Sourcing U.S. and Foreign Income: Dividends, Service Income, Property Sales, Rents, and Income Tax Treaties

Description

U.S. citizens, residents, domestic corporations, trusts, and estates are taxed on worldwide income. Foreign tax credits help alleviate the resulting double-taxation of income for U.S. residents but are only available on foreign-sourced income. Foreign persons, on the other hand, are generally subject to U.S. tax only on their income from sources within the U.S. Determining whether income is within the U.S. (U.S.) or without the U.S. (foreign) is critical to accurately assess taxes and credits for taxpayers.

Although logical at first blush, the rules for sourcing income are replete with exceptions. Dividends, for example, are sourced to the place of incorporation or the location of the taxpayer with exceptions. This is true unless it is foreign-sourced dividend income and 25% or more of the corporation's worldwide gross income over a certain testing period is effectively connected income.

Similarly, the source of compensation for labor or personal services is the place of performance of the services. However, there is a de minimis exception to the service income source rule for persons temporarily present in the United States and U.S. tax treaties provide additional exceptions to this rule.

Tax professionals must understand each income type--whether rents, property sales, dividends, or service income--and its sourcing rules and exceptions to mitigate the burden of worldwide taxation on taxpayers.

Listen as our panel of international tax veterans covers the details of appropriately sourcing income, the caveats and exceptions in sourcing this income, and best practices to lessen the taxation of global income paid by taxpayers.