§ 1442.  Withholding of tax on foreign corporations.

(a) General rule. In the case of foreign corporations subject to taxation under this subtitle, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 a tax equal to 30 percent thereof. For purposes of the preceding sentence, the references in section 1441(b) to sections 871(a)(1)(C) and (D) shall be treated as referring to sections 881(a)(3) and (4), the reference in section 1441(c)(1) to section 871(b)(2) shall be treated as referring to section 842 or section 882(a)(2), as the case may be, the reference in section 1441(c)(5) to section 871(a)(1)(D) shall be treated as referring to section 881(a)(4), the reference in section 1441(c)(8) to section 871(a)(1)(C) shall be treated as referring to section 881(a)(3), the references in section 1441(c)(9) to sections 871(h) and871(h)(3) or (4) shall be treated as referring to sections 881(c) and 881(c)(3) or (4), and the reference in section 1441(c)(10) to section 871(i)(2) shall be treated as referring to section 881(d).
 
(b) Exemption. Subject to such terms and conditions as may be provided by regulations prescribed by the Secretary, subsection (a) shall not apply in the case of a foreign corporation engaged in trade or business within the United States if the Secretary determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 881 on such corporation will not be jeopardized by the exemption.
 
(c) Exception for certain possessions corporations. For purposes of this section, the term "foreign corporation" does not include a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession if the requirements of subparagraphs (A), (B), and (C) of section 881(b)(1) are met with respect to such corporation.

HISTORY; ANCILLARY LAWS AND DIRECTIVES
 
Amendments:
   In 1993, P.L. 103-66, Sec. 13207(b) (applicable to interest received after 12/31/93, as provided by Sec. 13237(d)), amended subsec. (a) by substituting "871(h)(3) or (4)" for "871(h)(3)" and "881(c)(3) or (4)" for "881(c)(3)".
   In 1988, P.L. 100-647, Sec. 1012(g)(7)(A), substituted "the references in" for "and the references in" in subsec. (a) . . . Sec. 1012(g)(7)(B), added ", and the reference in section 1441(c)(10) to section 871(i)(2) shall be treated as referring to section 881(d)" before the period at the end of subsec. (a), effective for payments after 12/31/86.
   --P.L. 100-647, Sec. 6128(a), added "as such principles are applied in Revenue Ruling 86-6, except that the maximum debt-to-equity ratio described in such Revenue Rulings shall be increased from 5-to-1 to 25-to-1" before the period at the end of Sec. 127(g)(3)(B) of P.L. 98-369 [part of the effective date for amendments made by Sec. 127(e)(2)(A) and (B) of P.L. 98-369, see below], effective for tax. yrs. end. after 11/10/88.
   In 1986, P.L. 99-514, Sec. 1273(b)(2)(B), amended subsec. (c), effective for tax. yrs. begin. after 12/31/86, except as provided in Secs. 1277(b) and (d), reproduced in note following Code Sec. 931.
   Prior to amendment, subsec. (c) read as follows:
   "(c) Exception for certain Guam and Virgin Islands Corporations.
      "(1) In general. For purposes of this section, the term "foreign corporation" does not include a corporation created or organized in Guam or the Virgin Islands or under the law of Guam or the Virgin Islands if the requirements of subparagraphs (A) and (B) of section 881(b)(1) are met with respect to such corporation.
      "(2) Paragraph (1) not to apply to tax imposed in Guam. For purposes of applying this subsection with respect to income tax liability incurred to Guam--
         "(A) paragraph (1) shall not apply, and
         "(B) for purposes of this section, the term "foreign corporation" does not include a corporation created or organized in Guam or under the law of Guam.
      "(3) Cross reference.
      "For tax imposed in the Virgin Islands, see sections 934 and 934A."
   --P.L. 99-514, Sec. 1810(d)(3)(E)(i), substituted "sections 871(h)" for "sections 871(h)(2)" in subsec. (a) . . . Sec. 1810(d)(3)(E)(ii), substituted "sections 881(c)" for "sections 881(c)(2)" in subsec. (a) . . . Sec. 1810(d)(3)(E)(iii), substituted "section 1441(c)(9)" for "section 1449(c)(9)" in subsec. (a), effective for interest received after 7/18/84 for obligations issued after 7/18/84, in tax. yrs. end. after 7/18/84. Sec. 127(g)(3) of P.L. 98-369 [as amended by Sec. 6128(a) of P.L. 100-647, see above] provides a special rule, reproduced below.
   In 1984, P.L. 98-369, Sec. 127(e)(2)(A), deleted "and" after "section 881(a)(4)," in the sentence at the end of subsec. (a) . . . Sec. 127(e)(2)(B), added ", and the references in section 1449(c)(9) to sections 871(h)(2) and 871(h)(3) shall be treated as referring to sections 881(c)(2) and 881(c)(3)" before the period in the sentence at the end of subsec. (a), effective for interest received after 7/18/84, for obligations issued after 7/18/84, in tax. yrs. end. after 7/18/84. Sec. 127(g)(3) of this Act [as amended by Sec. 6128(a) of P.L. 100-647, see above] provides a special rule as follows:
      "(3) Special rule for certain United States affiliate obligations.--
         "(A) In general.--For purposes of the Internal Revenue Code of 1954, payments of interest on a United States affiliate obligation to an applicable CFC in existence on or before June 22, 1984, shall be treated as payments to a resident of the country in which the applicable CFC is incorporated.
         "(B) Exception.--Subparagraph (A) shall not apply to any applicable CFC which did not meet requirements which are based on the principles set forth in Revenue Rulings 69-501, 69-377, 70-645, and 73-110 as such principles are applied in Revenue Ruling 86-6, except that the maximum debt-to-equity ratio described in such Revenue Rulings shall be increased from 5-to-1 to 25-to-1.
         "(C) Definitions.--
            "(i) The term "applicable CFC" has the meaning given such term by section 121(b)(2)(D) of this Act, except that such section shall be applied by substituting "the date of interest payment" for "March 31, 1984," in clause (i) thereof.
            "(ii) The term "United States affiliate obligation" means an obligation described in section 121(b)(2)(F) of this Act which was issued before June 22, 1984."
   --P.L. 98-369, Sec. 130(b), amended subsec. (c), effective for payments made after 3/1/84, in tax. yrs. end. after 3/1/84.
   Prior to amendment, subsec. (c) read as follows:
   "(c) Exception for Guam corporations.
      "For purposes of this section, the term "foreign corporation" does not include a corporation created or organized in Guam or under the law of Guam."
   --P.L. 98-369, Sec. 474(r)(29)(I)(i), deleted "or section 1451" after "provided in section 1441" in subsec. (a) . . . Sec. 474(r)(29)(I)(ii), deleted "; except that, in the case of interest described in section 1451 (relating to tax-free covenant bonds), the deduction and withholding shall be at the rate specified therein" after "30 percent thereof" in subsec. (a), effective for tax. yrs. begin. after 12/31/83 and to carrybacks from tax. yrs. begin. after 12/31/83. Sec. 475(b) of this Act provides a special rule as follows:
   "(b) Tax-free covenant bonds. The amendments made by subsections (j) and (r)(29) of section 474 shall not apply with respect to obligations issued before January 1, 1984."
   In 1982, P.L. 97-248, Sec. 342, provides:
   "Sec. 342. Withholding of tax on nonresident aliens and foreign corporations.
      "Not later than 2 years after the date of the enactment of this Act, the Secretary of the Treasury or his delegate shall prescribe regulations establishing certification procedures, refund procedures, or other procedures which ensure that any benefit of any treaty relating to withholding of tax under sections 1441 and 1442 of the Internal Revenue Code of 1954 is available only to persons entitled to such benefit."
   In 1976, P.L. 94-455, Sec. 1906(b)(13)(A), substituted "Secretary" for "Secretary or his delegate" each place it appeared in subsec. (b), effective 2/1/77.
   In 1972, P.L. 92-606, Sec. 1(e)(2), added subsec. (c), effective 11/1/72.
   In 1971, P.L. 92-178, Sec. 313(c)(1), deleted "and" the last place it appeared in subsec. (a) . . . Sec. 313(e)(2), added ", and the reference in section 1441(c)(8) to section 871(a)(1)(C) shall be treated as referring to section 881(a)(3)" before the period at the end of subsec. (a), effective for payments occurring on or after 4/1/72.
   In 1966, P.L. 89-809, Sec. 104(c), amended Code Sec. 1442, effective for tax. yrs. begin. after 12/31/66.
   Prior to amendment, Code Sec. 1442 read as follows.
      "Sec. 1442. Withholding of tax on foreign corporations.
      "In the case of foreign corporations subject to taxation under this subtitle not engaged in trade or business within the United States, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 or section 1451 a tax equal to 30 percent thereof; except that, in the case of interest described in section 1451 (relating to tax-free covenant bonds), the deduction and withholding shall be at the rate specified therein."

NOTES:
 
                          CODE OF FEDERAL REGULATIONS
   Withholding of tax on nonresident aliens and foreign corporations and tax-free covenant bonds, 26 CFR §§ 1.1441-1 et seq., 1.145-1 et seq., 1.1461-1 et seq.
   Temporary employment tax regulations under Interest and Dividend Tax Compliance Act of 1983, 26 CFR §§ 35a.999-1 et seq. 
 
                               CROSS REFERENCES
   Tax withheld on wages as credit against income tax, 26 USCS § 31.
   Taxation of foreign corporations carrying on insurance business within United States, 26 USCS § 842.
   Rules applicable in determining whether foreign corporation is engaged in trade or business within United States, 26 USCS § 864(d).
   Tax on income of foreign corporations not connected with United States business, 26 USCS § 881.
   Tax on income of foreign corporations connected with United States business, 26 USCS § 882.
   Exclusions from gross income of foreign corporations, 26 USCS § 883.
   Adjustment of tax on nationals, residents, and corporations of foreign countries discriminating against United States citizens and corporations, 26 USCS §§ 891, 896.
   Income affected by treaty, 26 USCS § 894.
   Foreign tax credit of nonresident alien individuals and foreign corporations, 26 USCS § 906.
   Information with respect to certain foreign corporations, 26 USCS § 6038.
   Civil penalty for failure to collect and pay over tax, or attempt to evade or defeat tax, 26 USCS § 6672.
   Definition of "foreign," 26 USCS § 7701(a)(5).
   Definition of "withholding agent," 26 USCS § 7701(a)(16). 
 
                                RESEARCH GUIDE 
Federal Procedure:
   20 Fed Proc L Ed, Internal Revenue § 48:791. 
 
Am Jur:
   34 Am Jur 2d, Federal Taxation (1999) PP 30704, 30707, 30713, 30714, 30722, 30723, 30725.
   34 Am Jur 2d, Federal Taxation (1998) PP 30704, 30707, 30713, 30714, 30722, 30723, 30725.
   34 Am Jur 2d, Federal Taxation (1997) PP 30704, 30707, 30713, 30714, 30722,30723, 30725.
   34 Am Jur 2d, Federal Taxation (1996) PP 30703, 30706, 30712, 30713, 30721, 30722, 30724.
   34 Am Jur 2d, Federal Taxation (1995) P P 30703, 30705, 30712, 30713, 30722, 30723, 30724. 
 
Immigration:
   2A Immigration Law Service, Taxation § 26:33. 
 
RIA Coordinators:
   19A Fed Tax Coord 2d P P 0-11000--11057. 
 
Annotations:
   Validity of provision in tax statute requiring one person to collect tax imposed upon another. 4 L Ed 2d 1974.
   Construction, application, and effect, with respect to withholding, social security, and unemployment compensation taxes, of statutes imposing penalties for tax evasion or default. 22 ALR3d 8.

                        INTERPRETIVE NOTES AND DECISIONS
 
I. IN GENERAL
 1. Generally
 2. Constitutionality
 3. Domestic corporations
 4. Foreign corporations
 
II. INCOME ITEMS
 5. Interest
 6. Patronage dividends
 7. Royalties
 8. Sales income, patents
 9. Miscellaneous
 
III. EXCEPTIONS
 10. Income connected with United States business
 
I. IN GENERAL
 
1. Generally
   26 USCS § 1442 is tax collection provision, and its reference to 26 USCS § 1441 simply serves to avoid repetition of identical income items, and not to determine how those items are to be calculated. Newman & Co. v United States (1970, CA2 NY) 423 F2d 49, 70-1 USTC P 9262, 25 AFTR 2d 70- 777.
   Withholding provisions of Revenue Act are intended to facilitate administrative collection of tax, but these provisions do not impose tax. Estate of Marton v Commissioner (1942) 47 BTA 184.
   Where intermediary is used to participate in financing arrangement to avoid or reduce taxes, intermediaries may be disregarded and arrangement may be recharacterized as one directly among two or more parties. Rev Rul 95-56 (1995) 1995-36 IRB 20, 95 TNT 157-6.
 
2. Constitutionality
   Tax imposed on interest or dividends paid to nonresident alien holders of bonds of local corporations, and requiring their deductions at source, was valid. United States v Erie R. Co. (1882) 106 US 327, 27 L Ed 151, 1 S Ct 223, 3 AFTR 2435, reh den 107 US 1, 27 L Ed 385, 2 S Ct 83.
 
3. Domestic corporations
   Tax-at-source statute does not apply to payments to domestic corporation. St. Francis Hospital v Helvering (1942) 75 App DC 183, 125 F2d 553, 42-1 USTC P 9252, 28 AFTR 1090, cert den 316 US 697, 86 L Ed 1766, 62 S Ct 1293.
 
4. Foreign corporations
   Guam subsidiary of California parent corporation was not obliged to withhold tax on dividends paid by it to California parent under Guam territorial income tax laws (which made applicable to Guam provisions of Internal Revenue Code of 1954) since California parent corporation was not "foreign" within meaning of 26 USCS § 7701(a)(5), and hence was not taxable under 26 USCS § 881 which imposes on foreign corporation not engaged in trade or business in United States 30 percent tax on amount received from sources within United States as dividends. Atkins-Kroll (Guam), Ltd. v Government of Guam (1966, CA9 Guam) 367 F2d 127, 66-2 USTC P 9685, 18 AFTR 2d 5855, cert den 386 US 993, 18 L Ed 2d 339, 87 S Ct 1309.
   Royalties paid to foreign corporation by related foreign corporation are not US sourced, and are therefore not subject to withholding even though royalties were derived, in part, from royalties paid by related US corporation. SDI Netherlands B.V. v Commissioner (1996) 107 TC No. 10.
   Income of superannuation funds of England, Wales, and Scotland is exempt from United States income tax and is not subject to withholding under 26 USCS § 1441 or 26 USCS § 1442; Rev Rul 72-183 amplified and Rev Rul 84-28 distinguished. Rev Rul 88-7, IRB 1988-4, p 16.
 
II. INCOME ITEMS
 
5. Interest
   Interest income for United States treasury notes paid to nonresident Panamanian bank, not doing business within United States, is subject to withholding tax. Rev Rul 69-304, 1969-1 CB 216.
   Where domestic corporation on accrual method owns 100 percent of outstanding capital stock of several foreign corporations with which it maintains open accounts, and at close of its taxable year, its debits or credits accounts of subsidiaries with interest payable or receivable on open accounts, domestic corporation must withhold appropriate tax on amount of interest credited to foreign subsidiaries. Rev Rul 70-251, 1970-1 CB 182.
   Withholding of tax pursuant to 26 USCS §§ 1441 and 1442 on interest paid to nonresident aliens and foreign corporations on obligations that are purchased between interest payment dates is based on gross amount of interest paid on interest payment date. Rev Rul 85-193, 1985-2 CB 191.
   Domestic corporation that pays foreign corporation difference between accrued interest payable and accrued interest receivable is required to withhold on entire amount of interest paid and credited to foreign corporation's account, not merely upon net interest payable to foreign corporation. Technical Advice Memorandum 9252004.
 
6. Patronage dividends
   Patronage dividends paid to foreign corporations or foreign co-operatives which are members of domestic co-operative are subject to withholding if such foreign payees are not doing business in United States. Rev Rul 66-53, 1966-1 CB 206.
   Domestic corporation's payment of deemed dividend to foreign corporation is taxable under § 881 to extent it is from sources within United States, and is also subject to withholding of tax on foreign corporations to same extent; foreign corporation's payment of deemed dividend to another foreign corporation taxable under § 881 as also subject withholding except to extent that it can clearly be determined to be from foreign sources. Rev Rul 92-85, 1992-40 IRB.
 
7. Royalties
   Where foreign corporation not engaged in trade or business within United States which was possessor of United States patent to certain articles entered into "license agreement" with domestic corporations whereby it granted to such corporations exclusive license to "make, use and vend" devices and materials made from and in accordance with patents, and that licensees would pay stipulated royalties equivalent to certain percentage of their net sales prices of such manufactured devices and materials made in accordance with patents, and simultaneously entered into another agreement granting to domestic corporations option to purchase right, title, and interest in patents for lump sum, amounts paid to foreign corporation were subject to withholding provisions of predecessor statute to 26 USCS § 1442 as royalty payments and not payments for assignment or sale or foreign corporation's entire interest in patents. Eterpen Financiera Sociedad de Responsabilidad Limitada v United States (1952) 124 Ct Cl 20, 108 F Supp 100, 95 USPQ 191, 52-2 USTC P 9522, 42 AFTR 831, cert den 346 US 813, 98 L Ed 340, 74 S Ct 22, 99 USPQ 490.
 
8. Sales income, patents
   Purchase price paid by domestic corporation to foreign corporation for patent rights, and down payments made on other such rights, were not income subject to withholding provisions of predecessor statutes to Internal Revenue Code of 1954, either as royalties or otherwise, where such payments were not contingent upon future profits. General Aniline & Film Corp. v Commissioner (1944, CA2) 139 F2d 759, 60 USPQ 113, 44-1 USTC P 9134, 31 AFTR 1136.
 
9. Miscellaneous
   Amount received by nonresident foreign corporation, under contract entered into in United States with domestic corporation whereby foreign corporation agreed not to compete with domestic corporation in United States, was income from sources within United States under predecessor statute to 26 USCS § 861, and subject to withholding tax under predecessor statute to 26 USCS § 1442. Korfund Co. v Commissioner (1943) 1 TC 1180.
   Premiums which foreign insurance company that is not engaged in conduct of trade or business in United States receives are subject to excise tax imposed by 26 USCS § 4371, but are not subject to taxation under 26 USCS § 881 or to withholding under 26 USCS § 1442 (Rev Rule 80-222 modified and superseded). Rev Rul 89-91, IRB 1989-31, p 5.
 
III. EXCEPTIONS
 
10. Income connected with United States business
   Foreign corporation's income effectively connected with conduct of trade or business within United States which is includible in its gross income for taxable year, is not subject to withholding tax. Rev Rul 72-280, 1972-1 CB 275.