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Foreign Trusts Subject to Outbound U.S. Taxation Rules?

A foreign trust is subject to taxation on all income connected with a trade or business conducted within the U.S., otherwise known as “effectively connected income.”

Foreign trusts are also generally subject to a statutory 30% U.S. withholding requirement on their U.S. sourced fixed, determinable, annual, or periodic income (“FDAP income”.) FDAP income generally encompasses many types of income, such as compensation for personal services, dividends, interest, royalties, alimony, commissions, and rents. Payors who make payments of FDAP income to non-U.S. persons without the proper withholding become primarily liable for any resulting taxes, interest, and penalties due if the foreign payee fails to satisfy its U.S. tax liability.