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1. Introduction

Privileged “U.S. persons” are not subject to withholding or reporting under 26 U.S.C. §1441, but “foreign persons” can be. This is a trick to get you to “elect” the DOMESTIC “U.S. person” status under 26 U.S.C. §7701(a)(30) and to scare you away from being “foreign” but not a “person” status advocated by this website. The “U.S. person” they are talking about, by the way, is a POLITICAL/TERRITORIAL citizen and not a Fourteenth Amendment POLITICAL/CONSTITUTIONAL “citizen* of the United States***”. Even so, people in states of the union mindlessly pursue this status anyway to avoid the withholding and reporting aspect of taxation implemented for everything BUT “employment”.

Withholding and reporting are vastly more complicated for a “foreign person” than for a “U.S. person”. This is probably the main reason why most people avoid being a “nonresident alien” and a “foreign person”: Because they lack the legal skill to navigate this complexity and experts are not available to help them because this is not a mainstream approach. For instance:

1. The governing regulation at 26 C.F.R. §1.1441-1 is 104 pages long.
2. There are at least FIVE levels of hierarchy in the regulation that are presented in such a way that the text is difficult to read. The only place you can actually SEE the hierarchy with proper indentation is on the Cornell Website:
   https://www.law.cornell.edu/cfr/text/26/1.1441-1
3. The regulation is difficult to navigate and understand even for seasoned law professionals.
4. Taxes are too difficult even for those who file as “U.S. persons”. Most hire tax preparers and rely on untrustworthy IRS publications in the process.

The complexity described above is why we end this article with section 7 giving an example of how to apply it to the average American if they decide to undertake the foreign person approach.

Withholding and reporting always go together. Withholding is never done unless there is also reporting. Reporting, on the other hand, is done mainly under the authority of 26 U.S.C. §6041 and only in connection with the “trade or business” excise taxable franchise of the PAYOR and not the PAYEE. So if the PAYOR BELIEVES they are engaged in a public office or acting as an agent of the national government by BEING so engaged, they will report, even if there is no lawful authority for them to do so. Even if such reporting is unlawful, because it produces revenue for the government, OF COURSE the government will look the other way. To not do so would be to look a gift horse in the mouth.

2. FOREIGN and DOMESTIC are NOT geographical but a product of ELECTION!

The first thing we must remember about whether you are FOREIGN or DOMESTIC is that NOWHERE in the Internal Revenue Code or the Treasury Regulations at 26 C.F.R. are the words FOREIGN or DOMESTIC ever defined in such a way as to make them GEOGRAPHICAL. The definition of “domestic” in 26 U.S.C. §7701(a)(4) proves this. Instead, whether you are FOREIGN or DOMESTIC originates ENTIRELY from your own choice, which the IRS calls an “election”. This originates from the fact that the Thirteenth Amendment forbids “involuntary servitude” in the case of at least human beings, and this constitutional constraint is one of the few constitutional provisions that operates anywhere in the COUNTRY “United States*”.

Since the purpose of income tax is to impose civil and financial OBLIGATIONS, and such obligations involve SERVITUDE as defined by the Thirteenth Amendment, then all civil statutory “statuses” such as “person”, “citizen”, “resident”, “individual” must all be voluntary. If they weren’t voluntary, then you would have no choice but to be a slave. This is also why the Internal Revenue Code doesn’t have ANY actual liability statute making those with such statuses LIABLE for the income tax other than withholding agents on nonresident aliens in 26 U.S.C. §1461. The process of VOLUNTEERING therefore consists mainly of simply INVOKING any one of the civil statutory fictional statuses mentioned in the Internal Revenue Code that has both privileges and obligations attached. This process of volunteering is exhaustively documented in our How You Volunteer menu.

3. Definition of “Foreign person”

All withholding is done only on “foreign persons”, which includes “nonresident aliens” who are ALSO CIVIL STATUTORY “persons”. Note that you can be a “person” under the constitution WITHOUT being a “person” under a specific act of Congress by virtue of not having a domicile within the exclusive jurisdiction of the national government and yet STILL being present on land within the exclusive jurisdiction of a Constitutional State. Thus the “foreign persons” they are referring to for withholding purposes are:

1. CIVIL STATUTORY “foreign persons” and “individuals” in the case of human beings.
2. Not CONSTITUTIONAL “persons” who are all human beings. A CONSTITUTIONAL person is what we call a PRIVATE “person”, and thus FOREIGN.
3. Subject to the exclusive jurisdiction of the national government BECAUSE they are availing themselves of FOREIGN COMMERCE within the exclusive jurisdiction of congress.
4. Always ALIENS (foreign nationals) over which the national government has jurisdiction under the authority of Constitution Article 1, Section 8, Clause 3 and 5 U.S.C. §553(a)(1).

There are TWO types of “nonresident aliens” as described but not defined in 26 U.S.C. §7701(b)(1)(B):

1. American nationals born anywhere in the COUNTRY “United States”. These people don’t have their own name in the code. We simply all them non-resident nationals. See 26 U.S.C. §871.
2. Foreign nationals (aliens) born OUTSIDE the COUNTRY “United States*”. These people are called “non-resident aliens”. See 26 U.S.C. §874. These are also called “international taxpayers” by the IRS.

For a comparison of the two above types of “nonresident aliens”, see:

1. META AI: “Nonresident Alien” v. “non-resident alien”, FTSIG
   https://ftsig.org/meta-ai-nonresident-alien-v-non-resident-alien/
2. META AI: Is a “NATIONAL OF THE UNITED STATES” A “FOREIGN PERSON” under 26 U.S.C. 1441?, FTSIG
   https://ftsig.org/meta-ai-is-a-national-of-the-united-states-a-foreign-person/

“Nonresident aliens” are not DOMICILED or PHYSICALLY PRESENT or RESIDING within the exclusive jurisdiction of the national government or the statutory geographical “United States” defined in 26 U.S.C. §7701(a)(9) and (a)(10) and therefore are not CIVIL/DOMICILED “citizens**+D”, by the way under any act of congress. They become “individuals” mainly by:

1. Engaging in foreign commerce within the jurisdiction of the national government anywhere in the COUNTRY “United States*” and not through their consensual choice of domicile or residence.
2. Making “elections” to connect their otherwise FOREIGN and PRIVATE property to a privileged “trade or business” excise taxable franchise. This is called “effectively connecting” on the 1040NR form itself. Courts call this activity “purposeful availment”. An example of this is taking deductions under 26 U.S.C. §873, which names “nationals of the United States” as “nonresident alien INDIVIDUALS” in the context of deductions ONLY. Those deductions are PRIVILEGES under 26 U.S.C. §162 so by taking them, people in states are making an election and thereby become INDIVIDUALS.

IRS defines “foreign persons” as follows:

Foreign Persons, IRS (OFFSITE LINK)
https://www.irs.gov/individuals/international-taxpayers/foreign-persons

IRS calls “foreign persons” by the name “international taxpayers” on their website above. People within states of the Union, by the way are NOT “international taxpayers”.

The U.S. Supreme Court, by the way, refers to “nonresident aliens” as “non-resident aliens”, and thus aliens who are nonresident instead of nationals. We have never seen a court case that distinguishes the difference between “nonresident aliens” who are aliens and those who are nationals. If you find one, please let us know.

Those who are American Nationals and “nonresident aliens” can be “foreign” WITHOUT being “PERSONS” in the context of WITHHOLDING. The definition of “nonresident alien” for the purposes of withholding ONLY, for instance, includes only ALIENS:

26 C.F.R. §1.1441-1 – Requirement for the deduction and withholding of tax on payments to foreign persons.

(c) Definitions. 

The following definitions apply for purposes of sections 1441 through 1443, 1461, and regulations under those sections. For definitions of terms used in these regulations that are defined under sections 1471 through 1474, see subparagraphs (43) through (56) of this paragraph.

(1) Withholding. 

The term withholding means the deduction and withholding of tax at the applicable rate from the payment.

(2) Foreign and U.S. person—

(i) In general. 

The term foreign person means any person that is not a U.S. person, including a QI branch of a U.S. financial institution (as defined in § 1.1471-1(b)(109). Such a branch continues to be a U.S. payor for purposes of chapter 61 of the Code. See § 1.6049-5(c)(4). A U.S. person is a person described in section 7701(a)(30), the U.S. government (including an agency or instrumentality thereof), a State (including an agency or instrumentality thereof), or the District of Columbia (including an agency or instrumentality thereof).

(ii) Dual residents. 

Individuals will not be treated as U.S. persons for purposes of this section for a taxable year or any portion of a taxable year for which they are a dual resident taxpayer (within the meaning of § 301.7701(b)-7(a)(1) of this chapter) who is treated as a nonresident alien pursuant to § 301.7701(b)-7(a)(1) of this chapter for purposes of computing their U.S. tax liability.

(3) Individual—

(i) Alien individual. 

The term alien individual means an individual who is not a citizen or a national of the United States. See § 1.1-1(c).

(ii) Nonresident alien individual. 

The term nonresident alien individual means persons described in section 7701(b)(1)(B), alien individuals who are treated as nonresident aliens pursuant to § 301.7701(b)-7 of this chapter for purposes of computing their U.S. tax liability, or an alien individual who is a resident of Puerto Rico, Guam, the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa as determined under § 301.7701(b)-1(d) of this chapter. An alien individual who has made an election under section 6013(g) or (h) to be treated as a resident of the United States is nevertheless treated as a nonresident alien individual for purposes of withholding under chapter 3 of the Code and the regulations thereunder.

The only people listed in the above definition are ALIENS. Because “nationals of the United States” are NOT EXPRESSLY included in the definition of “nonresident alien individuals” above, they are PURPOSEFULLY excluded per the rules of statutory construction and interpretation. Note that they define a “foreign person” as any “person” who is NOT a “U.S. person” under 26 U.S.C. §7701(a)(30). We must therefore conclude that those who are:

1. “nationals of the United States” and therefore not “aliens”.
2. NONRESIDENT and not domiciled within the statutory geographical “United States” defined in 26 U.S.C. §7701(a)(9) and (a)(10).
3. Not engaged in a trade or business and therefore NOT within the purview of 26 U.S.C. §871(b) or §877(b).
4. Not “persons” based on the above.

We call these people “non-persons”, because they are not even included in the imposition of the tax within 26 C.F.R. §1.1-1(a):

26 C.F.R. § 1.1-1 – Income tax on individuals.

§ 1.1-1 Income tax on individuals.

(a) General rule.

(1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual.

The following article on our site confirms these inferences:

U.S. Department of the Treasury OFFICIALLY RECOGNIZES “non-resident non-persons” and “nontaxpayers”!, FTSIG
https://ftsig.org/u-s-department-of-the-treasury-officially-recognizes-non-resident-non-persons-and-nontaxpayers/

Thus, a “national of the United States” domiciled OUTSIDE the statutory geographical “United States” who is not engaged in the “trade or business” excise taxable franchise CANNOT lawfully be a “foreign person”. This inference is also consistent with the methods by which you acquire what is called a “civil status” as a “nonresident”.

1. Physical presence in the venue without a domicile.  This triggers common law jurisdiction.  If the venue is protected by the constitution, it also triggers constitutional jurisdiction.
2. Physical presence WITH a consensual domicile.  This triggers civil statutory jurisdiction.  If the venue is protected by the constitution, it also triggers constitutional jurisdiction.
3. Not physically present in the venue but purposefully and consensually doing business in the venue.  This triggers common law jurisdiction.  This ordinarily does NOT trigger constitutional jurisdiction, even if the venue is protected by the constitution.
4. Not physically present in the venue but domiciled in the venue.  This triggers statutory jurisdiction.  This ordinarily does NOT trigger constitutional jurisdiction, even if the venue is protected by the constitution.

Those who don’t meet any of the above criteria are NOT DEEMED LEGALLY present within the forum and thus BEYOND the jurisdiction of the forum or court. See:

Civil Status, section 4: Four Methods of acquiring a civil status, SEDM (OFFSITE LINK)
https://ftsig.org/how-you-volunteer/acquiring-a-civil-status/#4._Four_methods_of_acquiring_a_civil_status

By the above four criteria for ACQUIRING a civil status, if you do NOT meet them and are not a “foreign person”, anyone who attempts to MAKE you one through fraud or presumption is:

1. Violating due process of law, because presumptions with no evidentiary basis are unconstitutional.
2. Therefore engaging in theft by presumption.
3. Possibly committing identity theft.
4. Seeking your private property, which you should give them notice of the PRICE, rules, and conditions for to ensure that they pay that price.

In such a case you can pull the same tactic against THEM to bring THEM within YOUR legislative jurisdiction so that THEY become “person” under YOUR jurisdiction. We approach that scenario by warning them that by doing so they accept the following terms and conditions of doing so:

Injury Defense Franchise and Agreement, Form #06.027 (OFFSITE LINK)
https://sedm.org/Forms/06-AvoidingFranch/InjuryDefenseFranchise.pdf

You don’t have to use the above agreement. You can make your own. We only reference it for educational purposes and we didn’t write it.

For information on more government tricks with the word “person” and how to deal with them see:

Policy Document: IRS Fraud and Deception About the Statutory Word “Person”, Form #08.023 (OFFSITE LINK)
https://sedm.org/Forms/08-PolicyDocs/IRSPerson.pdf

4. Withholding on nonresident aliens: I.R.C. 1441

Withholding on “nonresident aliens” frequently uses the term “beneficial owner”, which is defined in 26 C.F.R. §1.1441-1(c)(6)(i) as:

26 C.F.R. § 1.1441-1 – Requirement for the deduction and withholding of tax on payments to foreign persons.

(6) Beneficial owner—

(i) General rule. 

This paragraph (c)(6) defines the term beneficial owner for payments of income other than a payment for which a reduced rate of withholding is claimed under an income tax treaty. The term beneficial owner means the person who is the owner of the income for tax purposes and who beneficially owns that income. A person shall be treated as the owner of the income to the extent that it is required under U.S. tax principles to include the amount paid in gross income under section 61 (determined without regard to an exclusion or exemption from gross income under the Internal Revenue Code). Beneficial ownership of income is determined under the provisions of section 7701(l) and the regulations under that section and any other applicable general U.S. tax principles, including principles governing the determination of whether a transaction is a conduit transaction. Thus, a person receiving income in a capacity as a nominee, agent, or custodian for another person is not the beneficial owner of the income. In the case of a scholarship, the student receiving the scholarship is the beneficial owner of that scholarship. In the case of a payment of an amount that is not income, the beneficial owner determination shall be made under this paragraph (c)(6) as if the amount were income.

The term “income” is then defined as follows:

26 U.S. Code § 643 – Definitions applicable to subparts A, B, C, and D

(b)Income

For purposes of this subpart and subparts B, C, and D, the term “income”, when not preceded by the words “taxable”, “distributable net”, “undistributed net”, or “gross”, means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income.

Nonresident alien withholding under 26 U.S.C. §1441 works the following way:

1. 26 U.S.C. §1441 deals with withholding of tax on “foreign persons” generally. This includes nonresident aliens.
2. The AMOUNT of withholding is:
   2.1. 30% per 26 U.S.C. §1441(a) by default.
   2.2. 14% if  the items of income amounts which are received by a nonresident alien individual 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 and which are—
3. Withholding only applies to “items of income specified in 26 U.S.C. §1441(b) which is “gross income” as defined in 26 U.S.C. §61 from “sources within the United States”. We believe that this “United States” means the government or its agents only. This is because it would be an interference in the right to contract of two private parties unless at least one of the parts was an agent of the national government.
4. Even within constitutional states, withholding is lawful in the case of aliens as a foreign affairs function under Constitution Article 1, Section 8, Clause 3 under the power to regulate foreign commerce.
   3.1. However, in the case of those who are not aliens, such withholding is ILLEGAL and not expressly authorized. This would include American Nationals who are “nonresident aliens” but also “nationals of the United States”.
   3.2. This is why we believe there are actually TWO types of “nonresident aliens”:
   3.2.1. ALIENS who are nonresident.
   3.2.2. NATIONALS who are nonresident.
5. Income items include:
   4.1. Qualified scholarship in which 26 U.S.C. §117(a) applies, but only to the extent includible in gross income.
   4.2. Those not candidates for a degree at an educational organization described in section 170(b)(1)(A)(ii), granted by—
   4.2.1. (A) an organization described in section 501(c)(3) which is exempt from tax under section 501(a),
   4.2.2. (B) a foreign government,
   4.2.3. (C) an international organization, or a binational or multinational educational and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961, or
   4.2.4. (D) the United States, or an instrumentality or agency thereof, or a State, or a possession of the United States, or any political subdivision thereof, or the District of Columbia, as a scholarship or fellowship for study, training, or research in the United States. In the case of a nonresident alien individual who is a member of a domestic partnership, the items of income referred to in subsection (a) shall be treated as referring to items specified in this subsection included in his distributive share of the income of such partnership.

Some people ask us whether there is any harm done in identifying oneself as a “beneficial owner” by filing a W-8BEN form. Here is our response:

1. Declaring yourself as the owner of anything violates your privacy. Its none of their business who the owner is. The fact that the earnings are private property and not THEIR property ought to be the only reason necessary to assert your right to simply deny them any use, benefit, or power to regulate the property as someone who is not an “alien” coming under the foreign affairs jurisdiction of the national government.
2. The “beneficial owner” is connected with the term “income”.
3. Income is defined in 26 U.S.C. §643(b) definition says:
   “For purposes of this subpart and subparts B, C, and D, the term “income”, when not preceded by the words “taxable”, “distributable net”, “undistributed net”, or “gross”, means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law.”
4. Human beings filing the 1040NR are NOT “estates or trusts” and therefore have no “income” as defined above.
5. The IRS Website describes “beneficial owners” below:
   https://www.irs.gov/individuals/international-taxpayers/beneficial-owners
6. The above website article deals with “international taxpayers”. People in states of the Union are NOT “international taxpayers”. Only aliens are international taxpayers as far as we can tell.
7. We therefore think that anyone who files a W-8BEN and declares themself a “beneficial owner” without at least clarifying that they are not an estate or trust is making a mistake.
8. On the flip side, if you are a “foreign beneficial owner”, they can’t reach you civillly but they can reach your property within the “United States”.

5. Backup Withholding under I.R.C. 3406 on “employees” who work for “employers”

1. 26 U.S.C. §3406 deals with backup withholding on foreign persons who work for a STATUTORY “employer”. Those opening accounts with banks and financial institutions are NOT “employees” of the institution so they would not come under “backup withholding”.
2. Backup withholding is 30% of the reported amount, which is the same rate of tax imposed upon “nonresident aliens” in 26 U.S.C. §871(a).
3. Backup Withholding only applies to “Reportable Payments” under 26 U.S.C. §3406(b):
4. “Reportable payments” include
   4.1. Reportable interest or dividend payments.
   
   4.1.1. Payments relating to payments of interest under 26 U.S.C. §6049(a).
   4.1.2. Payments relating to payments of dividends under 26 U.S.C. §6042(a).
   4.1.3. Payments relating to payment of patronage dividends, but only to the extent such payment is in money under 26 U.S.C. §6044.
   
   4.2. Other Reportable Payments including
   
   4.2.1. Payments in which the PAYEE is involved in a “trade or business” under 26 U.S.C. §6041.
   4.2.2. Payments relating to remuneration for services under 26 U.S.C. §6041A(a).
   4.3.3. Payments relating to returns of brokers under 26 U.S.C. §6045.
   4.3.4. Payments relating to reporting requirements of certain fishing boat operators, but only to the extent such payment is money and represents a share of the proceeds of the catch under 26 U.S.C. §6050A.
   4.3.5. Payments relating to payments of royalties under 26 U.S.C. §6050N.
   4.3.6. Payments relating to returns relating to payments made in settlement of payment card transactions under 26 U.S.C. §6050W.

6. Exclusions from or Reductions in Withholding

6.1. Avoiding Backup Withholding on Payments from Employers

To avoid backup withholding under 26 U.S.C. §3406, you must be able to prove one of the following:

1. The payor is not acting as an “employer” in relation to YOU.
2. That the amounts paid are not “reportable”. Only reportable payments can have withholding.
3. That the payment is not connected to employment. 26 U.S.C. §3406 is employment withholding under Subtitle C.

Nonresident aliens are excluded from backup withholding by the following authorities:

1. Earnings are expressly EXCLUDED rather than EXEMPTED from STATUTORY “wages” as defined in 26 U.S.C. §3401(a) because all services performed outside the STATUTORY “United States**” as defined in 26 U.S.C. §7701(a)(9) and (a)(10) (federal zone) and the CORPORATION “United States” as a legal fiction. Therefore, not subject to “wage” withholding of any kind for such services per:
   1.1. 26 C.F.R. §31.3401(a)(6)-1(b) in the case of income tax.
   1.2. 26 C.F.R. §31.3121(b)-3(c)(1) in the case of Social Security.
2. Expressly EXCLUDED rather than EXEMPTED from backup withholding because:
   2.1. Earnings are not reportable by 26 U.S.C. §3406(g) and 26 C.F.R. §31.3406(g)-1(e). 
   2.2. Even if earnings were reported, “wages” are zero per item 1 above.

6.2. Avoiding Withholding on Nonresident aliens or foreign corporations under I.R.C. 1441

To avoid withholding under 26 U.S.C. §1441, you must be able to prove that:

1. You’re not a “nonresident alien” or “foreign partnership”. 26 U.S.C. §1441(a) says these are the only parties subject.
2. Your earnings do not fall within the “income items” listed in 26 U.S.C. §1441(b).
3. Your earnings do not derive from a “source within the United States”, meaning the government and not the geography. Otherwise they would be interfering with your right to contract or stealing private property.
   3.1. 26 C.F.R. §1.6041-4(a)(2) in the case of reporting.
   3.2. 26 C.F.R. §1.1441-1(b)(4)(iii) in the case of withholding.
4. Your earnings are expressly exempted from reporting because:
   4.1. It falls under Chapter 61: Information and returns OR
   4.2. You are a foreign beneficial owner under 26 C.F.R. §1.1441-1(e)(1)(ii)(A)(1). OR
   4.3. It is exempted under 26 C.F.R. §1.6041-4(a). One of the items under this (4) includes “effectively connected” earnings, which we advise against because it is privileged.

Nonresident aliens are excluded from NRA withholding by the following authorities:

1. 26 C.F.R. §1.1441-1(b)(5): Foreign status under Chapter 61 exemption from reporting and backup withholding. This includes:
   (i) Payments to a foreign person that are governed by section 6041 (dealing with certain trade or business income) are exempt from information reporting under § 1.6041-4(a).
   (ii) Payments to a foreign person that are governed by section 6041A (dealing with remuneration for services and certain sales) are exempt from information reporting under § 1.6041A-1(d)(3).
   (iii) Payments to a foreign person that are governed by section 6042 (dealing with dividends) are exempt from information reporting under § 1.6042-3(b)(1) (iii) through (vi).
   (iv) Payments to a foreign person that are governed by section 6044 (dealing with patronage dividends) are exempt from information reporting under § 1.6044-3(c)(1).
   (v) Payments to a foreign person that are governed by section 6045 (dealing with broker proceeds) are exempt from information reporting under § 1.6045-1(g).
   (vi) Payments to a foreign person that are governed by section 6049 (dealing with interest) to a foreign person are exempt from information reporting under § 1.6049-5(b) (6) through (15).
   (vii) Payments to a foreign person that are governed by section 6050N (dealing with royalties) are exempt from information reporting under § 1.6050N-1(c).
   (viii) Payments to a foreign person that are governed by section 6050P (dealing with income from cancellation of debt) are exempt from information reporting under section 6050P or the regulations under that section except to the extent provided in Notice 96-61 (1996-2 C.B. 227); see also § 601.601(b)(2) of this chapter.
   (ix) Payments to a foreign person that are governed by section 6050W (dealing with payment card and third party network transactions) are exempt from information reporting under § 1.6050W-1(a)(5)(ii).
2. 26 C.F.R. §1.1441-1(e)(1)(ii)(A)(1): Foreign person beneficial owner. The withholding agent can reliably associate the payment with a beneficial owner withholding certificate described in paragraph (e)(2) of this section furnished by the person whose name is on the certificate or attached to a valid foreign intermediary, flow-through, or U.S. branch withholding certificate;
3. 26 C.F.R. §1.6041-4(a): Exempted foreign-related items.
   (1) Returns of information are not required for payments that a payor can, prior to payment, reliably associate with documentation upon which it may rely to treat as made to a foreign beneficial owner in accordance with § 1.1441-1(e)(1)(ii) or as made to a foreign payee in accordance with § 1.6049-5(d)(1) or presumed to be made to a foreign payee under § 1.6049-5(d)(2), (3), (4), or (5). Returns of information are also not required for a payment that a payor or middleman can, prior to payment, reliably associate with documentation upon which it may rely to treat as made to a foreign intermediary or flow-through entity in accordance with § 1.1441-1(b) if it obtains from the intermediary or flow-through entity a withholding statement described in § 1.6049-5(b)(14) that allocates the payment to a chapter 4 withholding rate pool (as defined in § 1.6049-4(f)(5)) or specific payees to which withholding applies under chapter 4. Payments excepted from reporting under this paragraph (a)(1) may be reportable, for purposes of chapter 3 of the Internal Revenue Code (Code), under § 1.1461-1(b) and (c) and, for purposes of chapter 4 of the Code, under § 1.1474-1(d)(2). The provisions in § 1.6049-5(c) regarding documentation of foreign status shall apply for purposes of this paragraph (a)(1). The provisions in § 1.6049-5(c)(5) regarding the definitions of U.S. payor and non-U.S. payor shall also apply for purposes of this paragraph (a)(1). See § 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules regarding scholarships, grants, pensions, annuities, etc. The provisions of § 1.1441-1 shall apply by substituting the term “payor” for the term “withholding agent” and without regard to the fact that the provisions apply only to amounts subject to withholding under chapter 3 of the Code and the regulations under that chapter.
   
   (2) Returns of information are not required for payments of amounts from sources outside the United States (determined under the provisions of part I, subchapter N, chapter 1 of the Code and the regulations under those provisions) paid by a non-U.S. payor or non-U.S. middleman and that are paid and received outside the United States. For a definition of non-U.S. payor and non-U.S. middleman, see § 1.6049-5(c)(5). For circumstances in which an amount is considered to be paid and received outside the United States, see § 1.6049-4(f)(16).
   
   (3) If a foreign intermediary, as described in § 1.1441-1(c)(13), or a U.S. branch that is not treated as a U.S. person receives a payment from a payor, which payment the payor can reliably associate with a valid withholding certificate described in § 1.1441-1(e)(3)(ii) or (iii), or § 1.1441-1(e)(3)(v), respectively, furnished by such intermediary or branch, then the intermediary or branch is not required to report such payment when it, in turn, pays the amount, unless, and to the extent, the intermediary or branch knows that the payment is required to be reported under this section and was not so reported. For example, if a U.S. branch described in § 1.1441-1(b)(2)(iv) fails to provide information regarding U.S. persons that are not exempt from reporting under § 1.6041-3(q) to the person from whom the U.S. branch receives the payment, the U.S. branch must report the payment on an information return. See, however, paragraph (a)(7) of this section for when reporting under section 6041is coordinated with reporting under chapter 4 of the Code or an applicable IGA (as defined in § 1.6049-4(f)(7)). The exception described in this paragraph (a)(3) for amounts paid by a foreign intermediary shall not apply to a qualified intermediary that assumes reporting responsibility under chapter 61 of the Code with respect to amounts reportable under the agreement described in § 1.1441-1(e)(5)(iii).
   
   (4) Returns of information are not required for amounts paid with respect to notional principal contracts referred to in § 1.863-7 or 1.988-2(e) which the payor may treat as effectively connected income of a foreign payee under the provisions of § 1.1441-4(a)(3) or if the payee provides a representation in a master agreement that governs the transactions in notional principal contracts between the parties (for example, an International Swap and Derivatives Association (ISDA) Agreement, including the Schedule thereto) or in the confirmation on the particular notional principal contract transaction that the counterparty is a foreign person. See, however, § 1.1461-1(c)(2)(i) for applicable reporting requirements.
   
   (5) Returns of information are not required for the period that the amounts paid represent assets blocked as described in § 1.1441-2(e)(3). The exemption in this paragraph (a)(5) shall terminate when payment is deemed to occur in accordance with the provisions of § 1.1441-2(e)(3).
   
   (6) For rules concerning direct sellers, see § 1.6041A-1(d)(3)(i)(C).
   
   (7) Returns of information are not required for payments with respect to which a return is not required by applying the rules of § 1.6049-4(c)(4) (by substituting the term “a payment subject to reporting under section 6041” for the term “an interest payment”).

6.3 Reduced rate of withholding on foreign persons

A reduced rate of withholding is identified in 26 C.F.R. §1.1441-1(b)(4).

26 CFR § 1.1441-1 – Requirement for the deduction and withholding of tax on payments to foreign persons.

(4) List of exemptions from, or reduced rates of, withholding under chapter 3 of the Code. 

A withholding agent that has determined that the payee is a foreign person for purposes of paragraph (b)(1) of this section must determine whether the payee is entitled to a reduced rate of withholding under section 1441, 1442, or 1443. This paragraph (b)(4) identifies items for which a reduction in the rate of withholding may apply and whether the rate reduction is conditioned upon documentation being furnished to the withholding agent. Documentation required under this paragraph (b)(4) is documentation that a withholding agent must be able to associate with a payment upon which it can rely to treat the payment as made to a foreign person that is the beneficial owner of the payment in accordance with paragraph (e)(1)(ii) of this section. This paragraph (b)(4) also cross-references other sections of the Code and applicable regulations in which some of these exceptions, exemptions, or reductions are further explained. See, for example, paragraph (b)(4)(viii) of this section, dealing with effectively connected income, that cross-references § 1.1441-4(a); see paragraph (b)(4)(xv) of this section, dealing with exemptions from, or reductions of, withholding under an income tax treaty, that cross-references § 1.1441-6. This paragraph (b)(4) is not an exclusive list of items to which a reduction of the rate of withholding may apply and, thus, does not preclude an exemption from, or reduction in, the rate of withholding that may otherwise be allowed under the regulations under the provisions of chapter 3 of the Code for a particular item of income identified in this paragraph (b)(4). The exclusions and limitations specified in this paragraph (b)(4) apply for purposes of chapter 3. Additional withholding and documentation requirements may apply to withholding agents under chapter 4 with respect to payments that are withholdable payments. See, for example, § 1.1471-2(a) requiring withholding on withholdable payments made to certain FFIs and § 1.1471-2(a)(4) for payments exempted from withholding under section 1471(a).

(i) Portfolio interest described in section 871(h) or 881(c) and substitute interest payments described in § 1.871-7(b)(2) or § 1.881-2(b)(2) are exempt from withholding under section 1441(a). See § 1.871-14 for regulations regarding portfolio interest and section 1441(c)(9) for the exemption from withholding for portfolio interest. Documentation establishing foreign status is required for interest on an obligation in registered form to qualify as portfolio interest. See section 871(h)(2)(B)(ii) and § 1.871-14(c)(1)(ii)(C). For special documentation rules regarding foreign-targeted registered obligations described in § 1.871-14(e)(2) (and issued before January 1, 2016), see § 1.871-14(e)(3) and (4) and, in particular, § 1.871-14(e)(4)(i)(A) and (ii)(A) regarding when the withholding agent must receive the documentation. The documentation furnished for purposes of qualifying interest as portfolio interest serves as the basis for the withholding exemption for purposes of this section and establishing foreign status for purposes of section 6049. See § 1.6049-5(b)(8). Documentation establishing foreign status is not required for qualifying interest on an obligation in bearer form described in § 1.871-14(b)(1) (and issued before March 19, 2012) as portfolio interest. However, in certain cases, documentation for portfolio interest on a bearer obligation may have to be furnished in order to establish foreign status for purposes of the information reporting provisions of section 6049 and backup withholding under section 3406. See § 1.6049-5(b)(7).

(ii) Bank deposit interest and similar types of deposit interest (including original issue discount) described in section 871(i)(2)(A) or 881(d) that are from sources within the United States are exempt from withholding under section 1441(a). See section 1441(c)(10). Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6049 and backup withholding under section 3406. See § 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt recipient rules regarding this type of income. See also § 1.6049-5(b)(11) for applicable documentation exemptions for certain bank deposit interest paid on obligations in bearer form.

(iii) Bank deposit interest (including original issue discount) described in section 861(a)(1)(B) is exempt from withholding under sections 1441(a) as income that is not from U.S. sources. Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6049 and backup withholding under section 3406. Reporting requirements for payments of such interest are governed by section 6049 and the regulations under that section. See § 1.6049-5(b)(12) and alternative documentation rules under § 1.6049-5(c)(1).

(iv) Interest or original issue discount from sources within the United States on certain short-term obligations described in section 871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections 1441(a). Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6049 and backup withholding under section 3406. See § 1.6049-5(b)(12) for applicable documentation for establishing foreign status and § 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt recipient rules regarding this type of income. See also § 1.6049-5(b)(10) for applicable documentation exemptions for certain obligations in bearer form.

(v) Income from sources without the United States is exempt from withholding under sections 1441(a). Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6049 or other applicable provisions of chapter 61 of the Code and backup withholding under section 3406. See, for example, § 1.6049-5(b) (6) and (12) and alternative documentation rules under § 1.6049-5(c). See also paragraph (b)(5) of this section for cross references to other applicable provisions of the regulations under chapter 61 of the Code.

(vi) Distributions from certain domestic corporations described in section 871(i)(2)(B) or 881(d) are exempt from withholding under section 1441(a). See section 1441(c)(10). Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6042 and backup withholding under section 3406. See § 1.6042-3(b)(1) (iii) through (vi).

(vii) Dividends paid by certain foreign corporations that are treated as income from sources within the United States by reason of section 861(a)(2)(B) are exempt from withholding under section 884(e)(3) to the extent that the distributions are paid out of earnings and profits in any taxable year that the corporation was subject to branch profits tax for that year. Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6042 and backup withholding under section 3406. See § 1.6042-3(b)(1) (iii) through (vii).

(viii) Certain income that is effectively connected with the conduct of a U.S. trade or business is exempt from withholding under section 1441(a). See section 1441(c)(1). Documentation establishing foreign status and status of the income as effectively connected must be furnished for purposes of this withholding exemption to the extent required under the provisions of § 1.1441-4(a). Documentation furnished for this purpose also serves as documentation establishing foreign status for purposes of applicable information reporting provisions under chapter 61 of the Code and for backup withholding under section 3406. See, for example, § 1.6041-4(a)(1).

(ix) Certain income with respect to compensation for personal services of an individual that are performed in the United States is exempt from withholding under section 1441(a). See section 1441(c)(4) and § 1.1441-4(b). However, such income may be subject to withholding as wages under section 3402. Documentation establishing foreign status must be furnished for purposes of any withholding exemption or reduction to the extent required under § 1.1441-4(b) or 31.3401(a)(6)-1 (e) and (f) of this chapter. Documentation furnished for this purpose also serves as documentation establishing foreign status for purposes of information reporting under section 6041. See § 1.6041-4(a)(1).

(x) Amounts described in section 871(f) that are received as annuities from certain qualified plans are exempt from withholding under section 1441(a). See section 1441(c)(7). Documentation establishing foreign status must be furnished for purposes of the withholding exemption as required under § 1.1441-4(d). Documentation furnished for this purpose also serves as documentation establishing foreign status for purposes of information reporting under section 6041. See § 1.6041-4(a)(1).

(xi) Payments to a foreign government (including a foreign central bank of issue) that are excludable from gross income under section 892(a) are exempt from withholding under section 1442. See § 1.1441-8(b). Documentation establishing status as a foreign government is required for purposes of this withholding exemption. Payments to a foreign government are exempt from information reporting under chapter 61 of the Code (see § 1.6049-4(c)(1)(ii)(F)).

(xii) Payments of certain interest income to a foreign central bank of issue or the Bank for International Settlements that are exempt from tax under section 895 are exempt from withholding under section 1442. Documentation establishing eligibility for such exemption is required to the extent provided in § 1.1441-8(c)(1). Payments to a foreign central bank of issue or to the Bank for International Settlements are exempt from information reporting under chapter 61 of the Code (see § 1.6049-4(c)(1)(ii) (H) and (M)).

(xiii) Amounts derived by a foreign central bank of issue from bankers’ acceptances described in section 871(i)(2)(C) or 881(d) are exempt from tax and, therefore, from withholding. See section 1441(c)(10). Documentation establishing foreign status is not required for purposes of this withholding exemption if the name of the payee and other facts surrounding the payment reasonably indicate that the beneficial owner of the payment is a foreign central bank of issue as defined in § 1.861-2(b)(4). See § 1.1441-8(c)(2) for withholding procedures. See also §§ 1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) for a similar exemption from information reporting.

(xiv) Payments to an international organization from investments in the United States of stocks, bonds, or other domestic securities or from interest on deposits in banks in the United States of funds belonging to such international organization are exempt from tax under section 892(b) and, thus, from withholding. Documentation establishing status as an international organization is not required if the name of the payee and other facts surrounding the payment reasonably indicate that the beneficial owner of the payment is an international organization within the meaning of section 7701(a)(18). See § 1.1441-8(d). Payments to an international organization are exempt from information reporting under chapter 61 of the Code (see § 1.6049-4(c)(1)(ii)(G)).

(xv) Amounts may be exempt from, or subject to a reduced rate of, withholding under an income tax treaty. Documentation establishing eligibility for benefits under an income tax treaty is required for this purpose as provided under §§ 1.1441-6. Documentation furnished for this purpose also serves as documentation establishing foreign status for purposes of applicable information reporting provisions under chapter 61 of the Code and for backup withholding under section 3406. See, for example, § 1.6041-4(a)(1).

(xvi) Amounts of scholarships and grants paid to certain exchange or training program participants that do not represent compensation for services but are not excluded from tax under section 117 are subject to a reduced rate of withholding of 14-percent under section 1441(b). Documentation establishing foreign status is required for purposes of this reduction in rate as provided under § 1.1441-4(c). This income is not subject to information reporting under chapter 61 of the Code nor to backup withholding under section 3406. The compensatory portion of a scholarship or grant is reportable as wage income. See § 1.6041-3(o).

(xvii) Amounts paid to a foreign organization described in section 501(c) are exempt from withholding under section 1441 to the extent that the amounts are not income includible under section 512 in computing the organization‘s unrelated business taxable income and are not subject to the tax imposed by section 4948(a). Documentation establishing status as a tax-exempt organization is required for purposes of this exemption to the extent provided in § 1.1441-9. Amounts includible under section 512 in computing the organization‘s unrelated business taxable income are subject to withholding to the extent provided in section 1443(a) and § 1.1443-1(a). Gross investment income (as defined in section 4940(c)(2)) of a private foundation is subject to withholding at a 4-percent rate to the extent provided in section 1443(b) and § 1.1443-1(b). Payments to a tax-exempt organization are exempt from information reporting under chapter 61 of the Code and the regulations thereunder (see § 1.6049-4(c)(1)(ii)(B)(1)).

(xviii) Per diem amounts for subsistence paid by the U.S. government to a nonresident alien individual who is engaged in any program of training in the United States under the Mutual Security Act of 1954 are exempt from withholding under section 1441(a). See section 1441(c)(6). Documentation of foreign status is not required under § 1.1441-4(e) for purposes of establishing eligibility for this exemption. See § 1.6041-3(p).

(xix) Interest with respect to tax-free covenant bonds issued prior to 1934 is subject to special withholding procedures set forth in § 1.1461-1 in effect prior to January 1, 2001 (see § 1.1461-1 as contained in 26 CFR part 1, revised April 1, 1999).

(xx) Income from certain gambling winnings of a nonresident alien individual is exempt from tax under section 871(j) and from withholding under section 1441(a). See section 1441(c)(11). Documentation establishing foreign status is not required for purposes of this exemption but may have to be furnished for purposes of the information reporting provisions of section 6041 and backup withholding under section 3406. See §§ 1.6041-1 and 1.6041-4(a)(1).

(xxi) Amounts paid with respect to a notional principal contract described in § 1.871-15(a)(7), an equity-linked instrument described in § 1.871-15(a)(4), or a securities lending or sale-repurchase transaction described in § 1.871-15(a)(13) are exempt from withholding under section 1441(a) as dividend equivalents under section 871(m) if the transaction is not a section 871(m) transaction within the meaning of § 1.871-15(a)(12), if the transaction is subject to the exception described in § 1.871-15(k), or if the payment is not a dividend equivalent pursuant to § 1.871-15(c)(2). However, the amounts may be subject to withholding under section 1441(a) if they are subject to tax under any section other than section 871(m). For purposes of this withholding exemption, it is not necessary for the payee to provide documentation establishing that a notional principal contract or equity-linked instrument has a delta (as described in § 1.871-15(g)) that is less than 0.80 or does not have substantial equivalence (as defined in § 1.871-15(h)) with the underlying security. For purposes of the withholding exemption regarding corporate acquisitions described in § 1.871-15(k), the exemption only applies if the long party furnishes, under penalties of perjury, a written statement to the withholding agent certifying that it satisfies the requirements of § 1.871-15(k).

(xxii) Certain payments to qualified derivatives dealers (as described in paragraph (e)(6) of this section). For purposes of this withholding exemption, the qualified derivatives dealer must furnish to the withholding agent the documentation described in paragraph (e)(3)(ii) of this section. A withholding agent that makes a payment to a qualified intermediary that is acting as a qualified derivatives dealer is not required to withhold on the following payments if the withholding agent can reliably associate the payment with a valid qualified intermediary withholding certificate as described in paragraph (e)(3)(ii) of this section, including the certification described in paragraph (e)(3)(ii)(E):

(A) A payment with respect to a potential section 871(m) transaction that is not an underlying security;

(B) A payment of a dividend equivalent; or

(C) A payment of a dividend in 2017.

(xxiii) Amounts paid with respect to a potential section 871(m) transaction that is only a section 871(m) transaction as a result of applying § 1.871-15(n) to treat certain transactions as combined transactions, if the withholding agent is able to rely on one or more of the presumptions provided in § 1.871-15(n)(3)(i) or (ii) (applying those paragraphs whether or not the withholding agent is a short party by substituting “withholding agent” for “short party”), and the withholding agent does not otherwise have actual knowledge that the long party (or a related person within the meaning of section 267(b) or section 707(b)) entered into the potential section 871(m) transaction in connection with any other potential section 871(m) transactions. The ability of one or more withholding agents to rely on the presumptions provided in section 1.871-15(n)(3) does not affect the withholding tax obligations or liability of any party to the transaction that cannot rely on the presumptions. Notwithstanding the withholding exemption provided to the withholding agent in this paragraph (b)(4)(xxii), the long party may still be liable for tax on dividend equivalent amounts with respect to such combined transactions under section 871(m).

(xxiv) Any payments not otherwise mentioned in this paragraph (b)(4) shall be subject to withholding at the rate of 30-percent if it is an amount subject to withholding (as defined in § 1.1441-2(a)) unless and to the extent the IRS may otherwise prescribe in published guidance (see § 601.601(d)(2) of this chapter) or unless otherwise provided in regulations under chapter 3 of the Code.

7. Practical Example: Joe Sixpack

Lets now apply the information in this article above to the MOST COMMON type of American as described below:

1. W-2 wage job.
2. Bank accounts that earn interest.
3. Stock investments yielding dividends
4. Rental property
5. Foreign Bank Accounts.

Below is a table describing how the above American could handle his affairs as a nonresident alien instead of a “U.S. person”:

#	Description	Withholding document	Withholding	Reporting	Taxable?	Notes
1	W-2 wage job	Submit W-8BEN	Yes (by compulsion)	W-2	No. 26 C.F.R. §31.3401(a)(6)-1(b) (income tax); 26 C.F.R. §31.3121(b)-3(c)(1)  (Social Security)	Get a refund of full amount of withholding for income tax and Social Security at end of year.
2	Bank account earning interest	Submit W-8BEN	None. 26 C.F.R. §1.6041-4(a)(1) and (2)		No	File W-8BEN as beneficial owner
3	Stock investment yielding dividends	Submit W-8BEN	26 C.F.R. §1.6041-4(a)(1) and (2)		No	File W-8BEN as beneficial owner
4	Rental property		None. Not a “United States” property under 26 U.S.C. §897	None	No	See our Real Property article
5	Foreign Bank Account	None	None	None	No	No FBAR reporting either.