterest paid by a domestic or foreign partnership or foreigncorporation engaged in a U.S. trade or business at any time during thetax year. Interest income also includes original issue discount. Inaddition, all interest received by a nonresident alien individual froma state, the District of Columbia, or the U.S. Government during thetax year is income from U.S. sources. The place or manner of payment is immaterial in determining thesource of the income. A substitute interest payment made to the transferor of a securityin a securities lending transaction or a sale-repurchase transactionis sourced in the same manner as the interest on the transferredsecurity. Exceptions.U.S. source interest income does not include the following items. Interest paid by a resident alien or a domestic corporationif for the 3-year period ending with the close of the payer's tax yearpreceding the interest payment at least 80% of the payer's total grossincome: Is from sources outside the United States, and Is attributable to the active conduct of a trade or businessby the individual or corporation in a foreign country or a U.S.possession. Interest paid by a foreign branch of a domestic corporationor a domestic partnership on deposits or withdrawable accounts withmutual savings banks, cooperative banks, credit unions, domesticbuilding and loan associations, and other savings institutionschartered and supervised as savings and loan or similar associationsunder federal or state law if the interest paid or credited can bededucted by the association. Interest on deposits with a foreign branch of a domesticcorporation or domestic partnership, but only if the branch is in thecommercial banking business. Dividends In most cases, dividend income received from domestic corporationsis U.S. source income. Dividend income from foreign corporations isusually foreign source income. Exceptions to both of these rules arediscussed below. A substitute dividend payment made to the transferor of a securityin a securities lending transaction or a sale-repurchase transactionis sourced in the same manner as a distribution on the transferredsecurity. First exception.Dividends received from a domestic corporation are not U.S. sourceincome if the corporation elects to take the Puerto Rico economicactivity credit or the possession tax credit. Second exception.Part of the dividends received from a foreign corporation is U.S.source income if 25% or more of its total gross income for the 3-yearperiod ending with the close of its tax year preceding the declarationof dividends was effectively connected with a trade or business in theUnited States. If the corporation was formed less than 3 years beforethe declaration, use its total gross income from the time it wasformed. Determine the part that is U.S. source income by multiplyingthe dividend by the following fraction. Formula Table 2-1 summary of source rules Personal Services All wages and any other compensation for services performed in theUnited States are considered to be from sources in the United States.The only exception to this rule is discussed in chapter 3,underEmployees of foreign persons, organizations, or offices. If your compensation is for personal services performed both insideand outside the United States, you must figure the amount of incomethat is for services performed in the United States. You usually dothis on a time basis. That is, you must include in gross income asU.S. source income the amount that results from multiplying the totalamount of compensation by the following fraction. Formula Example.Jean Blanc, a nonresident alien, is a professional hockey playerwith a U.S. hockey club. Under Jean's contract, he received $98,500for 242 days of play during the year. This includes days spent atpre-season training camp, days during the regular season, and playoffgame days. Of the 242 days, Jean spent 194 days performing services inthe United States and 48 days playing hockey in Canada. Jean's U.S.source income is $78,963, figured as follows: Formula Reenlistment bonus.A reenlistment bonus received by a nonresident alien forreenlistment in the U.S. Navy while in a foreign country is not U.S.sourced income. Crew members.Compensation for services performed by a nonresident alien inconnection with the individual's temporary presence in the UnitedStates as a regular crew member of a foreign vessel engaged intransportation between the United States and a foreign country or U.S.possession is not U.S. source income. Transportation Income Transportation income is income from the use of a vessel oraircraft or for the performance of services directly related to theuse of any vessel or aircraft. This is true whether the vessel oraircraft 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 inthe United States is treated as derived from sources in the UnitedStates. If the transportation begins or ends in the UnitedStates, 50% of the transportation income is treated as derived fromsources in the United States. For transportation income from personal services, 50% of the incomeis U.S. source income if the transportation is between the UnitedStates and a U.S. possession. For nonresident aliens, this onlyapplies to income derived from, or in connection with, an aircraft. For information on how U.S. source transportation income is taxed,see chapter 4. Scholarships, Grants,Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants,prizes, and awards is the residence of the payer regardless of whoactually disburses the funds. However, see Activities to beperformed outside the United States, later. For example, payments for research or study in the United Statesmade by the United States, a noncorporate U.S. resident, or a domesticcorporation, are from U.S. sources. Similar payments from a foreigngovernment or foreign corporation are foreign source payments eventhough the funds may be disbursed through a U.S. agent. Payments made by an entity designated as a public internationalorganization under the International Organizations Immunities Act arefrom foreign sources. Activities to be performed outside the United States.Scholarships, fellowship grants, targeted grants, and achievementawards received by nonresident aliens for activities performed, or tobe performed, outside the United States are not U.S. source income. Caution: These rules do not apply to amounts paid as salary or othercompensation for services. See Personal Services, earlier,for the source rules that apply. Pensions and Annuities When you receive a pension from a domestic trust for servicesperformed both in and outside the United States, part of the pensionpayment is from U.S. sources. That part is the amount attributable toearnings of the trust and the employer contributions made for servicesperformed in the United States. This applies whether the distributionis 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, youmay receive a distribution from the U.S. Government under a plan, suchas the Civil Service Retirement System, that is treated as a qualifiedpension plan. Your U.S. source income is the otherwise taxable amountof the distribution that is attributable to your total U.S. Governmentbasic pay other than tax-exempt pay for services performed outside theUnited States. Rents or Royalties Your U.S. source income includes rent and royalty income receivedduring the tax year from property located in the United States or fromany interest in that property. U.S. source income also includes rents or royalties for the use of,or for the privilege of using, in the United States, intangibleproperty such as patents, copyrights, secret processes and formulas,goodwill, trademarks, franchises, and similar property. Real Property Real property is land and buildings and generally anything builton, growing on, or attached to land. Gross income from sources in the United States includes gains,profits, and income from the sale or other disposition of realproperty located in the United States. Natural resources.The income from the sale of products of any farm, mine, oil or gaswell, other natural deposit, or timber located in the United Statesand sold in a foreign country, or located in a foreign country andsold in the United States, is partly from sources in the UnitedStates. For information on determining that part, see section1.863-1(b) of the regulations. Personal Property Personal property is property, such as machinery, equipment, orfurniture, that is not real property. Income from the sale or exchange of personal property by anonresident alien individual generally has its source in the UnitedStates if the individual has a tax home in the UnitedStates. If the individual does not have a tax home in the UnitedStates, the income generally is considered to be from sources outsidethe United States. Tax home.Your tax home is the general area of your main place of business,employment, or post of duty, regardless of where you maintain yourfamily home. Your tax home is the place where you permanently orindefinitely work as an employee or a self-employed individual. If youdo not have a regular or main place of business because of the natureof your work, then your tax home is the place where you regularlylive. If you do not fit either of these categories, you are consideredan itinerant and your tax home is wherever you work. Inventory property.Inventory property is personal property that is stock in trade orthat is held primarily for sale to customers in the ordinary course ofyour trade or business. Income from the sale of inventory that youpurchased is sourced where the property is sold. Generally, this iswhere title to the property passes to the buyer. For example, incomefrom the sale of inventory in the United States is U.S. source income,whether you purchased it in the United States or in a foreign country. Income from the sale of inventory property that you produced in theUnited States and sold outside the United States (or vice versa) ispartly from sources in the United States and partly from sourcesoutside the United States. For information on making this allocation,see section 1.863-3 of the regulations. These rules apply even if your tax home is not in the UnitedStates. Depreciable property.To determine the source of any gain from the sale of depreciablepersonal property, you must first figure the part of the gain that isnot more than the total depreciation adjustments on the property. Youallocate this part of the gain to sources in the United States basedon the ratio of U.S. depreciation adjustments to total depreciationadjustments. The rest of this part of the gain is considered to befrom sources outside the United States. For this purpose, "U.S. depreciation adjustments" are thedepreciation adjustments to the basis of the property that areallowable in figuring taxable income from U.S. sources. However, ifthe property is used predominantly in the United States during a taxyear, all depreciation deductions allowable for that year are treatedas U.S. depreciation adjustments. But there are some exceptions forcertain transportation, communications, and other property usedinternationally. Gain from the sale of depreciable property that is more than thetotal depreciation adjustments on the property is sourced as if theproperty were inventory property, as discussed above. A loss recognized after January 10, 1999, is sourced in the sameway as the depreciation deductions were sourced. However, if theproperty was used predominantly inside the United States, the entireloss reduces U.S. source income. You can choose to apply this rule tolosses recognized in tax years beginning after 1986. For details aboutmaking this choice, see section 1.865-1T(f)(2) of theregulations. The basis of property usually means the cost (money plusthe fair market value of other property or services) of property youacquire. Depreciation is an amount deducted to recover thecost or other basis of a trade or business asset. The amount you candeduct depends on the property's cost, when you began using theproperty, how long it will take to recover your cost, and whichdepreciation method you use. A depreciation deduction is any deductionfor depreciation or amortization or any other allowable deduction thattreats a capital expenditure as a deductible expense. Intangible property.Intangible property includes patents, copyrights, secret processesor formulas, goodwill, trademarks, trade names, or other likeproperty. Income from the sale of intangible property that iscontingent on the productivity, use, or disposition of the property issourced in the country where the property is used. If the income isnot contingent on the productivity, use, or disposition of theproperty, the income is sourced according to the seller's tax home asdiscussed earlier. If payments for goodwill do not depend on itsproductivity, use, or disposition, their source is the country inwhich the goodwill was generated. To the extent gain from the sale of an intangible does not exceedits depreciation adjustments, treat the gain as if the intangible weredepreciable personal property, discussed earlier. Sales through offices or fixed places of business.Despite any of the above rules, if you do not have a tax home inthe United States, but you maintain an office or other fixed place ofbusiness in the United States, treat the income from any sale ofpersonal property (including inventory property) that is attributableto that office or place of business as U.S. source income. However,this rule does not apply to sales of inventory property for use,disposition, or consumption outside the United States if your officeor other fixed place of business outside the United States materiallyparticipated in the sale. If you have a tax home in the United States but maintain an officeor other fixed place of business outside the United States, incomefrom sales of personal property, other than inventory, depreciableproperty, or intangibles, that is attributable to that foreign officeor place of business may be treated as U.S. source income. The incomeis treated as U.S. source income if an income tax of less than 10% ofthe income from the sale is paid to a foreign country. This rule alsoapplies to losses recognized after January 10, 1999, if the foreigncountry would have imposed an income tax of less than 10% had the saleresulted in a gain. You can choose to apply this rule to lossesrecognized in tax years beginning after 1986. For details about makingthis choice, see section 1.865-1T(f)(2) of the regulations. Forstock losses, see section 1.865-2(e) of the regulations.