Nonresident aliens’ employment in U.S. subject to employment tax withholding

In a recent Chief Counsel Advice, IRS concluded that remuneration for services performed by nonresident alien (NRA) employees on structures permanently or temporarily attached to the U.S. “Outer Continental Shelf” (OCS) or on vessels or other devices engaged in activities related to exploration/exploitation of natural resources on the OCS was subject to income tax withholding as well as FICA, and FUTA. These services were performed within the U.S.

Under S. 871(b), an NRA engaged in a trade or business in the U.S. during the tax year is subject to U.S. federal income tax on income that is effectively connected with the conduct of a trade or business. S. 864(b) provides that a trade or business within the U.S. includes performance of personal services. However, a trade or business within the U.S. doesn’t include the performance of personal services for a foreign person not engaged in a trade or business within the U.S. by a NRA temporarily present in the U.S. for less than 90 days during the tax year that doesn’t exceed $3,000 (the business visitor exception). (Reg. § 1.864-2(b))

CCA found that NRA employees who perform personal services on structures attached to the OCS or on associated vessels were subject to U.S. income tax on their compensation that was effectively connected with a U.S. trade or business, unless the income was exempt from tax under an applicable income tax treaty. The CCA concluded that the NRA employees generally wouldn’t qualify for the business visitor exception because the employer company was engaged in a U.S. trade or business because of its exploration activities on the OCS.

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