Business Income from U.S. Sources

A foreign company’s income that is effectively connected with a U.S. trade or business is taxed on a net basis (income less related deductions) at graduated tax rates. Foreign companies that engaged in a U.S. trade or business are required to file a U.S. tax return. This is still required even if all of their business income is exempt from U.S. taxation by virtue of an income tax treaty.

It is not necessary for a foreign corporation to have employees or property in the United States in order to become subject to U.S. taxation on its business income. Selling products to customers in the United States may be enough, even if sales orders are taken by representatives located outside the United States over the telephone or Internet. The important factor is where the risk and benefits of ownership of the property transfers from the seller to the buyer. If this transfer occurs in the United States, the sale is considered U.S. source effectively connected income.

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