The Internal Revenue Service (IRS) considers all services performed entirely outside of the U.S. by a Nonresident Alien (NRA) to be Non-U.S. Source Income. Nonresident aliens, for tax purposes, unlike U.S. citizens and residents, are only subject to tax on income that is considered U.S.-source income.
Foreign-source Income received by nonresident aliens is not subject to U.S. taxation. Income is considered foreign-source if the location of the activity for which the payment is being issued is outside the U.S. A clear indication of the location of the activity is necessary on all supporting documentation for the payment to be correctly classified. This applies to both service and non-service income.
If the source of income cannot be determined at the time of payment, such as when the location of the activity is not indicated, the payment must be treated as U.S. sourced under IRS Regulations.
Royalties, such as those paid for the use of intellectual properties (industrial properties and copyrights), are taxable and considered U.S. sourced if the subject property is used in the U.S.
Non-U.S. Source Income is not applicable to payments to U.S. Persons (Citizens, Resident Aliens) performing work outside the U.S. as U.S. Persons are taxed on World-Wide Income per IRS regulations.