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The Business Profits Exemption

Most (but not all) treaties include a “business profits” provision that exempts compensation paid to a foreign business from U.S. tax.  If a performing group is considered a business by the IRS (as explained above), and the group has no “permanent establishment” in the U.S. (such as an office or other base of operations), then the entire amount paid is exempt from tax in the U.S.

It is important to note that although the payments made to a foreign business may be tax-exempt, the business is still required to withhold U.S. taxes on its payments to its foreign performers, whether it pays the performers as employees or as independent contractors.  For example, if payments made to a Moroccan theater company for its performances in the U.S. are exempt from tax pursuant to the U.S./Morocco tax treaty, the theater company is nonetheless required to withhold U.S. taxes from its payments to its actors, whether they be employees of the theater company or independent contractors.  The 30% withholding requirement applies to payments made by the foreign business to independent contractors (unless an exemption applies); withholding from payments to employees applies at graduated rates, as discussed below.

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