Passive income (i.e. FDAP income) is subject to a 30% withholding tax with exceptions for:
1. Bank Deposit Interest;
2. Portfolio Interest: Fixed interest only. Exception not applicable to bank loans in ordinary course of business, “10% shareholders” of corporate or partnership lender.
Regarding Portfolio Income, under IRC Sec. 469(e)(1), it includes: interest, dividends, annuities and royalties, gain or loss from the disposition of income-producing or investment property that is not derived in the ordinary course of a trade or business. Portfolio income is not treated as income from a passive activity, it must be accounted for separately, and passive losses and credits generally not be applied against it.
Regarding income from swaps:
1. Income is sourced by residence, no withholding tax on U.S. source;
2. Exception, certain “dividend equivalents” sourced as dividends.
For NRAs, FDAP income, 30% withholding U.S. tax, may be reduced or avoided under applicable income tax treaties. Under the U.S. Model Tax Treaty, dividend withholding tax generally reduced to 15%. Interest withholding tax generally eliminated, unless “back-to-back loans” involved.