Section 2(d) Definitions and Special Rules
Section 871(a), (g) through (i) Tax on Nonresident Alien Individuals
Section 872(a)(1) Gross Income
Section 877 Expatriation to Avoid Tax
Section 881 Tax on Income of Foreign Corporations Not Connected with United States Business
Section 1441 Withholding of Tax on Nonresident Aliens
Section 1442 Withholding of Tax on Foreign Corporations
Section 7701(l) Definitions
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as--
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(B) gains described in section 631(b) or (c), and gains on transfers described in section 1235 made on or before October 4, 1966,
(C) in the case of--
(i) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and
(ii) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the nonresident alien individual (except that such original issue discount shall be taken into account under this clause only to the extent such discount was not theretofore taken into account under this clause and only to the extent that the tax thereon does not exceed the payment less the tax imposed by subparagraph (A) thereon), and
(D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(2) Capital gains of aliens present in the United States 183 days or more
In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gains and losses shall be taken into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year.
(3) Taxation of social security benefits
For purposes of this section and section 1441--
(A) 85 percent of any social security benefit (as defined in section 86(d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and
(B) section 86 shall not apply.
For treatment of certain citizens of possessions of the United States, see section 932(c).
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.C. 1101(a)(15)(F), (J), (M), or (Q)), shall be treated as a nonresident alien individual engaged in trade or business within the United States, and any income described in the second sentence of section 1441(b) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States.
(1) In general
A nonresident alien individual who during the taxable year derives any income--
(A) from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and
(B) which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States,
may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year.
(2) Election after revocation
If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary consents to such new election.
(3) Form and time of election and revocation
An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary may by regulations prescribe.
(1) In general
For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if--
(A) all of the personal services by reason of which the annuity is payable were either--
(i) personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or
(ii) personal services described in section 864(b)(1) performed within the United States by such individual, and
(B) at the time the first amount is paid as an annuity under the annuity plan or by the trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which the trust is a part, are citizens or residents of the United States.
(2) Exclusion
Income received during the taxable year which would be excluded from gross income under this subsection but for the requirement of paragraph (1)(B) shall not be included in gross income if--
(A) the recipient's country of residence grants a substantially equivalent exclusion to residents and citizens of the United States; or
(B) the recipient's country of residence is a beneficiary developing country under Title V of the Trade Act of 1974 (19 U.S.C. 2461 et seq.).
For purposes of this section and section 881--
(1) Original issue discount obligation
(A) In general
Except as provided in subparagraph (B), the term "original issue discount obligation" means any bond or other evidence of indebtedness having original issue discount (within the meaning of section 1273).
(B) Exceptions
The term "original issue discount obligation" shall not include--
(i) Certain short-term obligations
Any obligation payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer).
(ii) Tax-exempt obligations
Any obligation the interest on which is exempt from tax under section 103 or under any other provision of law without regard to the identity of the holder.
(2) Determination of portion of original issue discount accruing during any period
The determination of the amount of the original issue discount which accrues during any period shall be made under the rules of section 1272 (or the corresponding provisions of prior law) without regard to any exception for short-term obligations.
(3) Source of original issue discount
Except to the extent provided in regulations prescribed by the Secretary, the determination of whether any amount described in subsection (a)(1)(C) is from sources within the United States shall be made at the time of the payment (or sale or exchange) as if such payment (or sale or exchange) involved the payment of interest.
(4) Stripped bonds
The provisions of section 1286 (relating to the treatment of stripped bonds and stripped coupons as obligations with original issue discount) shall apply for purposes of this section.
(1) In general
In the case of any portfolio interest received by a nonresident individual from sources within the United States, no tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which would be subject to tax under subsection (a) but for this subsection and which is described in any of the following subparagraphs:
(A) Certain obligations which are not registered
Interest which is paid on any obligation which--
(i) is not in registered form, and
(ii) is described in section 163(f)(2)(B).
(B) Certain registered obligations
Interest which is paid on an obligation--
(i) which is in registered form, and
(ii) with respect to which the United States person who would otherwise be required to deduct and withhold tax from such interest under section 1441(a) receives a statement (which meets the requirements of paragraph (5)) that the beneficial owner of the obligation is not a United States person.
(3) Portfolio interest not to include interest received by 10-percent shareholders
For purposes of this subsection--
(A) In general
The term "portfolio interest" shall not include any interest described in subparagraph (A) or (B) of paragraph (2) which is received by a 10-percent shareholder.
(B) 10-Percent shareholder
The term "10-percent shareholder" means--
(i) in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or
(ii) in the case of an obligation issued by a partnership, any person who owns 10 percent or more of the capital or profits interest in such partnership.
(C) Attribution rules
For purposes of determining ownership of stock under subparagraph (B)(i) the rules of section 318(a) shall apply, except that--
(i) section 318(a)(2)(C) shall be applied without regard to the 50-percent limitation therein,
(ii) section 318(a)(3)(C) shall be applied--
(I) without regard to the 50-percent limitation therein; and
(II) in any case where such section would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) which is owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owns in such corporation bears to the value of all stock in such corporation, and
(iii) any stock which a person is treated as owning after application of section 318(a)(4) shall not, for purposes of applying paragraphs (2) and (3) of section 318(a), be treated as actually owned by such person.
Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall be applied in determining the ownership of the capital or profits interest in a partnership for purposes of subparagraph (B)(ii).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection--
(A) In general
Except as otherwise provided in this paragraph, the term 'portfolio interest' shall not include--
(i) any interest if the amount of such interest is determined by reference to--
(I) any receipts, sales or other cash flow of the debtor or a related person,
(II) any income or profits of the debtor or a related person,
(III) any change in value of any property of the debtor or a related person, or
(IV) any dividend, partnership distributions, or similar payments made by the debtor or a related person, or
(ii) any other type of contingent interest that is identified by the Secretary by regulation, where a denial of the portfolio interest exemption is necessary or appropriate to prevent avoidance of Federal income tax.
(B) Related person
The term 'related person' means any person who is related to the debtor within the meaning of section 267(b) or 707(b)(1), or who is a party to any arrangement undertaken for a purpose of avoiding the application of this paragraph.
(C) Exceptions
Subparagraph (A)(i) shall not apply to--
(i) any amount of interest solely by reason of the fact that the timing of any interest or principal payment is subject to a contingency,
(ii) any amount of interest solely by reason of the fact that the interest is paid with respect to nonrecourse or limited recourse indebtedness,
(iii) any amount of interest all or substantially all of which is determined by reference to any other amount of interest not described in subparagraph (A) (or by reference to the principal amount of indebtedness on which such other interest is paid),
(iv) any amount of interest solely by reason of the fact that the debtor or a related person enters into a hedging transaction to reduce the risk of interest rate or currency fluctuations with respect to such interest,
(v) any amount of interest determined by reference to--
(I) changes in the value of property (including stock) that is actively traded (within the meaning of section 1092(d)) other than property described in section 897(c)(1) or (g),
(II) the yield on property described in subclause (I), other than a debt instrument that pays interest described in subparagraph (A), or stock or other property that represents a beneficial interest in the debtor or a related person, or
(III) changes in any index of the value of property described in subclause (I) or of the yield on property described in subclause (II), and
(vi) any other type of interest identified by the Secretary by regulation.
(D) Exception for certain existing indebtedness
Subparagraph (A) shall not apply to any interest paid or accrued with respect to any indebtedness with a fixed term--
(i) which was issued on or before April 7, 1993, or
(ii) which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued.
(5) Certain statements
A statement with respect to any obligation meets the requirements of this paragraph if such statement is made by--
(A) the beneficial owner of such obligation, or
(B) a securities clearing organization, a bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business.
The preceding sentence shall not apply to any statement with respect to payment of interest on any obligation by any person if, at least one month before such payment, the Secretary has published a determination that any statement from such person (or any class including such person) does not meet the requirements of this paragraph.
(6) Secretary may provide subsection not to apply in cases of inadequate information exchange
(A) In general
If the Secretary determines that the exchange of information between the United States and a foreign country is inadequate to prevent evasion of the United States income tax by United States persons, the Secretary may provide in writing (and publish a statement) that the provisions of this subsection shall not apply to payments of interest to any person within such foreign country (or payments addressed to, or for the account of, persons within such foreign country) during the period--
(i) beginning on the date specified by the Secretary, and
(ii) ending on the date that the Secretary determines that the exchange of information between the United States and the foreign country is adequate to prevent the evasion of United States income tax by United States persons.
(B) Exception for certain obligations
Subparagraph (A) shall not apply to the payment of interest on any obligation which is issued on or before the date of the publication of the Secretary's determination under such subparagraph.
(7) Registered form
For purposes of this subsection, the term "registered form" has the same meaning given such term by section 163(f).
(1) In general
No tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a) on any amount described in paragraph (2).
(2) Amounts to which paragraph (1) applies
The amounts described in this paragraph are as follows:
(A) Interest on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States.
(B) A percentage of any dividend paid by a domestic corporation meeting the 80-percent foreign business requirements of section 861(c)(1) equal to the percentage determined for purposes of section 861(c)(2)(A).
(C) Income derived by a foreign central bank of issue from bankers' acceptances.
(D) Dividends paid by a foreign corporation which are treated under section 861(a)(2)(B) as income from sources within the United States.
(3) Deposits
For purposes of paragraph (2), the term "deposits" means amounts which are--
(A) deposits with persons carrying on the banking business,
(B) deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under section 591 (determined without regard to sections 265 and 291) in computing the taxable income of such institutions, and
(C) amounts held by an insurance company under an agreement to pay interest thereon.
No tax shall be imposed under paragraph (1)(A) of subsection (a) on the proceeds from a wager placed in any of the following games: blackjack, baccarat, craps, roulette, or big-6 wheel. The preceding sentence shall not apply in any case where the Secretary determines by regulation that the collection of the tax is administratively feasible.
(k) Exemption for certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a regulated investment company.
(B) Exceptions
Subparagraph (A) shall not apply--
(i) to any interest-related dividend received from a regulated investment company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E) (i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder,
(ii) to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under chapter 3 receives a statement (which meets requirements similar to the requirements of subsection (h)(5)) that the beneficial owner of such stock is not a United States person, and
(iii) to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary's determination under subsection (h)(6).
(C) Interest-related dividend
For purposes of this paragraph, the term "interest-related dividend" means any dividend (or part thereof) which is designated by the regulated investment company as an interest-related dividend in a written notice mailed to its shareholders not later than 60 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 855) is greater than the qualified net interest income of the company for such taxable year, the portion of each distribution which shall be an interest-related dividend shall be only that portion of the amounts so designated which such qualified net interest income bears to the aggregate amount so designated. Such term shall not include any dividend with respect to any taxable year of the company beginning after December 31, 2007.
(D) Qualified net interest income
For purposes of subparagraph (C), the term "qualified net interest income" means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income.
(E) Qualified interest income
For purposes of subparagraph (D), the term "qualified interest income" means the sum of the following amounts derived by the regulated investment company from sources within the United States:
(i) Any amount includible in gross income as original issue discount (within the meaning of section 1273) on an obligation payable 183 days or less from the date of original issue (without regard to the period held by the company).
(ii) Any interest includible in gross income (including amounts recognized as ordinary income in respect of original issue discount or market discount or acquisition discount under part V of subchapter P and such other amounts as regulations may provide) on an obligation which is in registered form; except that this clause shall not apply to--
(I) any interest on an obligation issued by a corporation or partnership if the regulated investment company is a 10-percent shareholder in such corporation or partnership, and
(II) any interest which is treated as not being portfolio interest under the rules of subsection (h)(4).
(iii) Any interest referred to in subsection (i)(2)(A) (without regard to the trade or business of the regulated investment company).
(iv) Any interest-related dividend includable in gross income with respect to stock of another regulated investment company.
(F) 10-percent shareholder
For purposes of this paragraph, the term "10-percent shareholder" has the meaning given such term by subsection (h)(3)(B).
(2) Short-term capital gain dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any short-term capital gain dividend received from a regulated investment company.
(B) Exception for aliens taxable under subsection (a)(2)
Subparagraph (A) shall not apply in the case of any nonresident alien individual subject to tax under subsection (a)(2).
(C) Short-term capital gain dividend
For purposes of this paragraph, the term "short-term capital gain dividend" means any dividend (or part thereof) which is designated by the regulated investment company as a short-term capital gain dividend in a written notice mailed to its shareholders not later than 60 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 855) is greater than the qualified short-term gain of the company for such taxable year, the portion of each distribution which shall be a short-term capital gain dividend shall be only that portion of the amounts so designated which such qualified short-term gain bears to the aggregate amount so designated. Such term shall not include any dividend with respect to any taxable year of the company beginning after December 31, 2007.
(D) Qualified short-term gain
For purposes of subparagraph (C), the term "qualified short-term gain" means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company for such taxable year. For purposes of this subparagraph--
(i) the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain, and
(ii) the excess of the net short-term capital gain for a taxable year over the net long-term capital loss for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss or net short-term capital loss attributable to transactions after October 31 of such year, and any such net capital loss or net short-term capital loss shall be treated as arising on the 1st day of the next taxable year.
To the extent provided in regulations, clause (ii) shall apply also for purposes of computing the taxable income of the regulated investment company.
(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(e)(2).
(2) For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877.
(3) For doubling of tax on citizens of certain foreign countries, see section 891.
(4) For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896.
(5) For withholding of tax at source on nonresident alien individuals, see section 1441.
(6) For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013.
(7) For special tax treatment of gain or loss from the disposition by a nonresident alien individual of a United States real property interest, see section 897.
In the case of a nonresident alien individual, except where the context clearly indicates otherwise, gross income includes only--
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle:
(1) Ships operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to individual residents of the United States.
(2) Aircraft operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to individual residents of the United States.
(3) Compensation of participants in certain exchange or training programs
Compensation paid by a foreign employer to a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J) or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended. For purposes of this paragraph, the term "foreign employer" means--
(A) a nonresident alien individual, foreign partnership, or foreign corporation, or
(B) an office or place of business maintained in a foreign country or in a possession of the United States by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States.
(4) Certain bond income of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands
Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.
(5) Income derived from wagering transactions in certain parimutuel pools
Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race or dog race in the United States.
(6) Certain rental income
Income to which paragraphs (1) and (2) apply shall include income which is derived from the rental on a full or bareboat basis of a ship or ships or aircraft, as the case may be.
(7) Application to different types of transportation
The Secretary may provide that this subsection be applied separately with respect to income from different types of transportation.
(8) Treatment of possessions
To the extent provided in regulations, a possession of the United States shall be treated as a foreign country for purposes of this subsection.
(1) In general
Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
(2) Individuals subject to this section
This section shall apply to any individual if--
(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B) the net worth of the individual as of such date is $2,000,000 or more, or
(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
In the case of the loss of United States citizenship in any calendar year after 2004, such $124,000 amount shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting "2003" for "1992" in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.
A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or 55 except that--
(1) the gross income shall include only the gross income described in section 872(a) (as modified by subsection (d) of this section), and
(2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary.
For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. The tax imposed solely by reason of this section shall be reduced (but not below zero) by the amount of any income, war profits, and excess profits taxes (within the meaning of section 903) paid to any foreign country or possession of the United States on any income of the taxpayer on which tax is imposed solely by reason of this section.
(c) Exceptions
(1) In general
Subparagraphs (A) and (B) of subsection (a)(2) shall not apply to an individual described in paragraph (2) or (3).
(2) Dual citizens
(A) In general
An individual is described in this paragraph if--
(i) the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and
(ii) the individual has had no substantial contacts with the United States.\
(B) Substantial contacts
An individual shall be treated as having no substantial contacts with the United States only if the individual--
(i) was never a resident of the United States (as defined in section 7701(b)),
(ii) has never held a United States passport, and
(iii) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
(3) Certain minors
An individual is described in this paragraph if--
(A) the individual became at birth a citizen of the United States,
(B) neither parent of such individual was a citizen of the United States at the time of such birth,
(C) the individual's loss of United States citizenship occurs before such individual attains age 18 1/2 , and
(D) the individual was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
For purposes of subsection (b)--
(1) Source rules
The following items of gross income shall be treated as income from sources within the United States:
(A) Sale of property
Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States.
(B) Stock or debt obligations
Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia.
(C) Income or gain derived from controlled foreign corporation
Any income or gain derived from stock in a foreign corporation but only--
(i) if the individual losing United States citizenship owned (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), at any time during the 2-year period ending on the date of the loss of United States citizenship more than 50 percent of--
(I) the total combined voting power of all classes of stock entitled to vote of such corporation, or
(II) the total value of the stock of such corporation, and
(ii) to the extent such income or gain does not exceed the earnings and profits attributable to such stock which were earned or accumulated before the loss of citizenship and during periods that the ownership requirements of clause (i) are met.
(2) Gain recognition on certain exchanges
(A) In general
In the case of any exchange of property to which this paragraph applies, notwithstanding any other provision of this title, such property shall be treated as sold for its fair market value on the date of such exchange, and any gain shall be recognized for the taxable year which includes such date.
(B) Exchanges to which paragraph applies
This paragraph shall apply to any exchange during the 10-year period beginning on the date the individual loses United States citizenship if--
(i) gain would not (but for this paragraph) be recognized on such exchange in whole or in part for purposes of this subtitle,
(ii) income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), and
(iii) income derived from the property acquired in the exchange would be from sources outside the United States.
(C) Exception
Subparagraph (A) shall not apply if the individual enters into an agreement with the Secretary which specifies that any income or gain derived from the property acquired in the exchange (or any other property which has a basis determined in whole or part by reference to such property) during such 10-year period shall be treated as from sources within the United States. If the property transferred in the exchange is disposed of by the person acquiring such property, such agreement shall terminate and any gain which was not recognized by reason of such agreement shall be recognized as of the date of such disposition.
(D) Secretary may extend period
To the extent provided in regulations prescribed by the Secretary, subparagraph (B) shall be applied by substituting the 15-year period beginning 5 years before the loss of United States citizenship for the 10-year period referred to therein. In the case of any exchange occurring during such 5 years, any gain recognized under this subparagraph shall be recognized immediately after such loss of citizenship.
(E) Secretary may require recognition of gain in certain cases
To the extent provided in regulations prescribed by the Secretary--
(i) the removal of appreciated tangible personal property from the United States, and
(ii) any other occurrence which (without recognition of gain) results in a change in the source of the income or gain from property from sources within the United States to sources outside the United States,
shall be treated as an exchange to which this paragraph applies.
(3) Substantial diminishing of risks of ownership
For purposes of determining whether this section applies to any gain on the sale or exchange of any property the running of the 10-year period described in subsection (a) and the period applicable under paragraph (2) shall be suspended for any period during which the individual's risk of loss with respect to the property is substantially diminished by--
(A) the holding of a put with respect to such property (or similar property),
(B) the holding by another person of a right to acquire the property, or
(C) a short sale or any other transaction.
(4) Treatment of property contributed to controlled foreign corporations
(A) In general
If--
(i) an individual losing United States citizenship contributes property during the 10-year period beginning on the date the individual loses United States citizenship to any corporation which, at the time of the contribution, is described in subparagraph (B), and
(ii) income derived from such property immediately before such contribution was from sources within the United States (or, if no income was so derived, would have been from such sources),
any income or gain on such property (or any other property which has a basis determined in whole or part by reference to such property) received or accrued by the corporation shall be treated as received or accrued directly by such individual and not by such corporation. The preceding sentence shall not apply to the extent the property has been treated under subparagraph (C) as having been sold by such corporation.
(B) Corporation described
A corporation is described in this subparagraph with respect to an individual if, were such individual a United States citizen--
(i) such corporation would be a controlled foreign corporation (as defined in 957), and
(ii) such individual would be a United States shareholder (as defined in section 951(b)) with respect to such corporation.
(C) Disposition of stock in corporation
If stock in the corporation referred to in subparagraph (A) (or any other stock which has a basis determined in whole or part by reference to such stock) is disposed of during the 10-year period referred to in subsection (a) and while the property referred to in subparagraph (A) is held by such corporation, a pro rata share of such property (determined on the basis of the value of such stock) shall be treated as sold by the corporation immediately before such disposition.
(D) Anti-abuse rules
The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the purposes of this paragraph, including where--
(i) the property is sold to the corporation, and
(ii) the property taken into account under subparagraph (A) is sold by the corporation.
(E) Information reporting
The Secretary shall require such information reporting as is necessary to carry out the purposes of this paragraph.
(1) In general
Any long-term resident of the United States who--
(A) ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or
(B) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country,
shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.
(2) Long-term resident
For purposes of this subsection. the term 'long-term resident' means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
(3) Special rules
(A) Exceptions not to apply
Subsection (c) shall not apply to an individual who is treated as provided in paragraph (1).
(B) Step-up in basis
Solely for purposes of determining any tax imposed by reason of this subsection, property which was held by the long-term resident on the date the individual first became a resident of the United States shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
(4) Authority to exempt individuals
This subsection shall not apply to an individual who is described in a category of individuals prescribed by regulation by the Secretary.
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations providing for the application of this subsection in cases where an alien individual becomes a resident of the United States during the 10-year period after being treated as provided in paragraph (1).
If the Secretary establishes that it is reasonable to believe that an individual's loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.
(g) Physical presence
(1) In general
This section shall not apply to any individual to whom this section would otherwise apply for any taxable year during the 10-year period referred to in subsection (a) in which such individual is physically present in the United States at any time on more than 30 days in the calendar year ending in such taxable year, and such individual shall be treated for purposes of this title as a citizen or resident of the United States, as the case may be, for such taxable year.
(2) Exception
(A) In general
In the case of an individual described in any of the following subparagraphs of this paragraph, a day of physical presence in the United States shall be disregarded if the individual is performing services in the United States on such day for an employer. The preceding sentence shall not apply if--
(i) such employer is related (within the meaning of section 267 and 707) to such individual, or
(ii) such employer fails to meet such requirements as the Secretary may prescribe by regulations to prevent the avoidance of the purposes of this paragraph.
Not more than 30 days during any calendar year may be disregarded under this subparagraph.
(B) Individuals with ties to other countries
An individual is described in this subparagraph if--
(i) the individual becomes (not later than the close of a reasonable period after loss of United States citizenship or termination of residency) a citizen or resident of the country in which--
(I) such individual was born,
(II) if such individual is married, such individual's spouse was born, or
(III) either of such individual's parents were born, and
(ii) the individual becomes fully liable for income tax in such country.
(C) Minimal prior physical presence in the United States
An individual is described in this subparagraph if, for each year in the 10-year period ending on the date of loss of United States citizenship or termination of residency, the individual was physically present in the United States for 30 days or less. The rule of section 7701(b)(3)(D)(ii) shall apply for purposes of this subparagraph.
Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as--
(1) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(2) gains described in section 631(b) or (c),
(3) in the case of--
(A) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and
(B) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and
(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(1) Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands
For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if--
(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,
(B) at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and
(C) no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.
(2) Commonwealth of Puerto Rico
(A) In general
If dividends are received during a taxable year by a corporation--
(i) created or organized in, or under the law of, the Commonwealth of Puerto Rico, and
(ii) with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,
subsection (a) shall be applied for such taxable year by substituting "10 percent" for "30 percent".
(B) Applicability
If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico's withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase.
(3) Definitions
(A) Foreign person
For purposes of paragraph (1), the term "foreign person" means any person other than--
(i) a United States person, or
(ii) a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.
(B) Indirect ownership rules
For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that "5 percent" shall be substituted for "50 percent" in subparagraph (C) thereof.
(1) In general
In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which would be subject to tax under subsection (a) but for this subsection and which is described in any of the following subparagraphs:
(A) Certain obligations which are not registered
Interest which is paid on any obligation which is described in section 871(h)(2)(A).
(B) Certain registered obligations
Interest which is paid on an obligation--
(i) which is in registered form, and
(ii) with respect to which the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person.
(3) Portfolio interest shall not include interest received by certain persons
For purposes of this subsection, the term "portfolio interest" shall not include any portfolio interest which--
(A) except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,
(B) is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or
(C) is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection, the term 'portfolio interest' shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).
(5) Special rules for controlled foreign corporations
(A) In general
In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:
(i) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(ii) Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).
(iii) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(B) Controlled foreign corporation
For purposes of this subsection, the term "controlled foreign corporation" has the meaning given to such term by section 957(a).
(6) Secretary may cease application of this subsection
Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6).
(7) Registered form
For purposes of this subsection, the term "registered form" has the meaning given such term by section 163(f).
No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).
(e) Tax not to apply to certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.
(B) Exception
Subparagraph (A) shall not apply--
(i) to any dividend referred to in section 871(k)(1)(B), and
(ii) to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.
(C) Treatment of dividends received by controlled foreign corporations
The rules of subsection (c)(5)(A) shall apply to any (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).
(2) Short-term capital gain dividends
No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.
For doubling of tax on corporations of certain foreign countries, see section 891.For special rules for original issue discount, see section 871(g).
The Secretary may prescribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among any 2 or more of such parties where the Secretary determines that such recharacterization is appropriate to prevent avoidance of any tax imposed by this title.
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