What types of US sourced income are NRAs subject to US tax on?
As a NRA, you are potentially subject to US tax on certain US sourced income that is either:
- “Fixed or Determinable Annual or Periodical income” (FDAP); or
- Certain US-source capital gains; or
- “Effectively Connected Income” (ECI) from the conduct of a “trade or business” within the US.
Generally, ECI is taxed on a net basis at graduated rates, while FDAP income is taxed only on a gross basis at a flat rate of 30%.
US tax is often withheld from US sourced income and if you invest only in FDAP income producing assets, then you’re normally not required to file a US income tax return because tax should have been fully withheld at source. US sourced dividends will be subject to a flat rate of 30% withholding tax or potentially a lower rate if you are able to claim the benefits of a double taxation treaty and a Form W-8BEN has been completed accordingly.
FDAP income includes passive investment income, such as US sourced dividends or interest, however there is an exemption for US sourced interest income received from bank deposits, financial institutions, and insurance companies.
As a NRA, if you have capital gains from selling personal property this is generally not subject to US tax but you should be aware if you’re a NRA student present in the US for greater than 183 days in a year, you would be subject to a flat tax of 30% on US sourced capital gains. Please note that gain or loss from the sale or exchange of personal property generally has its source in the US if the NRA has a tax home in the US.
Capital gains from the sale of US real property is always ECI so you’d need to file a tax return in this situation. By default, withholding tax of 15% should be applied to the sales proceeds when you sell US real estate but potential it may be possible to apply for the withholding tax to be reduced if you know that the tax due on the gain will be lower than 15% of the proceeds. If this is not possible, then any excess withholding can be reclaimed on the tax return.
If you were to sell US real estate, the US would have the primary taxing rights on any capital gain realised, but the transaction may also be reportable and taxable in the jurisdiction where you are resident. If so, you would need to consider how your tax in that jurisdiction could be eliminated or reduced. If there is a double taxation agreement between that jurisdiction and the US, this would be a useful resource in ensuring that there is no double taxation
Rental income from US real estate can potentially be FDAP or ECI, depending on the situation, however, it is often favourable to elect to treat the rental income as ECI so that deductions can be claimed against the rental income.