Other Income

For the discussion of income codes 24, 25, and 26, see U.S. Real Property Interest, later. For the discussion of income code 27, see Publicly Traded Partnership Distribu- tions, later.

Gambling winnings (income code 28). In general, nonresident aliens are subject to chapter 3 withholding at 30% on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U.S. trade or business and is not exempted by treaty. The tax withheld and winnings are reportable on Forms 1042 and 1042-S. Chapter 4 withholding does not apply to these proceeds.

No tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. A Form W-8BEN is not required to obtain the exemption from withholding, but a Form W-8BEN may be required for purposes of Form 1099 reporting and backup withholding. Gambling income that is not subject to chapter 3 withholding is not subject to reporting on Form 1042-S.

Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U.S. trade or business.

Tax treaties. Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.

Gambling income of residents of Malta is taxed at 10%. Claimants must give you a Form W-8BEN (with a U.S. or foreign TIN) to claim treaty benefits on gambling income that is not effectively connected with a U.S. trade or business. See U.S. or Foreign TINs , later, for when you can accept a Form W-8BEN without a TIN.

The provisions of the Hungary and Russia treaties exempting taxation on gambling winnings in the United States are no longer in operation. As a result, gambling winnings are taxable and subject to 30% withholding as of August 16, 2024, for Russia and January 1, 2024, for Hungary.

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Transportation income. U.S. source gross transportation income (USSGTI), as defined in section 887, is not subject to 30% gross withholding tax, and chapter 4 withholding does not apply to this income. Transportation income is income from the use of a vessel or aircraft, whether owned, hired, or leased, or from the performance of services directly related to the use of a vessel or aircraft. U.S. source gross transportation income includes 50% of all transportation income from transportation that either begins or ends in the United States. USSGTI does not include transportation income of a foreign corporation taxable in a U.S. territory. The recipient of USSGTI must pay tax on it annually at the rate of 4% on Section I of Form 1120-F, unless the income is effectively connected with the conduct of a U.S. trade or business and is reportable on Section II of Form 1120-F. Special rules apply to determine if a foreign corporation’s USSGTI is effectively connected with a U.S. trade or business.

Canadian truck and rail income. Under Article VIII (Transportation) of the U.S.–Canada treaty, any U.S. source income derived by a Canadian company engaged in the operation of trucks or a railway as a common carrier or contract carrier, and attributable to the transportation of property between Canada and the United States, is exempt from tax in the United States, provided the company is otherwise eligible for treaty benefits. Payments for the use of trucks (including trailers) or railway rolling stock, or from the use, maintenance, or rental of containers (including trailers and related equipment for the transport of containers) used to transport property between Canada and the United States are also exempt from U.S. tax, provided the company is otherwise eligible for treaty benefits. Canadian companies must file Form 1120-F and Form 8833 to claim an exemption from tax for profits from their operating income. Canadian corporations are subject to chapter 3 withholding on rental payments for the use of such equipment in the United States and may claim an exemption on Form W-8BEN-E.

Foreign freight charges or rental of equipment used outside the United States. Payments for transportation of property, whether by ship, air, or truck, solely between points outside the United States or rental of tangible property in connection with transportation solely for use between points outside the United States is not U.S. source income and not subject to chapter 3 withholding.

Payments to certain expatriates. Certain payments to nonresident aliens who are covered expatriates under section 877A(g)(1) are subject to withholding at 30%. In general, nonresident aliens are covered expatriates if they were U.S. citizens or long-term residents who renounced their citizenship or ceased to be long-term residents for U.S. tax purposes after June 16, 2008, and satisfied other tests for average annual net income tax or net worth. For more information on the definition of covered expatriates, see the Instructions for Form 8854, Initial and Annual Expatriation Information Statement.

A covered expatriate should have provided you with Form W-8CE notifying you of their covered expatriate status and the fact that they may be subject to special tax

rules with respect to certain items. For more information, see the Instructions for Form W-8CE.

Eligible deferred compensation items (income code 38). In general, you must withhold tax at a 30% rate on any payment of an eligible deferred compensation item paid to a covered expatriate. The amount subject to tax is the amount of the payment that would have been included in the nonresident alien’s U.S. gross income if they had continued to be taxed as a U.S. citizen or resident.

Distributions from a nongrantor trust (income code 39). In general, you must withhold tax at a 30% rate on any direct or indirect distribution from a nongrantor trust. The amount subject to tax is the part of the distribution that would have been included in the nonresident alien’s U.S. gross income if they had continued to be taxed as a U.S. citizen or resident. If the nonresident alien was not a beneficiary of the nongrantor trust on the day before they gave up their U.S. citizenship or long-term residence, you do not have to withhold tax. See section 7 of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/ 2009-45_IRB#NOT-2009-85 .

Guarantee of indebtedness (income code 41). An amount paid to a foreign payee for the provision of a guarantee of indebtedness issued after September 27, 2010, may be subject to chapter 3 withholding. The amounts must be paid by one of the following.

1. A noncorporate U.S. resident.

2. A domestic corporation.

3. Any foreign person if the amount paid is connected with income that is effectively connected, or treated as effectively connected, with a U.S. trade or business.

An indirect payment includes a payment by a foreign bank to a foreign corporation for the foreign corporation’s guarantee of indebtedness owed to the foreign bank by the foreign corporation’s domestic subsidiary, where the cost of the guarantee fee is passed on to the domestic subsidiary through additional interest charged on the indebtedness.

The amounts described above for a guarantee of indebtedness are withholdable payments, such that chapter 4 withholding may apply absent an exclusion from withholding under chapter 4.

Other income (income code 23). Use this category to report U.S. source FDAP income that is not reportable under any of the other income categories. Examples of income that may be reportable under this category are commissions, insurance proceeds, patronage distributions, prizes, and racing purses.

As discussed earlier under Amounts Subject to Chap- ter 3 Withholding , every kind of FDAP income from U.S. sources that is not effectively connected with a U.S. trade or business is subject to chapter 3 withholding unless the income is specifically exempt under the Internal Revenue Code or a tax treaty. You must generally withhold at the 30% rate on this income. As a payment of U.S. source

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FDAP is generally a withholdable payment, you should review Regulations section 1.1473-1(a) (definition of withholdable payment) to determine if the payment is excluded from the definition of a withholdable payment.