IN THIS ISSUE

	U.S. Person or Foreign Person
	Windstar’s Year-end NRA Tax Training
	Foreign National Tax Resource™ Webinar
	Windstar Publishing Tax Guides

U.S. Person or Foreign Person

by Paula N. Singer, Esq.

In order for payers (called “withholding agents” because of their obligation to withhold taxes) to withhold and report income payments appropriately, they must determine whether the beneficial owner of the income is a U.S. person or a foreign person. The broad definition for the term “withholding agent” includes anyone who “has control, receipt, custody, or payment of any item of income that is subject to withholding.”  The beneficial owner is the person that must include the gross income on their U.S. tax return if they have a filing requirement.

“Person” is a tax term that includes both individuals and entities.  U.S. persons are subject to U.S. tax on their worldwide income.  They may provide their name, address, and U.S. taxpayer identification number (TIN) on a Form W-9, which also serves as a certificate of U.S. status.  If a U.S. person fails to provide a U.S. TIN for a Form 1099 reportable payment, the payment is subject to backup withholding, currently 28 percent. 

Foreign persons are subject to U.S. tax only on their U.S.-source income and income effectively connected to a U.S. trade or business.  They may provide a Form W-8BEN, which serves both as a certificate of foreign status and evidence that they are not subject to backup withholding (important if they are being paid foreign-source income not subject to U.S. tax).  Their non-wage U.S.-source income payments are subject to 30 percent withholding tax (called “NRA withholding”) unless an exception applies assuming the payee provides a valid withholding certificate supporting the exemption from withholding prior to payment.  Income and taxes withheld (if any) must be reported on a Form 1042-S information return, even if the payment is exempt from withholding, (except taxable wage income) and withholding must be reported on a Form W-2.

U.S. Persons

Individuals who are U.S. persons include U.S. citizens and non-U.S. citizens who are resident aliens for U.S. federal tax purposes.  U.S. citizens and resident aliens are subject to withholding and reporting on their worldwide income even when they live and work outside the United States.

U.S. citizens include:

• Individuals born in the United States
• Individuals born outside of the United States whose parents are citizens (one of whom had resided in the United States or one of its possessions)
• Individuals who became U.S. citizens through naturalization 

Individuals with dual citizenship, one of which is the United States, receive treatment as U.S. citizens for all tax purposes.  Non-U.S. citizens are resident aliens for tax purposes if they meet either the U.S. lawful permanent resident test or the 183-day substantial presence test as defined by Internal Revenue Code Section 7701(b).  Individuals accorded the right to reside and work indefinitely in the United States are U.S. lawful permanent residents (green card holders).  Nonresident aliens, who make a marriage-based election to file a joint U.S. tax return with a U.S.-citizen or resident spouse, are nevertheless, foreign persons for purposes of NRA withholding. (They may make such an election for wage-withholding purposes with their employer, however.)  Eligible students who make a treaty-based resident election under the treaty with Hungary, Jamaica, or Barbados are treated as U.S. persons for NRA withholding and reporting purposes. (They remain nonresident aliens for  FICA/Medicare purposes so the NRA FICA Exception may still apply if they are otherwise eligible.)

Entities that are U.S. persons include corporations and partnerships organized under the laws of one of the 50 states or the District of Columbia.  A subsidiary of a foreign corporation so organized is a U.S. corporation.  U.S. persons also include U.S. limited liability corporations (LLCs) organized under the laws of one of the 50 states or the District of Columbia that have elected on Form 8832 to be taxed as a corporation under the U.S. “check the box” rules.  This is the case even if some, or all, of the owners of the corporation are foreign persons.  Because single-owner disregarded entities are ignored for U.S. income tax purposes, the payer must determine whether the single owner is a U.S. person or foreign person and withhold and report accordingly.

An estate or trust is a U.S. person if it is governed under the jurisdiction of one of the 50 states or the District of Columbia and one or more U.S. persons have authority to control all substantial decisions. For this purpose, a U.S. citizen or resident alien who has their tax home in a foreign country is not considered a U.S. person.

Foreign Persons

1. Individuals who are foreign persons include all non-U.S. citizens who are neither green-card holders nor meet the 183-day substantial presence test (called “nonresident aliens”).  Nonresident aliens also include individuals who meet the 183-day substantial presence test for the calendar year but who are also residents of a tax treaty country (called “dual residents”) who make an election with supporting facts that they are nonresidents of the United States under a residency tiebreaker rule under an applicable tax treaty. Special rules may apply to nonresident aliens who are former U.S. citizens or former long-term green-card holders.
2. Foreign corporations who are foreign persons include any corporation not organized under the laws of one of the 50 states or the District of Columbia.  The IRS provides a list of per se corporations to assist payers in distinguishing foreign corporations.  Although a subsidiary of a foreign corporation organized in the United States is not a U.S. person, a branch of a foreign corporation located in the United States is a foreign person because it is not an entity separate from the foreign corporation.
3. A partnership not organized in the United States is a foreign person even if some, or all, of the partners are U.S. persons.  Because a partnership is a flow-through entity, NRA withholding and reporting is in the name of the foreign person partners who are the beneficial owners of the income, or in the name of “Unknown Recipient,” if the partners are not unknown.
4. An estate or trust that is not a U.S. person is a foreign person.  If the estate or trust is a flow-through entity under U.S. tax principles (some are, some are not), the NRA withholding and reporting must be in the name of the beneficiary or beneficiaries.

Individuals and Entities in U.S. Possessions

Determining the proper withholding and reporting on income paid to individuals or entities in U.S. possessions or territories can be confusing.  In addition to the rules for determining U.S. or foreign person, there are special rules that might apply for withholding and reporting purposes.

Individuals who were born in Puerto Rico, Guam, or the U.S. Virgin Islands are U.S. persons.  A resident of Guam, Puerto Rico, or the U.S. Virgin Islands who was not born there is not a U.S. citizen (unless the individual is a U.S. citizen under the rules described above).

The 183-day substantial presence test is based on days spent in the United States, a term which does not include U.S. possessions or territories.  Therefore, bona fide residents of Puerto Rico, Guam, Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and American Samoa who are not U.S. citizens or green-card holders are nonresident aliens for federal income tax purposes.

Branches of foreign corporations located in a U.S. possession are foreign persons.  Corporations organized under the laws of Puerto Rico are also foreign persons.  Corporations formed under the laws of Guam, the Northern Mariana Islands, U.S. Virgin Islands, or American Samoa are subject to special ownership and effectively connected income tests.  As a result, they may be either U.S. or foreign persons for withholding purposes.

For more information about these rules, see IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Paula Singer, Esq., Co-founder and Chair of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 7, Number 5, for a discussion on agents and intermediaries.

Q: Our organization has engaged an individual in England to provide services for us remotely. All the work will occur outside the United States. The individual holds dual U.S./U.K. citizenship. Since he lives and works in England, do we have any U.S. tax withholding and reporting obligations?

A: Yes, depending on the nature of the relationship. Because one of his countries of citizenship is the U.S., you need to treat him as a U.S. person for tax purposes regardless of where he resides or where the services are performed. If he is an independent contractor, you will have 1099-MISC reporting responsibilities if his annual income exceeds the 1099 filing threshold. If he is your employee, you will have wage reporting and withholding requirements (including FICA/Medicare). You may have U.K withholding and reporting obligations as well.

Get Ready for Year-end Reporting – Attend Windstar’s Year-end NRA Tax Training December 7 – 10, 2010

Make sure your year-end processing is on track with Windstar.  The IRS is ramping up enforcement on withholding and reporting in an effort to increase tax revenues.  The IRS now has the resources it needs to focus on withholding and reporting on payments to foreign individuals and entities.  Noncompliance could be more costly. 

Prepare your organization with Windstar.  The December 7^th – 10^th NRA Tax Training will give you a solid foundation in the rules and regulations that affect payments as well as how to accurately report withholdings to the IRS. 

Choose from dedicated tracks featuring two days of substantive tax and immigration-based class sessions followed by two days of hands-on Tax Navigator training.  Or, for the ultimate learning experience attend, all four days! 

The Doubletree Guest Suites hosts Windstar’s Year-end training
The Doubletree Guest Suites is an all-suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions.  Hotel features include:

• Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
• Low cost transportation to and from Logan International Airport
• High-def flat screen televisions in each room
• Scullers Jazz Club

A special discounted rate of $139 per night is available for reservations made before November 11^th.

Detailed schedule information will be available in early September.  E-mail training@windstar.com to request the schedule once it is available.

Free Webinar – Foreign National Tax Resource™

Join Windstar September 29^th for a free webinar on our comprehensive resource for tax professionals and foreign nationals, Foreign National Tax Resource (FNTR). 

The FNTR gives you easy-to-use tax preparation software, along with an extensive online library of information researched, organized, and translated into clear language by Windstar’s tax experts.

Benefits include:

• Tax preparation software for 1040NR and 1040NR-EZ
• Access to previous tax returns
• Tax treaty analysis and explanations
• Form W-7 preparation
• Extensive, searchable tax content library
• Information for nonresident and resident aliens, and dual-status individuals
• Tax resource page for each state

FNTR is the total solution for you and your foreign national students, researchers, and employees.

Don’t miss the opportunity to learn more about this comprehensive resource.

Register today!

Windstar Publishing Tax Guides - Additional Foreign National Tax Compliance Resources from Windstar

In addition to industry leading software, services, and training, Windstar also offers a line of tax guidebooks to help organizations of any size, tax preparers, and employees understand tax issues for foreign nationals.

Titles include:

U.S. Tax Guides for Foreign Persons and Those Who Pay Them^® Series
U.S. Taxation of Foreign Students
U.S. Taxation of B-1 Business Visitors
U.S Taxation of H-1B Specialty Workers
J-1 Nonstudent Exchange Visitors Performing U.S. Services
L-1 Intracompany Transferees on U.S. Assignment
Tax Treaty Benefits for Foreign Nationals Performing U.S. Services
A Guide for Filing IRS Forms 1042 and 1042-S

Cross-Winds™
Cross-Winds: What You Need to Know About Exchange Visitors
Cross-Winds: What You Need to Know About Honorarium Payments and Service Fees (coming soon!)

U.S. Tax Returns
International Aspects of Individual U.S. Tax Returns (Awarded a bronze medal in the Accounting/Tax category of the Axiom Business Book Awards)

Tax Policy
A Simple, More Efficient Tax Collection System for America

Award-winning author Paula N. Singer, Esq. has over 30 years of experience as a tax lawyer specializing in cross-border tax issues for individuals, businesses, trusts, and estates.  In 1994, she co-founded the tax and immigration software company, Windstar Technologies, Inc., where she serves as chair.  She is also responsible for developing tax- and immigration-related content, providing substantive tax seminars, and answering tax- and immigration-related questions for Windstar's clients. 

Click here to view full descriptions on each of the tax guides. 

©Copyright 2010 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties. When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting. Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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