Reporting

Foreign individuals and businesses earning income from U.S. sources are subject to specific reporting and withholding requirements. Proper compliance ensures accurate taxation, access to treaty benefits, and avoidance of penalties. The following outlines key reporting obligations for income, information returns, and FIRPTA compliance.

Here are some common reporting requirements applicable to individuals and corporations.

Income Reporting

Foreign individuals are generally required to report all U.S. source income on Form 1040NR (Non-resident Alien Income Tax Return), including wages, business income, rental income, and investment gains.

Foreign businesses typically file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) to report income effectively connected with a US trade or business.

Treaty benefits may reduce tax obligations, but proper reporting and documentation are still required through Form 8833 (Treaty-Based Return Position Disclosure).

Passive income, in the form of dividends, rents, royalties, and interest, may be subject to 30% withholding tax (or reduced treaty rates) and should be reported accordingly.

Examples of reportable income generally include:

• Dividends from US corporations.
• Interest from US bank accounts, bonds, or other debt instruments.
• Rental income from US real estate properties.
• Royalties from US intellectual property licensing.
• Capital gains from sales of US real property interests.
• Business profits from US operations or partnerships.

Foreign Investment in Real Property Tax Act  (FIRPTA) Compliance

Foreign individuals and corporations planning to sell their real estate in the U.S. should also comply with FIRPTA regulations. FIRPTA stands for the Foreign Investment in Real Property Tax Act.

FIRPTA is a U.S. federal law that requires withholding taxes when foreign individuals or foreign corporations sell real estate in the United States. It ensures that foreign investors are taxed on the disposition of U.S. real property interests.  

Buyers are generally required to withhold 10-15% of the gross sales price when purchasing real property from foreign sellers and submit it to the IRS.

Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests) should be filed within 20 days of the transfer. Form 8288-A provides the certificate of withholding to the foreign seller.

A Foreign Seller may be able to reduce or eliminate the withholding through applications for withholding certificates (Form 8288-B) based on the maximum tax liability.

Foreign corporations owning US real property should also comply with annual reporting requirements under Section 6039C.

For a detailed discussion about FIRPTA, please refer to our article.