JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

U.S. Withholding on Payments to a
Foreign National

QUESTION: A US Company pays a Foreign National (Non US resident/citizen person) for work done in a Foreign Country, say Germany. Does US company withhold on this payment and if so what is the rate and what forms do the Foreign National need to complete?

REPLY: The IRS has a Q&A web page dealing with withholding requirements for payments to non-resident alien persons. The URL is http://www.irs.gov/businesses/international/article/0,,id=164600,00.html

In addition, IRS Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities - provides extensive details.

With regard to any withholding, the related income must meet the test of U.S. source income. That can result from having a trade or business in the U.S., from receiving interest, dividends, royalties, rents, etc from U.S. based assets or from personal services provided inside the U.S.

Where the services are provided outside the U.S. they are not treated as U.S. source income (to the recipient) and are therefore not subject to withholding of U.S. income taxes by a U.S. person who is making the payments.