Easy Tax Planning for Tax Free Foreign Income for the Non-resident and Foreign Corporation

Tax planning for foreign corporations and non-resident aliens starts with looking at the income. A foreign person does not pay U.S. income tax on many types of U.S. income.  Unlike the UK and Europe, the U.S. can be the company’s headquarters and not pay tax U.S. taxes on the foreign income.

Avoiding the value added tax increases the business working capital by 25%.  While the VAT is often as low as 17%, the UK or EU business pays the VAT with after income tax profits.   This causes the VAT to be a 25% drag on working capital.

The U.S. is the only industrialized country that does not charge this anti-business tax. The tax planning rules for determining tax-free foreign source income are summarized in the guide below in blue print to be used  for tax planning for foreign corporations and non-resident aliens

Summary of Source Rules for Income of Nonresident Aliens

Item of IncomeFactor Determining Source

Salaries, wages, other compensation

Where services performed

Business income:
Personal services
Where services performed
Business income:
Sale of inventory -purchased
Where sold- where the customer takes possession of the property.  A foreign business can warehouse and store their inventory in the U.S. This is a popular way to avoid the VAT.

Business income:
Sale of inventory -produced

Where produced (Allocation may be necessary)


Residence of payer- except for bank deposit interest is tax free to the foreign person


Foreign source when paid by a  foreign corporation
U.S. source from a domestic corporation


Location of property

Natural resources
Location of property

Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller’s tax home


Where services were performed that earned the pension

U.S. Stock Market & Commodity ProfitsTreated as tax-free foreign source income

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations.

*Exceptions include:
a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the Puerto Rico economic activity credit or possessions tax credit.
b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.

 Tax planning for foreign corporations and non-resident aliens

Tax planning for foreign corporations and non-resident aliens sometimes requires a non-U.S. office to be involved with certain aspect of the international business.  This part is complicated.   You will  need the help of your CPA and attorney.    I suggest that you consider my book to learn the fundamentals.  Amazon has it on sale for $9.50.