Treasury Regulations · 26 CFR
§ 1.871-12. Determination of tax on treaty income.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 871
Cite as 26 CFR § 1.871-12
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- December 23, 1974 by T.D. 7332
- Last amended
- March 8, 1996 by T.D. 8657
- Issued under
- 26 U.S.C. § 871
- Length
- 1,316 words · about 6 min to read
- Defines
- 2 terms
- Cross-references
- cites 9 Code sections and 9 regulations; cited by 10
¶(a) In general. This section applies for purposes of determining under § 1.871-7 or § 1.871-8 the tax of a nonresident alien individual, or under § 1.881-2 or § 1.882-1 the tax of a foreign corporation, which for the taxable year has income described in section 872(a) or 882(b) upon which the tax is limited by an income tax convention to which the United States is a party. Income for such purposes does not include income of any kind which is exempt from tax under the provisions of an income tax convention to which the United States is a party. See §§ 1.872-2(c) and 1.883-1(b). This section shall not apply to a nonresident alien individual who is a bona fide resident of Puerto Rico during the entire taxable year.
¶(b) Definition of treaty and nontreaty income—
¶(1) In general.
¶(i) For purposes of this section the term “treaty income” shall be construed to mean the gross income of a nonresident alien individual or foreign corporation, as the case may be, the tax on which is limited by a tax convention. The term “non-treaty income” shall be construed, for such purposes, to mean the gross income of the nonresident alien individual or foreign corporation other than the treaty income. Neither term includes income of any kind which is exempt from the tax imposed by chapter 1 of the Code.
¶(ii) In determining either the treaty or nontreaty income the gross income shall be determined in accordance with §§ 1.872-1 and 1.872-2, or with §§ 1.882-3 and 1.883-1, except that in determining the treaty income the exclusion granted by section 116(a) for dividends shall not be taken into account. Thus, for example, treaty income includes the total amount of dividends paid by a domestic corporation not disqualified by section 116(b) and received from sources within the United States if, in accordance with a tax convention, the dividends are subject to the income tax at a rate not to exceed 15 percent but does not include interest which, in accordance with a tax convention, is exempt from the income tax. In further illustration, neither the treaty nor the nontreaty income includes interest on certain governmental obligations which by reason of section 103 is excluded from gross income, or interest which by reason of a tax convention is exempt from the tax imposed by chapter 1 of the Code.
¶(iii) For purposes of applying any income tax convention to which the United States is a party, original issue discount which is subject to tax under section 871(a)(1)(C) or 881(a)(3) is to be treated as interest, and gains which are subject to tax under section 871(a)(1)(D) or 881(a)(4) are to be treated as royalty income. This subdivision shall not apply, however, where its application would be contrary to any treaty obligation of the United States.
¶(2) Application of permanent establishment rule of treaties. In applying this section with respect to income which is not effectively connected for the taxable year with the conduct of a trade or business in the United States by a nonresident alien individual or foreign corporation, see section 894(b), which provides that with respect to such income the nonresident alien individual or foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year for purposes of applying any exemption from, or reduction in rate of, tax provided by any tax convention.
¶(c) Determination of tax—
¶(1) In general. If the gross income of a nonresident alien individual or foreign corporation, as the case may be, consists of both treaty and nontreaty income, the tax liability for the taxable year shall be the sum of the amounts determined in accordance with subparagraphs (2) and (3) of this paragraph. In no case, however, may the tax liability so determined exceed the tax liability (tax reduced by allowable credits) with respect to the taxpayer's entire income, determined in accordance with § 1.871-7 or § 1.871-8, or with § 1.881-2 or § 1.882-1, as though the tax convention had not come into effect and without reference to the provisions of this section. Determinations under this paragraph shall be made without taking into account any credits allowed by sections 31, 32, 39, and 6402, but such credits shall be allowed against the tax liability determined in accordance with this subparagraph.
¶(2) Tax on nontreaty income. For purposes of subparagraph (1) of this paragraph, compute a partial tax (determined without the allowance of any credit) upon only the nontreaty income in accordance with § 1.871-7 or § 1.871-8, or with § 1.881-2 or § 1.882-1, whichever applies, as though the tax convention had not come into effect. To the extent allowed by paragraph (d) of § 1.871-8, or paragraph (c) of § 1.882-1, the credits allowed by sections 33, 35, 38, and 40 shall then be allowed, without taking into account any item included in the treaty income, against the tax determined under this subparagraph.
¶(3) Tax on treaty income. For purposes of subparagraph (1) of this paragraph, compute a tax upon the gross amount, determined without the allowance of any deduction, of each separate item of treaty income at the reduced rate applicable to that item under the tax convention. No credits shall be allowed against the tax determined under this subparagraph.
¶(d) Illustration. The application of this section may be illustrated by the following example:
¶Example.
(a) A nonresident alien individual who is a resident of a foreign country with which the United States has entered into a tax convention receives during the taxable year 1967 from sources within the United States total gross income of $22,000, consisting of the following items:
| Compensation for personal services the tax on which is not limited by the tax convention (effectively connected income under § 1.864-4(c)(6)(ii)) | $20,000 |
| Oil royalties the tax on which is limited by the tax convention to 15 percent of the gross amount thereof (effectively connected income by reason of election under § 1.871-10) | 2,000 |
| Total gross income | 22,000 |
(b) The taxpayer is engaged in business in the United States during the taxable year but does not have a permanent establishment therein. There are no allowable deductions, other than the deductions allowed by sections 613 and 873(b)(3).
(c) The tax liability for the taxable year is $6,100, determined as follows:
| Nontreaty gross income | $20,000 |
| Less: Deduction for personal exemption | 600 |
| Nontreaty taxable income | 19,400 |
| Tax under section 1 of the Code on nontreaty taxable income ($5,170 plus 45 percent of $1,400) | 5,800 |
| Plus: Tax on treaty income (Gross oil royalties) ($2,000 × 15 percent) | 300 |
| Total tax (determined as provided in paragraph (c) (2) and (3) of this section) | 6,100 |
(d) If the tax had been determined under paragraph (b)(2) of § 1.871-8 as though the tax liability would have been $6,478, determined as follows and by taking into account the election under § 1.871-10:
¶(e) Effective date. This section shall apply for taxable years beginning after December 31, 1966. For corresponding rules applicable to taxable years beginning before January 1, 1967, see 26 CFR 1.871-7(e) (Revised as of January 1, 1971).
[T.D. 7332, 39 FR 44225, Dec. 23, 1974, as amended at T.D. 8657, 61 FR 9338, Mar. 8, 1996]
Terms defined here
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Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 872 Gross income
- § 116 Repealed
- § 103 Interest on State and local bonds
- § 871 Tax on nonresident alien individuals
- § 894 Income affected by treaty
- § 31 Tax withheld on wages
- § 33 Tax withheld at source on nonresident aliens and foreign corporations
- § 613 Percentage depletion
- § 1 Tax imposed
Regulations it cites
- § 1.871-7 Taxation of nonresident alien individuals not engaged in U.S. business.
- § 1.871-8 Taxation of nonresident alien individuals engaged in U.S. business or treated as having effectively connected income.
- § 1.881-2 Taxation of foreign corporations not engaged in U.S. business.
- § 1.882-1 Taxation of foreign corporations engaged in U.S. business or of foreign corporations treated as having effectively connected income.
- § 1.872-2 Exclusions from gross income of nonresident alien individuals.
- § 1.872-1 Gross income of nonresident alien individuals.
- § 1.882-3 Gross income of a foreign corporation.
- § 1.864-4 U.S. source income effectively connected with U.S. business.
- § 1.871-10 Election to treat real property income as effectively connected with U.S. business.
Cited by 10 other regulations
- § 1.871-1 Classification and manner of taxing alien individuals.
- § 1.871-7 Taxation of nonresident alien individuals not engaged in U.S. business.
- § 1.871-8 Taxation of nonresident alien individuals engaged in U.S. business or treated as having effectively connected income.
- § 1.872-2 Exclusions from gross income of nonresident alien individuals.
- § 1.881-2 Taxation of foreign corporations not engaged in U.S. business.
- § 1.882-1 Taxation of foreign corporations engaged in U.S. business or of foreign corporations treated as having effectively connected income.
- § 1.894-1 Income affected by treaty.
- § 1.952-1 Subpart F income defined.
- § 1.6012-1 Individuals required to make returns of income.
- § 1.6012-2 Corporations required to make returns of income.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Amended by T.D. 8657 (61 FR 9338)
- Issued by T.D. 7332 (39 FR 44225)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Nonresident alien individuals
Nearby sections
- § 1.871-8 Taxation of nonresident alien individuals engaged in U.S. business or treated as having effectively connected income.
- § 1.871-9 Nonresident alien students or trainees deemed to be engaged in U.S. business.
- § 1.871-10 Election to treat real property income as effectively connected with U.S. business.
- § 1.871-11 Gains from sale or exchange of patents, copyrights, or similar property.
- § 1.871-12 Determination of tax on treaty income.
- § 1.871-13 Taxation of individuals for taxable year of change of U.S. citizenship or residence.
- § 1.871-14 Rules relating to repeal of tax on interest of nonresident alien individuals and foreign corporations received from certain portfolio debt investments.
- § 1.871-15 Treatment of dividend equivalents.
- § 1.872-1 Gross income of nonresident alien individuals.