Taxation of Nonresident Alien Crew Members Working Onboard a Foreign Flagged Yacht

Nonresident alien crew members working onboard a foreign flagged yacht may not be subject to the United States Internal Revenue Code’s federal tax withholding requirements found in I.R.C. §§ 3402 or 1441, so long as that yacht is engaged in transportation between the U.S. and a foreign country or U.S. possession. The specific exclusion carved out in the Taxpayer Relief Act of 1997 (Section 1174, Public Law 105-34) (“Act”) and codified in I.R.C. § 861(a)(3) states: “Compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States.”

It should be noted that this discussion applies if the nonresident alien crew member performs certain services in the U.S. in connection with the individual’s temporary presence in the U.S. Compensation earned by a nonresident alien crew member while working only in international waters should also not be U.S. source income. Additionally, according to the definition of the United States, Puerto Rico, the U.S. Virgin Islands, and their territorial waters are not considered part of the U.S. This is the definition applicable to determine the source of compensation derived from rendering personal services. Therefore, even if a vessel is in or around Puerto Rico or the U.S. Virgin Islands, compensation paid to nonresident alien crew should not be from U.S. sources and thus, should be exempt from U.S. income taxes and withholding requirements.