Foreign Persons

Rules relevant to chapters 3 and 4. A payee is subject to withholding only if it is a foreign person. A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. FI if the foreign branch is a QI. In most cases, the U.S. branch of a foreign corporation or partnership is treated as a foreign person. The determination of whether a foreign person is treated as an entity (that is, as opposed to being disregarded as separate from its owner), or as a foreign corporation, foreign partnership, or foreign trust, is made under U.S. tax rules.

If an amount is both a withholdable payment and an amount subject to chapter 3 withholding and the withholding agent withholds under chapter 4, it may credit this amount against any tax due under chapter 3.

Nonresident alien. A nonresident alien is an individual who is not a U.S. citizen or a resident alien. A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding.

Married to U.S. citizen or resident alien. Nonresident alien individuals married to U.S. citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. However, these individuals are still subject to the chapter 3 withholding rules that apply to nonresident aliens for all income except wages. Wages paid to these individuals are subject to graduated withholding. See Wages Paid to Employees, later.

Resident alien. A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.

• Green card test. An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because these aliens hold immigrant visas (also known as green cards).

• Substantial presence test. An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Under this test, the individual must be physically present in the United States on at least:

1. 31 days during the current calendar year; and

2. 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only ¹ /3 the number of days of presence in the first preceding year, and only ¹ /6 the number of days in the second preceding year.

In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. This exception is for a limited period of time.

For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Pub. 519 .

Note: If your employee is late in notifying you that their status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. For more information on making adjustments, see chapter 13 of Pub. 15 (Circular E) .

Resident of a U.S. territory. A bona fide resident of Puerto Rico, the U.S. Virgin Islands (USVI), Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U.S. citizen or a U.S. national is treated as a nonresident alien for the withholding rules explained here. A bona fide resident of a territory is someone who:

• Meets the presence test,

• Does not have a tax home outside the territory, and

• Does not have a closer connection to the United States or to a foreign country than to the territory.

For more information, see Pub. 570 .

Foreign corporations. A foreign corporation is one that does not fit the definition of a domestic corporation. A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia.

Guam or CNMI corporations. A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if:

• At all times during the tax year less than 25% in value of the corporation’s stock is owned, directly or indirectly, by foreign persons; and

• At least 20% of the corporation’s gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less).

Note: The provisions discussed below under USVI and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that territory.

USVI and American Samoa corporations. A corporation created or organized in, or under the laws of, the

12 Publication 515 (2026)

USVI or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if:

• At all times during the tax year less than 25% in value of the corporation’s stock is owned, directly or indirectly, by foreign persons;

• At least 65% of the corporation’s gross income is effectively connected with the conduct of a trade or business in the USVI, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less); and

• No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the USVI, American Samoa, Guam, the CNMI, or the United States.

Foreign private foundations. A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate.

Other foreign organizations, associations, and chari- table institutions. An organization may be exempt from income tax under section 501(a) and chapter 4 withholding tax even if it was formed under foreign law. In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations.

Payments to these organizations, however, must be reported on Form 1042-S if the payment is subject to chapter 3 withholding, even though no tax is withheld.

You must withhold tax on the unrelated business income (as described in Pub. 598 ) of foreign tax-exempt or- ganizations in the same way that you would withhold tax on similar income of nonexempt organizations when the organization does not provide you a Form W-8ECI to certify that the income is effectively connected with a U.S. trade or business of the organization.

U.S. branches of foreign persons. In most cases, a payment to a U.S. branch of a foreign person is a payment made to the foreign person. However, you may treat payments to U.S. branches of foreign banks and foreign insurance companies (discussed earlier) as payments made to a U.S. person, if you and the U.S. branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. For this purpose, a territory financial institution acting as an intermediary or that is a flow-through entity is treated as a U.S. branch.

Additional Rules Specific to Chapter 4

A payee may be subject to chapter 4 withholding only if it is a foreign entity. A foreign entity for chapter 4 purposes

means any entity that is not a U.S. person and includes a territory entity as defined in Regulations section 1.1471-1(b)(129).

A foreign entity is subject to chapter 4 withholding if it is a nonparticipating FFI or a passive NFFE that does not provide the appropriate certification regarding its substantial U.S. owners. A nonparticipating FFI is an FFI other than a participating FFI, deemed-compliant FFI, or exempt beneficial owner. See Definitions , later, for the definitions of these terms.

A passive NFFE is:

• An NFFE other than a publicly traded corporation,

• Certain affiliated entities related to a publicly traded corporation,

• Certain territory entities,

• Active NFFEs, or

• Excluded FFIs.

For chapter 4 purposes, a U.S. person does not include a foreign insurance company that has made an election under section 953(d) if it is a specified insurance company (defined in Regulations section 1.1471-5(e)(1)(iv)) and is not licensed to do business in any state. Notwithstanding the foregoing, a withholding agent should treat such entity as a U.S. person for purposes of documenting the entity’s status for purposes of chapters 3 and 4.