Question

A US citizen residing in Peru owes money to an acquaintance in Peru and has given an interest-bearing note to evidence the obligation to repay. Is the interest on the obligation subject to w/h under sec 1441? See reg. 301-7701(b)-1(a).

Answer 1

Foreign persons are subject to US tax at rate of 30% on income which is received from US sources that consists of interest (including certain original issue discounts (OID), rents, dividend, annuities, premium, compensation for, or in expectation of, services performed or other fixed or determinable periodical or annual gains, income, or profits. This tax is imposed on the gross amount paid and is often collected by withholding under section 1441 or 1442 on that amount. Thus, the interest obtained by the acquaintance within the definition of Sec. 1441 is an income, therefore subject to 30% withholding on the gross amount if it is received from US source. However the withholding under sec. 1441 depends on whether the income is received from US source; and US source depends on the US citizen residential status. Section 301.7701 (b) - 1(b) provides rules on determination of whether an alien individual is a lawful permanent resident of U.S. In this case, we have not been provided information on residential status , thus assuming that Peru is citizen and also a resident then the Peru's income acquaintance from interest bearing obligation will be subject US 30% tax rate.