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. See Foreign Income in
The general rules for determining U.S. source income that apply to
most nonresident aliens are shown in Table 2-1. The
following discussions cover the general rules as well as the
exceptions to these rules.
Not all items of U.S. source income are taxable. See chapter 3.
Generally, U.S. source interest income includes the following
- 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.
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
U.S. source interest income does not include the following items.
- Interest paid by a resident alien or a domestic corporation
if for the 3-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
- Is from sources outside the United States, and
- Is attributable to the active conduct of a trade or business
by the individual or corporation in a foreign country or a U.S.
- 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.
- 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.
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
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
Dividends received from a domestic corporation are not U.S. source
income if the corporation elects to take the Puerto Rico economic
activity credit or the possession tax credit.
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-year
period ending with the close of its tax year preceding the declaration
of dividends was effectively connected with a trade or business in the
United States. If the corporation was formed less than 3 years before
the declaration, use its total gross income from the time it was
formed. Determine the part that is U.S. source income by multiplying
the dividend by the following fraction.
Table 2-1 Summary of Source Rules for Income of Nonresident Aliens
All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States.
The only exception to this rule is discussed in chapter 3,
Employees of foreign persons, organizations, or offices.
If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States. You usually do
this on a time basis. That is, you must include in gross income as
U.S. source income the amount that results from multiplying the total
amount of compensation by the following fraction.
Jean Blanc, a nonresident alien, is a professional hockey player
with a U.S. hockey club. Under Jean's contract, he received $98,500
for 242 days of play during the year. This includes days spent at
pre-season training camp, days during the regular season, and playoff
game days. Of the 242 days, Jean spent 194 days performing services in
the United States and 48 days playing hockey in Canada. Jean's U.S.
source income is $78,963, figured as follows:
A reenlistment bonus received by a nonresident alien for
reenlistment in the U.S. Navy while in a foreign country is not U.S.
Compensation for services performed by a nonresident alien in
connection with the individual's temporary presence in the United
States as a regular crew member of a foreign vessel engaged in
transportation between the United States and a foreign country or U.S.
possession is not U.S. source 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 only
applies to income derived from, or in connection with, an aircraft.
For information on how U.S. source transportation income is taxed,
see chapter 4.
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. However, see Activities to be
performed outside the United States, later.
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.
Activities to be performed outside the United States.
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. See Personal Services, earlier,
for the source rules that apply.
Pensions and Annuities
When 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 trust 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 your total U.S. Government
basic pay other than tax-exempt pay for services performed outside the
Rents or Royalties
Your U.S. source income includes rent and royalty income received
during the tax year from property located in the United States or from
any 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, intangible
property such as patents, copyrights, secret processes and formulas,
goodwill, trademarks, franchises, and similar property.
Real property is land and buildings and generally anything built
on, 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 real
property located in the United States.
The income from the sale of products of any farm, mine, oil or gas
well, other natural deposit, or timber located in the United States
and sold in a foreign country, or located in a foreign country and
sold in the United States, is partly from sources in the United
States. For information on determining that part, see section
1.863-1(b) of the regulations.
Personal property is property, such as machinery, equipment, or
furniture, that is not real property.
Gain or loss from the sale or exchange of personal property
generally has its source in the United States if you have a tax
home in the United States. If you do not have a tax home in the
United States, the gain or loss generally is considered to be from
sources outside the United States.
Your tax home is the general area of your main place of business,
employment, or post of duty, regardless of where you maintain your
family home. Your tax home is the place where you permanently or
indefinitely work as an employee or a self-employed individual. If you
do not have a regular or main place of business because of the nature
of your work, then your tax home is the place where you regularly
live. If you do not fit either of these categories, you are considered
an itinerant and your tax home is wherever you work.
Inventory property is personal property that is stock in trade or
that is held primarily for sale to customers in the ordinary course of
your trade or business. Income from the sale of inventory that you
purchased is sourced where the property is sold. Generally, this is
where title to the property passes to the buyer. For example, income
from 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 the
United States and sold outside the United States (or vice versa) is
partly from sources in the United States and partly from sources
outside 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 United
To determine the source of any gain from the sale of depreciable
personal property, you must first figure the part of the gain that is
not more than the total depreciation adjustments on the property. You
allocate this part of the gain to sources in the United States based
on the ratio of U.S. depreciation adjustments to total depreciation
adjustments. The rest of this part of the gain is considered to be
from sources outside the United States.
For this purpose, "U.S. depreciation adjustments" are the
depreciation adjustments to the basis of the property that are
allowable in figuring taxable income from U.S. sources. However, if
the property is used predominantly in the United States during a tax
year, all depreciation deductions allowable for that year are treated
as U.S. depreciation adjustments. But there are some exceptions for
certain transportation, communications, and other property used
Gain from the sale of depreciable property that is more than the
total depreciation adjustments on the property is sourced as if the
property were inventory property, as discussed above.
A loss recognized after January 10, 1999, is sourced in the same
way as the depreciation deductions were sourced. However, if the
property was used predominantly in the United States, the entire loss
reduces U.S. source income. You can choose to apply this rule to
losses recognized in tax years beginning after 1986. For details about
making this choice, see section 1.865-1T(f)(2) of the
The basis of property usually means the cost (money plus
the fair market value of other property or services) of property you
acquire. Depreciation is an amount deducted to recover the
cost or other basis of a trade or business asset. The amount you can
deduct depends on the property's cost, when you began using the
property, how long it will take to recover your cost, and which
depreciation method you use. A depreciation deduction is any deduction
for depreciation or amortization or any other allowable deduction that
treats a capital expenditure as a deductible expense.
Intangible property includes patents, copyrights, secret processes
or formulas, goodwill, trademarks, trade names, or other like
property. Income from the sale of intangible property that is
contingent on the productivity, use, or disposition of the property is
sourced in the country where the property is used. If the income is
not contingent on the productivity, use, or disposition of the
property, the income is sourced according to the seller's tax home as
discussed earlier. If payments for goodwill do not depend on its
productivity, use, or disposition, their source is the country in
which the goodwill was generated.
To the extent gain from the sale of an intangible does not exceed
its depreciation adjustments, treat the gain as if the intangible were
depreciable 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 in
the United States, but you maintain an office or other fixed place of
business in the United States, treat the income from any sale of
personal property (including inventory property) that is attributable
to 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 office
or other fixed place of business outside the United States materially
participated in the sale.
If you have a tax home in the United States but maintain an office
or other fixed place of business outside the United States, income
from sales of personal property, other than inventory, depreciable
property, or intangibles, that is attributable to that foreign office
or place of business may be treated as U.S. source income. The income
is treated as U.S. source income if an income tax of less than 10% of
the income from the sale is paid to a foreign country. This rule also
applies to losses recognized after January 10, 1999, if the foreign
country would have imposed an income tax of less than 10% had the sale
resulted in a gain. You can choose to apply this rule to losses
recognized in tax years beginning after 1986. For details about making
this choice, see section 1.865-1T(f)(2) of the regulations. For
stock losses, see section 1.865-2(e) of the regulations.