Determining the proper withholding and reporting on income paid to individuals or entities in U.S. possessions or territories can be confusing. In addition to the rules for determining U.S. or foreign person, there are special rules that might apply for withholding and reporting purposes.
Individuals who were born in Puerto Rico, Guam or the U.S. Virgin Islands are U.S. persons. A resident of Guam, Puerto Rico or the U.S. Virgin Islands who was not born there is not a U.S. citizen (unless the individual is a U.S. citizen under the rules described in part two of this series).
The 183-day substantial presence test is based on days spent in the U.S., a term which does not include U.S. possessions or territories. Therefore, bona fide residents of Puerto Rico, Guam, Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands and American Samoa who are not U.S. citizens or green-card holders are nonresident aliens for federal income tax purposes.
Branches of foreign corporations located in a U.S. possession are foreign persons. Corporations organized under the laws of Puerto Rico are also foreign persons. Corporations formed under the laws of Guam, the Northern Mariana Islands, U.S. Virgin Islands or American Samoa are subject to special ownership and effectively connected income tests. As a result, they may be either U.S. or foreign persons for withholding purposes.
For more information about these rules, see IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.