JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

U.S. Tax on Interest Paid
to a Nonresident Alien

QUESTION: I'm one of your subscribers to the Wealth Protection Library, but I’m having a little trouble finding information on how foreign  (non-US citizens) are taxed on investments that they make here.

We are in the business of funding life insurance premiums for high- net-worth clients with investment capital from all over the world.   We have recently become aware (and maybe a little concerned) about  how these foreign clients are taxed on the interest that they are  paid by the policy owner for the premium loan.  These loans are for  either one or two years and pay approximately %15 per annum.

Can you point me to any of your books or articles that can provide  insight into whether-or-not the U.S. government taxes an investor in  France or Argentina on the interest earned from this type of  investment.

And by-the-way, a search engine on your website might facilitate  finding these obscure little tidbits.
 

REPLY:  There is a search engine on the subscribers’ web site which also searches through our public web site. The link to the search engine is at the bottom of the column that says "Other News Sources". When I entered [ interest nonresident alien ] I got 67 page hits. Most of that information should still be current because there haven't been any changes (that I can recall) in the taxation of nonresident aliens in many years.

Exclusions and exemptions on U.S. source income paid to nonresident aliens (NRA) are buried deep in the labyrinth of the tax code -- perhaps because the government doesn't want it to become public knowledge. The primary source is section 871. That section states that interest paid to a NRA is taxable, but section 871(i) describes the exceptions. Section 871(i)(3)(C) provides for an exception for interest on amounts held by an insurance company under an agreement to pay interest.

However, that does not appear to include interest paid by an individual to an NRA even though it may be for the purpose of paying premiums on an insurance policy. Section 871(h) provides for an exception to the taxation of interest paid to a NRA in the case of interest on "portfolio indebtedness".  That section (like many others) is full of cross references and it seems that it would take a few hours to study it in detail, along with the related IRS regulations and any rulings or cases that have been issued about this part of the tax code.